Quantitative easing and common sense | Letters

Zoe Williams (It's fine to print money, so long as it's not for the people, 5 October) raises an important question about quantitative easing (QE). In the wake of the global financial crisis, it was adopted by the Bank of England. Capital markets had ceased to function. The banking system was in deep crisis. In the US and Britain, governments were driven to inject equity into the collapsing banking system. These huge outlays had to be funded by the issuance of public debt. The Bank made clear to the prime brokers (mainly the major commercial banks) that they would be offered access to zero-cost funds in order to bid in Treasury auctions. These funds were provided electronically by the Bank into the accounts of those banks held with it.

These no-cost credits enabled the prime brokers to purchase the government debt, and by agreement swap back the debt to the Bank at a modest profit. Once this happened, the electronic advances made by the Bank were cancelled. The net effect was threefold. First, the government's solvency was preserved. Second, the prime brokers were able to secure profit from guaranteed transactions to replace more traditional forms of lending. Third - the odd bit - the Bank ultimately ended up holding the debt of the British government, not the private sector of the economy.