by Dirk Ehnts, Econoblog101

The BBC had an article last week which is interesting for two reasons: first, the authors seem to have no grasp of monetary theory, and second, the authors are not asking obvious questions.

Let’s have a look:

The overnight deposit rate was cut from -0.2% to -0.3%, to push banks to lend instead of parking money at the ECB.

This is misleading. Since readers usually have no grasp of monetary operations at the central bank level, most readers will get away thinking that banks can lend central bank deposits to households or corporations. That’s false. There are many critiques, so here is just one, written by the chief economist from Standard&Poor’s:

John Maynard Keynes famously wrote that: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” A modern example of that dictum, relevant to the economy, policy, and markets, is the widespread view that banks can “lend out” their reserves (deposits) at the central bank, as if bank reserves represented a pool of money that is just waiting to “flow into” bank lending. Because such a thing cannot occur and therefore has not occurred, the point is usually made in reverse: banks currently are not “lending out” their reserves – rather they are “parking” their reserves at the central bank or leaving them “idle.” But that they might lend them out in the future is a lurking risk and a reason to be cautious about the central bank engaging in aggressive quantitative easing (QE).

So, what QE cannot do is increase lending to the private sector. Have a look at the next bit:

ECB president Mario Draghi told a news conference that its bond-buying stimulus program, or quantitative easing (QE), was working.

But an extension of QE was needed to tackle prolonged low inflation and get it back towards the ECB’s 2% target, he said. QE would now run to at least March 2017, from…

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