The Obvious Reason QE Doesn't Work

George Washington's picture

Paul Gambles -  the managing partner of MBMG Group - explains at CNBC, there is an obvious flaw in QE:

BoE's Quarterly Bulletin ... states that a "common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called 'money multiplier' approach."


This "misconception" is obviously shared by the world's policymakers, including the U.S. Federal Reserve, the Bank of Japan and the People's Bank of China, not to mention the Bank of England itself, who have persisted with a policy of quantitative easing (QE).

Here's background on the flaw in the theory of the money multiplier.

Indeed, Ben Bernanke might have had hints about the flaw in the money multiplier theory back in 1988.

Gambles continues:

QE is seen by its adherents, such as former U.S. Federal Reserve Chairman Ben Bernanke, as both the panacea to heal the post-global financial crisis world and also the factor whose absence was the main cause of the Great Depression. This is in line with their view that central banks create currency for commercial banks to then lend on to borrowers and that this stimulates both asset values and also consumption, which then underpin and fuel the various stages of the expected recovery, encouraging banks to create even more money by lending to both businesses and individuals as a virtuous cycle of expansion unfolds.


The theory sounds great.


However it has one tiny flaw. It's nonsense.



Professor Hyman Minsky was one of the first to recognize the flaw in those theories. He realized that in practise, in a credit-driven economy, the process is the other way round. The credit which underpins economic activity isn't created by a supply of large deposits which then enables banks to lend; instead it is the demand for credit by borrowers that creates loans from banks which are then paid to recipients who then deposit them into banks. Loans create deposits, not the other way round.

Here's background on the fact that loans create depositsnot the other way around.

But Gambles notes that central bankers are trying to salvage the reputation of QE as an economy-saver by relying on interest rates:

In the BoE's latest quarterly bulletin, they conceded this point, recognizing that QE is indeed tantamount to pushing on a piece of string. The article tries to salvage some central banker dignity by claiming somewhat hopefully that the artificially lower interest rates caused by QE might have stimulated some loan demand.


However the elasticity or price sensitivity of demand for credit has long been understood to vary at different points in the economic cycle or, as Minsky recognized, people and businesses are not inclined to borrow money during a downturn purely because it is made cheaper to do so. Consumers also need a feeling of job security and confidence in the economy before taking on additional borrowing commitments.

In addition, lowering interest rates through quantitative easing may well create a trap. And former FDIC chair Sheila Bair notes:

“The Fed has got the best of intentions…but it’s counterintuitive,” she argues. “Low rates dampen the incentives to invest.”




Banks can make money in other ways – trading profits, investment banking fees, deposit accounts – other ways…that don’t necessarily help the economy.”

Indeed, the big banks do very little traditional banking these days, as most of their business is from financial speculation. For example, less than 10% of Bank of America's profits come from traditional lending.

Gambles explains another reason that QE may hurt the economy:

It may even be that QE has actually had a negative effect on employment, recovery and economic activity.


This is because the only notable effect QE is having is to raise asset prices. If the so-called wealth effect -- of higher stock indices and property markets combined with lower interest rates -- has failed to generate a sustained rebound in demand for private borrowing, then the higher asset values can start to depress economic activity. Just think of a property market where unclear job or income prospects make consumers nervous about borrowing but house prices keep going up. The higher prices may act as either a deterrent or a bar to market entry, such as when first time buyers are unable to afford to step onto the property ladder.


Dr Andrea Terzi, Professor of Economics at Franklin University Switzerland, also suggests that many in the banking and finance industry, who often have trouble with the way academics teach and discuss monetary policy, will find the new view much closer to their operational experience.

Given that former Fed chairman Bernanke, Treasury Secretary Geithner and chief economist Summer’s entire strategy was to artificially prop up asset prices – including the stock market (and see this, this, this and this) - and so their eagerness to launch QE is not surprising.

Indeed, 3 academic studies found that  quantitative easing doesn't work.   The head of Japan's quantitative easing program agrees, as does the original inventor of QE.

The Federal Reserve official responsible for implementing $1.25 trillion of quantitative easing has confirmed that QE is just a massive bailout for the rich:

I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.




Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.


You’d think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany’s finance minister, Wolfgang Schäuble, immediately called the decision “clueless.”


That was when I realized the Fed had lost any remaining ability to think independently from Wall Street.

And see this.

Indeed,  economists note that QE helps the rich … but not the average American.

The president of the Federal Reserve Bank of Dallas said that Fed’s Fisher said that “QE was a massive gift intended to boost wealth.”

And Japanese quantitative easing expert Richard Koo said:

In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging them to consume more.

In fact, that's all QE does ... benefit the rich.

QE is one of the main causes of inequality (and see this and this).  Many economists have said that QE quantitative easing benefits the rich, and hurts the little guy.    And economists now admit that runaway inequality cripples the economy.  So QE indirectly hurts the economy by fueling runaway inequality.

Additionally, a loss of trust destroys the economy.  55% of Americans say that "The economic and political systems in the country are stacked against people like me”.     Americans making $90,000 or less don't like Federal Reserve policies.  QE might therefore further undermine trust - and hurt the economy - since it so obviously skews the playing field.

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elwind45's picture

QE was the answer to the demand collapse for loans since the Fed bought up everything and isn't selling! The Fed now gives the treasury what it captures from production because banks don't need to loan except to the Fed which is captured anywho? Nothing can be loaned out unless it goes EAST to Europe who lives off the Fed and tourists! Because loans cause GROWTH and a no no for structural balance sheets (too many Q.?) NOW IN THE ELEVNTH INNINGS of the crisis most of the real bad shit in the lake is long gone and the bond pool has turned everything into a water spout with bond traders trying to time the spout's collapse as it turns into a funnel cloud? LEAVING ALL YOU DUMBFUCKS WONDERING WHAT HAPPENED TO THE DAY WHEN THE TEMPEST BLEW AWAY$

DOGGONE's picture

Effective market manipulations surely happened. See the two charts here.

kellycriterion's picture

Why all the rationalizing and circumlocution over simple programs of confiscation? Is it semantics? If the terms "borrowing" and "buying" are continually used when what is actually happening is "taking", will that suffice to keep people confused?

If you were gifted with the power of ZIRP and/or QE you could then "buy"(with the understanding you don't provide anything of value in the exchange)consumer goods, real assets, or other financial instruments. Now since the number of people "gifted" are tiny the effect on consumer goods will be small, even assuming conspicuous consumption, and tend to be on the high end products. But while individual consumption is limited, the ability of an individual to "buy" real and financial assets is great.

Now I won't go through the steps of why people who have relative advantage(easy money)rather than absolute advantage are incentivized to extract cash and acquire existing operations rather than creating new ones. I'll just say it should be obvious in an environment of rising confiscation and crowding out.

ZIRP and QE are not extensions of CB theory or mere differences in degree. Confiscation and bankrolling systemic fraud are not counter cyclical tweaking and lender of last resort.

Fractional reserve lending isn't fractional reserve lending when banks are not only not reserve constrained but in reality aren't even capital constrained anymore. Cullen Roche and the MMT people haven't nailed anything. They obfuscate with partial truth.

VWAndy's picture

The economy has been fixed. Its the meaning of the word fixed most are having trouble with.

kchrisc's picture

QE is working fine, as it is more theft to cover up the previous theft.

Son of Captain Nemo's picture

"I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time."...

And for the egregious crimes you've committed that have ruined countless lives in your "occupation" the sentence should be death!

Sorry!  But your death among all the others at the Fed, Treasury, commerical banking institution and the policymakers in Washington that "rubber stamped" those crimes you committed by looking the other way should all be put to death as well for the worst banking fraud in the history of the World not to mention the war crimes you are indirectly guilty of as well!

Only then will we have a chance to rebuild and the ones who aren't put to death will be looking over their shoulders permanently only because they know the rule of law will put them to death as well should step out of line!

Sad but so true if you plan to fix it!!!

TimmyM's picture

What? No mention of monetizing the deficit? Crony fascists wallow at the trough. Sure it makes the rich richer at the expense of the poor. But Fed policies work on many ways besides asset price pumping. To neglect mentioning the full spectrum of the screwing, makes you look like controlled opposition.


the grateful unemployed's picture

the welfare state has expanded exponentially. Yellen referred to the role of the private sector creating jobs just to prove how disconnected she is (and more dangerous than bernanke) his mantra of throwing money from the sky has a populist tone, even if it doesn't work that way, he throws it down from heaven and the bankers see that it never reaches the ground. a few years ago i started the FreeGasolineforEveryone party. if you won't give the working people anything, at least give them a direct subsidy they can use, and which might improve consumer spending for a while (when asked Yellen had no clue that direct subsidies might help, but the GOP has always preferred that method) my point was we should have used the 2 to 6 trillion spent on that rat hole Iraq, (to secure oil) and give americans direct subsidies to buy their own gasoline (Bush, being of the party of government is the problem proceeded to craft an expensive and wasterful government solution to the energy crisis) obama has a different solution same wasteful stupid poorly thoughtout and ultimately failed policy (like but not limited to the electric car, and the phony solar panel craze which is subsidized by failed chinese business policies, they made too many of the damn things and are dumping them on the market) the spectrum is full, in america we want for nothing especially peace of  mind

JRobby's picture

Really Benny? QE would have softened the Great Depression? Tool Box!


The only difference between 2008 and 1929 is the FDIC, Social Security and other welfare programs: Taxing income flows and re-distributing it so that the rich can continue to play.

Reaper's picture

The sheeple are fooled by the government and its media to believe putting on the cloak of Fed Chairman changes an economic Cretin into an omniscient all-benevolent banker.

JRobby's picture

Dr - Loan Asset

Cr - Deposits Payable

Continue indefinitely. Reserve requirements? Check in with B of A (Balls of Ass) on that calculation. I mean it's math. (high pitched whine) Math is hard!


OC Sure's picture





F  O   O   O  O   O   O   L   S  !!!!!!!!!

QE  IS  WORKING !!!!!!!





Mediocritas's picture

Shout out to Cullen Roche at who has been explaining this all for years now.

Banks are never constrained by any reserve requirement, a fact clearly evidenced by the fact that several OECD nation have reserve requirements of zero percent.

Where a requirement exists, banks lend first (in violation), then worry about finding reserves later in the interbank market to satisfy pesky legal requirements. Even then, it's largely irrelevant as they use sweeps to window dress on a daily basis, so the US reserve requirement and it's alleged restriction upon total credit via the money multiplier is fiction.

As realized by many, including GW now, money supply is determined by the aggregate willingness to borrow, and modern banks will always step up to service that, prudent or not. QE simply pushes on a string if people are no longer mad keen to take on more debt, it's pointless.

Take Japan. No amount of QE can pull the population out of its depression, a depression caused by a brutal hangover from the 80's and the reality of an aging population. Financially burnt and older people just ain't going to borrow again, not like before. Period. Unless the working population can be given a realistic expectation of future growth, they will not borrow, and QE is futile, nothing more than a means by which Megabank can delegate risk to the CB and go speculating in every market there is, because there sure as shit isn't any money to be made making loans anymore.

Furthermore, a recent hot-spot in the economics blogosphere is a bunch of respected heterodox bloggers getting on board the Fisher Effect train which, in short, says that an economy has an intrinsic, organic growth rate (a natural, physical, thermodynamic limit) of around 2%, no matter what policy tries to achieve, and that central bank inflation targeting (via rates) must account for this.

ZIRP is intended to cause inflation, but the Fisher Effect predicts that ZIRP will actually be a deflationary factor for the wider economy, which is indeed what has been observed in Japan, the EU and the USA. The longer rates are held artificially low in an environment where the economy is growing organically, then the higher real rates have to snap-back if left to correct.

Given a 2% inflation target, 2% natural growth and the time ZIRP has been in place, it's not unreasonable to say that rates should be at 6% right now and that CBs absolutely do not know what they are doing. Don't call conspiracy here, it really is incompetence. Just consider the post you just read from GW, I mean this is really fundamental stuff and most economists still don't get it, Krugman included, though he continually attempts to rewrite history in an attempt to delete his own embarassing blunders.

Go read Edward Lambert, he's all over this:

JRobby's picture

Ah yes, the interbank market. The one that exploded in Sept. 2008. It would have been so cool if they had let it unwind then. Pussy's.


Send these junkies to detox? Never happen. "So your sickness weighs a ton" (Layne Staley) This sickness weighs more than the universe. They will lie, cheat, steal and murder to perpetuate it forever.

Mediocritas's picture

When you're one of the chosen few, with access to a discount window and a Fed that's perfectly happy to provide way below the interbank rate, then the interbank market means nothing. Lend away and lend stupidly! Don't worry if your mates won't back you up because the Fed's good for it, always. (Not to mention the alphabet soup of other programs to complement the traditional discount window).

Imagine if QE had been done on TSYs only, with the gov simply crediting taxpaying citizens' bank accounts with a dividend (instead of the govt deciding where to allocate). Plenty of reserves would then exist within the system to make the interbank market liquid, Main St would be juiced instead of Wall St, and the chips could be simply left to fall where they may on Wall St, the whole thing later sterilised via taxation. (This isn't a thought experiment btw, one nation in the OECD (Australia) actually did this and avoided recession).

But we all know that saving the economy is not what the Fed is all about, it exists to save banks.

marathonman's picture

Sheila Bair, “The Fed has got the best of intentions…,” she argues.

A private cartel of bankers has the best of intentions?!  Is that what that 'poor' woman honestly thinks?

rsnoble's picture

"The stock market is all that matters"

Thus, so far, QE has worked.

topshelfstuff's picture

Pretty much what I was going to say ... same words

QE is working fine, as Really Intended

and will continue to as long as the Printng Press is allowed to keep going

thurstjo63's picture

It's not even close to being correct. Let's imagine BEFORE we had fractional reserve banking, I have a business that is doing very well. I'm accumulating funds and want to keep them safe. My focus is on safely WAREHOUSING my funds. If I have sufficient funds to manage and grow my business and excess funds then I think about investing those funds. It's the accumulation of funds (saved from the production of goods and services) from busineses (and now workers) that allows for further investment. All that money printing does is steal from those who have invested wisely and managed their affairs prudently.

Fix-ItSilly's picture

Why do articles like this never discuss age demographics?  Borrowings will be shunned as a population ages (retires).  Is it that this concept is too utterly pedestrian and the Ivory Tower types have to disguise it with convoluted economic terms?

whidbey-2's picture

Bernanke gave a consultation to the Japanese before he went to the Fed.  The Japanese told him that QE did not work for them.  When he departed he did not have the ideas of what Japan had done, nor did he understand the Japanese problem was no different than than what a war time econmy attempts to do when it borrows and manufactures war goods, but ends up loosing the war.  The driver is demand for goods and services.  Without it the economy is merely liquified and must eventually be leaned up to drive demand.  No easy answers that work.  BB knows that but it will not appear in his new book. A million dollar advance probably will not create ademand for a book by a  blind man with a hard head.

the grateful unemployed's picture

theres a fed paper on the japanese deflation with bernankes name all over it. he basically said they were not accomodative enough, long enough, his same idea for the problems of the us great depression. what are the risks if you remain accomodative too long (the congressmen want to know) well nobody knows, the obvious answer is that government becomes the permanent engine of growth. at this point the standard bearer conservatives should reign in government expansion (but who wants to get blamed for crashing the economy?) you mention demand as the driver, but from greenspan on we have had supply side economics, which works well enough if you have new products and services, once technological development slows you have to return to older (more austrian) methods. ironic in a world with soon 8B people that supply should lead economic policy, and government is the guaranteer of money to keep new supply coming. then one day its 7B peopel and there is a lot of overcapacity, and then kablooey

Fix-ItSilly's picture

Japan was a nation of savers back then - deflation is beneficial.  QE therefore impacts, pro and con, Japan differently than the US.

no more banksters's picture

“Banksters : First: if more money were going to the market, then they would lose much of their value and we would lose profits because we are the ones who print money! That's why we invented inflation, to keep governments in fear and directing money back to us through the so-called Quantitative Easing Policies.

BMCs : But inflation happens anyway!

Banksters : Yes, but it is controlled. We control it. When money start to spread in the society "above acceptable limits", we create financial crises to take them back. We dictate governments to take measures and apply austerity policies directing money back to us. We keep money valuable to everyone and secure our profits.”

AdvancingTime's picture

We may soon be forced to face our economic Armageddon. The forces that have driven stock markets ever-higher and upward may be beginning to wane. Many markets became distorted years ago when QE and super low interest rates hit the economy in an effort to lessen many of the missteps of recent years.

The policy of QE it now appears has been more helpful in holding up the underlying value of assets and derivatives than helping to repair a wounded economy. Unfortunately the economy has not fared as well as these asset prices and in many ways these policies have harmed Main Street and stripped savers of the interest they deserve. More on this subject in the article below.


Mareka's picture

Comparing the actions of the FED to their stated goals, it would appear that they are ignorant or incompetent.

If you look at the actions of the FED as designed to serve the banking cartel by transferring the wealth of the citizens onto their balance sheets, the actions make perfect sense.


mccvilb's picture

PCR's latest posting yesterday describes in detail how the Fed not only isn't tapering, the Fed has increased QE!

He claims the Fed is covertly funding foreign entities in order to facilitate their purchases of US Treasury Bonds, and at the same time employing this sleight of hand removes the bond purchases from the Fed's paper trail.

As an example he described Belgium's recent purchases and sales of 141 Billion dollars worth of US treasuries, almost a third of their GDP, and he goes on to say such a purchase is inane for Belgium given their economy's trade and accounts are in deficit. If ever a reason was needed to be provided to disband the Fed, this has to be it.

Ghordius's picture

ultra-low rates of interest will never help the economy to make new investments. they help the economy to keep old investments, by preventing "creative destruction"

on the other side, even here it's very difficult to say if national or central banks are really the "masters of the rates", or if they react only

take the eurozone. as soon as there were higher rates than in the US, hot money flowed in like mad, looking for yield

take Japan. as soon as there were lower rates than in the US, hot credit flowed out like mad, borrowed by megabanks to chase yield somewhere else

at it's heart, the hegemon, the mighty USD, the only currency that has leeway to act. and yet there, again, it's really the willingness of debtors to do or not to do - and what - that ultimately sets the rates

so ultimately it's the quality of investment that sets everything in motion, and steers the quantities

QE and ultra-low rates are nothing else then, than the systemic reaction of the decision on keeping old, possibly foolish investments alive. it's a bet at gigantic levels, like the US housing market

Fix-ItSilly's picture

You describe the situation but do not realize it for what it is.  The Federal Reserve, now having a currency untethered to economic conditions, have full control of an international monetary process (which you described portions of) that in President Jefferson's words:


"If the American people ever allow private banks [Central Banks]  to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

fonzannoon's picture

"In fact, that's all QE does ... benefit the rich."

So it is working.

Ghordius's picture

excellent article, GW. "The credit which underpins economic activity isn't created by a supply of large deposits which then enables banks to lend; instead it is the demand for credit by borrowers that creates loans from banks which are then paid to recipients who then deposit them into banks. Loans create deposits, not the other way round."

This is an ugly truth about fiat/fractional banking systems, and ugly truths are often neglected

in fact, it all starts with the debtor, tapping what should imho be called the public credit well. of course, he gets this debt peddled by "intermediaries", but without the willingness to go into debt the system would not work. and this willingness is often cultural, i.e. if your peers have similar debt levels... well, then you are just keeping it up with the Joneses

and as long as the public debt system does not get a shock - for example minor or major wars - it usually works, like bridges work even though they "cheat" nature

Hobbleknee's picture

QE is working perfectly for the people that it's intended to work for. Anyone who believes the charade is a fool. QE is theft, pure and simple.

LawsofPhysics's picture

Correct.  Even worse, ZIRP (NIRP in real terms) is far more destructive.

Bindar Dundat's picture

The most insightful article I have read on the subject yet. Thanks GW.  

dontgoforit's picture

As a "massive bailout for the rich" wouldn't you think those hustlers had gotten enough out of this by now?  And yet QE marches on.  Seriously?  I think I could have read these tea leaves when I was in the 7th grade.  You can't borrow your way to prosperity.