I keep reading people on comments boards saying "why does the government do quantitative easing by buying (worthless) assets from banks, couldn't they actually print money and give it to people instead?". I've not seen an answer to this question - anyone got an answer? I heard that the Australian government did something similar once, anyone know anything about that?
This question is slightly confused in a couple of senses, which I will try to explain, but fundamentally the reason is that the central bank is not in the business of redistributing wealth, and that is what handing out newly printed money would amount to.
The Bank’s QE programme (known as the Asset Purchase Facility or APF) involves the purchase of long maturity high grade debt from the non-bank private sector. So, by design, the central bank is not buying worthless assets and it is not buying them from the banks. It is buying (long maturity) risk free assets (UK government debt), and it is buying them from the big institutional investors that hold them (like pension funds). (If you think about it, it’s obvious that banks are not going to be big lenders to the government, since banks want to earn a spread between their cost of funding and their customers, and the government‘s cost of funding is naturally very low.)
Because the Bank is purchasing assets rather than simply handing out cash (as any people assume), no one involved in the scheme gets any “free money”. Think of an imaginary investor who holds some quantity of gilts (i.e. UK government debt). Their balance sheet might have say £1mn gilts on the asset side and no liabilities, so their net worth is £1mn. The Bank of England then comes to them and buys half of the gilts. Now the investor’s balance sheet has £0.5mn gilts and a £0.5mn deposit at the bank.
So
the investor’s net worth is unchanged. The difference is that now they hold an asset—the bank deposit—earning a very low return, which they will hopefully take and use to purchase another bond, which will help to pin down long-term interests rates, which is essentially the goal of QE.
As a rule, the Bank of England wants to leave everyone’s net worth unchanged as a first order effect whenever it carries out a monetary policy operation. It does this by 1, conducting monetary operations via the purchase and sale of assets (which it does every day in the gilt repo market), and 2, only ever purchasing high grade assets that will not make a loss.
Consider the case where the Bank buys crappy assets from some investor as part of its QE programme. Say that it over pays for them, and makes a loss when it tries to sell them bank to the market after the QE programme is unwound. Then the Bank will have to be recapitalised by the Treasury, i.e. by taxpayers, and this constitutes a direct redistribution of wealth from the taxpayer to the investor who sold the assets to the Bank originally.
One way to think of the difference between monetary and fiscal policy is like this. At any one time, the non-government sector holds some quantity of government liabilities. Call this its risk free portfolio, or portfolio of safe assets. This is the national debt, and consists of liabilities of the treasury (gilts of varying maturities, i.e. government debt) and liabilities of the central bank (mostly paper currency and bank reserves, i.e. central bank money). It is the job of fiscal policy to determine the
size of this portfolio. And it is the job of monetary policy to determine the
composition of this portfolio in terms of how it is split between central bank money and government debt.