Quantitative easing

The US Federal Reserve belatedly implemented policies similar to the recent quantitative easing during the Great Depression of the 1930s.[10][11] Specifically, banks' excess reserves exceeded 6 percent in 1940, whereas they vanished during the entire postwar period until 2008.[12] Despite this fact, many commentators called the scope of the Federal Reserve quantitative easing program after the 2008 crisis "unprecedented".[13][14][15]

A policy termed "quantitative easing" (量的金融緩和, ryōteki kin'yū kanwa) was first used by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s.[16][17][18][19] The BOJ had maintained short-term interest rates at close to zero since 1999. The Bank of Japan had for many years, and as late as February 2001, stated that "quantitative easing ... is not effective" and rejected its use for monetary policy.[20]

According to the Bank of Japan, the central bank adopted quantitative easing on 19 March 2001.[21][22] Under quantitative easing, the BOJ flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves and therefore little risk of a liquidity shortage.[23] The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It later also bought asset-backed securities and equities and extended the terms of its commercial paper-purchasing operation.[24] The BOJ increased commercial bank current account balances from ¥5 trillion to ¥35 trillion (approximately US$300 billion) over a four-year period starting in March 2001. The BOJ also tripled the quantity of long-term Japan government bonds it could purchase on a monthly basis. However, the seven-fold increase notwithstanding, current account balances (essentially central bank reserves) being just one (usually relatively small) component of the liability side of a central bank's balance sheet (the main one being banknotes), the resulting peak increase in the BOJ's balance sheet was modest, compared to later actions by other central banks.

The use by the Bank of Japan is not the origin of the term "quantitative easing" or its Japanese original (量的金融緩和, ryōteki kin'yū kanwa). This expression had been used since the mid-1990s by critics of the Bank of Japan and its monetary policy. The earliest written record of the phrase and concept of "quantitative easing" has been attributed to the economist Dr Richard Werner, Professor of Banking and Finance. At the time working as chief economist of Jardine Fleming Securities (Asia) Ltd in Tokyo, and noted for his 1991 warning of the coming collapse of the Japanese banking system and economy [25], he coined the expression in an article published on September 2, 1995 in the Nihon Keizai Shinbun (Nikkei).[26] According to its author, Werner used this phrase in order to propose a new form of monetary stimulation policy by the central bank that relied neither on interest rate reductions (which Werner claimed in his Nikkei article would be ineffective) nor on the conventional monetarist policy prescription of expanding the money supply (e.g. through "printing money", expanding high powered money, expanding bank reserves or boosting deposit aggregates such as M2+CD, all of which Werner claimed would be ineffective).[19] Instead, Werner argued, it was necessary and sufficient for an economic recovery to boost 'credit creation', through a number of measures.[27]

Since the global financial crisis of 2007–08, policies similar to those undertaken by Japan have been used by the United States, the United Kingdom, and the Eurozone. Quantitative easing was used by these countries because their risk-free short-term nominal interest rates (termed the federal funds rate in the US, or the official bank rate in the UK) were either at or close to zero.

During the peak of the financial crisis in 2008, the US Federal Reserve expanded its balance sheet dramatically by adding new assets and new liabilities without "sterilizing" these by corresponding subtractions. In the same period, the United Kingdom also used quantitative easing as an additional arm of its monetary policy to alleviate its financial crisis.[28][29][30]

Federal Reserve Holdings of Treasury Notes (blue) and Mortgage-Backed Securities (red)

The U.S. Federal Reserve System held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession. In late November 2008, the Federal Reserve started buying $600 billion in mortgage-backed securities.[31] By March 2009, it held $1.75 trillion of bank debt, mortgage-backed securities, and Treasury notes; this amount reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy started to improve, but resumed in August 2010 when the Fed decided the economy was not growing robustly. After the halt in June, holdings started falling naturally as debt matured and were projected to fall to $1.7 trillion by 2012. The Fed's revised goal became to keep holdings at $2.054 trillion. To maintain that level, the Fed bought $30 billion in two- to ten-year Treasury notes every month.[32]

In November 2010, the Fed announced a second round of quantitative easing, buying $600 billion of Treasury securities by the end of the second quarter of 2011.[33][34] The expression "QE2" became a ubiquitous nickname in 2010, used to refer to this second round of quantitative easing by US central banks.[35] Retrospectively, the round of quantitative easing preceding QE2 was called "QE1".[36][37]

A third round of quantitative easing, "QE3", was announced on 13 September 2012. In an 11–1 vote, the Federal Reserve decided to launch a new $40 billion per month, open-ended bond purchasing program of agency mortgage-backed securities. Additionally, the Federal Open Market Committee (FOMC) announced that it would likely maintain the federal funds rate near zero "at least through 2015".[38][39] According to NASDAQ.com, this is effectively a stimulus program that allows the Federal Reserve to relieve $40 billion per month of commercial housing market debt risk.[40] Because of its open-ended nature, QE3 has earned the popular nickname of "QE-Infinity".[41] On 12 December 2012, the FOMC announced an increase in the amount of open-ended purchases from $40 billion to $85 billion per month.[42]

On 19 June 2013, Ben Bernanke announced a "tapering" of some of the Fed's QE policies contingent upon continued positive economic data. Specifically, he said that the Fed could scale back its bond purchases from $85 billion to $65 billion a month during the upcoming September 2013 policy meeting.[43] He also suggested that the bond-buying program could wrap up by mid-2014.[44] While Bernanke did not announce an interest rate hike, he suggested that if inflation followed a 2% target rate and unemployment decreased to 6.5%, the Fed would likely start raising rates. The stock markets dropped by approximately 4.3% over the three trading days following Bernanke's announcement, with the Dow Jones dropping 659 points between 19 and 24 June, closing at 14,660 at the end of the day on 24 June.[45] On 18 September 2013, the Fed decided to hold off on scaling back its bond-buying program,[46] and announced in December 2013 that it would begin to taper its purchases in January 2014.[47] Purchases were halted on 29 October 2014[48] after accumulating $4.5 trillion in assets.[49]

Immediate and delayed effects of quantitative easing.[50]

During its QE programme, the Bank of England bought gilts from financial institutions, along with a smaller amount of relatively high-quality debt issued by private companies.[51] The banks, insurance companies, and pension funds could then use the money they received for lending or even to buy back more bonds from the bank. Further, the central bank could lend the new money to private banks or buy assets from banks in exchange for currency. These measures have the effect of depressing interest yields on government bonds and similar investments, making it cheaper for business to raise capital.[52] Another side effect is that investors will switch to other investments, such as shares, boosting their price and thus encouraging consumption.[51] QE can reduce interbank overnight interest rates and thereby encourage banks to loan money to higher interest-paying and financially weaker bodies.

Beginning in March 2009, the Bank of England had purchased around £165 billion in assets as of September 2009 and around £175 billion in assets by the end of October 2009.[53] At its meeting in November 2009, the Monetary Policy Committee (MPC) voted to increase total asset purchases to £200 billion. Most of the assets purchased have been UK government securities (gilts); the Bank has also purchased smaller quantities of high-quality private-sector assets.[54] In December 2010, MPC member Adam Posen called for a £50 billion expansion of the Bank's quantitative easing programme, while his colleague Andrew Sentance has called for an increase in interest rates due to inflation being above the target rate of 2%.[55] In October 2011, the Bank of England announced that it would undertake another round of QE, creating an additional £75 billion.[56] In February 2012 it announced an additional £50 billion.[57] In July 2012 it announced another £50 billion,[58] bringing the total amount to £375 billion. The Bank has said that it will not buy more than 70% of any issue of government debt.[59] This means that at least 30% of any issue of government debt will have to be purchased and held by institutions other than the Bank of England. In 2012 the Bank estimated that quantitative easing had benefited households differentially according to the assets they hold; richer households have more assets.[60]

In August 2016, the Bank of England said it would buy an additional £60bn of UK government bonds and £10bn of corporate bonds, to address uncertainty over Brexit and worries about productivity and economic growth.[61] In an emergency meeting due to the COVID-19 pandemic in March 2020, the Bank announced £200bn purchases of government bonds, bringing the total to £645bn. [62]

The European Central Bank said that it would focus on buying covered bonds, a form of corporate debt. It signalled that its initial purchases would be worth about €60 billion in May 2009.[63]

At the beginning of 2013, the Swiss National Bank had the largest balance sheet relative to the size of the economy it was responsible for, at close to 100% of Switzerland's national output. A total of 12% of its reserves were in foreign equities. By contrast, the US Federal Reserve's holdings equalled about 20% of US GDP, while the European Central Bank's assets were worth 30% of GDP.[64]

In a dramatic change of policy, following the new Jackson Hole Consensus, on 22 January 2015 Mario Draghi, President of the European Central Bank, announced an "expanded asset purchase programme", where €60 billion per month of euro-area bonds from central governments, agencies and European institutions would be bought. Beginning in March 2015, the stimulus was planned to last until September 2016 at the earliest with a total QE of at least €1.1 trillion. Mario Draghi announced the programme would continue: "until we see a continued adjustment in the path of inflation", referring to the ECB's need to combat the growing threat of deflation across the eurozone in early 2015.[65][66]

On 10 March 2016, the ECB increased its monthly bond purchases to €80 billion from €60 billion and started to include corporate bonds under the asset purchasing programme and announced new ultra-cheap four-year loans to banks. After a short pause of about a year, the ECB resumed buying up eurozone government bonds at a rate of €20 billion as from November 2019 in an effort to encourage governments to borrow more and spend in domestic investment projects. On 18 March 2020, to help the economy absorb the shock of the COVID-19 crisis, the ECB announced a €750 billion Pandemic Emergency Purchase Programme (PEPP). The aim of the stimulus package (PEPP) was to lower borrowing costs and increase lending in the euro area.[67]

Sveriges Riksbank launched quantitative easing in February 2015, announcing government bond purchases of nearly 1.2 billion USD.[68] The annualised inflation rate in January 2015 was minus 0.3 percent, and the bank implied that Sweden's economy could slide into deflation.[68]

In early October 2010, the Bank of Japan announced that it would examine the purchase of ¥5 trillion (US$60 billion) in assets. This was an attempt to push down the value of the yen against the US dollar to stimulate the domestic economy by making Japanese exports cheaper; however, it was ineffective.[69]

On 4 August 2011 the BOJ announced a unilateral move to increase the commercial bank current account balance from ¥40 trillion (US$504 billion) to a total of ¥50 trillion (US$630 billion).[70][71] In October 2011, the Bank expanded its asset purchase program by ¥5 trillion ($66bn) to a total of ¥55 trillion.[72]

On 4 April 2013, the Bank of Japan announced that it would expand its asset purchase program by 60 to 70 trillion Yen a year.[73]

The Bank hoped to bring Japan from deflation to inflation, aiming for 2% inflation. The amount of purchases was so large that it was expected to double the money supply.[74] This policy has been named Abenomics, as a portmanteau of economic policies and Shinzō Abe, the current Prime Minister of Japan.

On 31 October 2014, the BOJ announced the expansion of its bond buying program, to now buy ¥80 trillion of bonds a year.[75]

In the European Union, World Pensions Council (WPC) financial economists have also argued that artificially low government bond interest rates induced by QE will have an adverse impact on the underfunding condition of pension funds, since "without returns that outstrip inflation, pension investors face the real value of their savings declining rather than ratcheting up over the next few years".[91][92] In addition to this, low or negative interest rates create disincentives for saving.[93] In a way this is an intended effect, since QE is intended to spur consumer spending.

According to Bloomberg reporter David Lynch, the new money from quantitative easing could be used by the banks to invest in emerging markets, commodity-based economies, commodities themselves, and non-local opportunities rather than to lend to local businesses that are having difficulty getting loans.[94]

Critics frequently point to the redistributive effects of quantitative easing. For instance, British Prime Minister Theresa May openly criticized QE in July 2016 for its regressive effects: "Monetary policy – in the form of super-low interest rates and quantitative easing – has helped those on the property ladder at the expense of those who can't afford to own their own home."[95] Dhaval Joshi of BCA Research wrote that "QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it".[96] Anthony Randazzo of the Reason Foundation wrote that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality".[96]

Those criticisms are partly based on some evidence provided by central banks themselves. In 2012, a Bank of England report[97] showed that its quantitative easing policies had benefited mainly the wealthy, and that 40% of those gains went to the richest 5% of British households.[96][98]

In May 2013, Federal Reserve Bank of Dallas President Richard Fisher said that cheap money has made rich people richer, but has not done quite as much for working Americans.[99]

Answering similar criticisms expressed by MEP Molly Scott Cato, the President of the ECB Mario Draghi once declared:[100]

Some of these policies may, on the one hand, increase inequality but, on the other hand, if we ask ourselves what the major source of inequality is, the answer would be unemployment. So, to the extent that these policies help – and they are helping on that front – then certainly an accommodative monetary policy is better in the present situation than a restrictive monetary policy.

In July 2018, the ECB published a study[101] showing that its QE programme increased the net wealth of the poorest fifth of the population by 2.5 percent, compared with just 1.0 percent for the richest fifth. The study's credibility was however contested.[102]

BRIC countries have criticized the QE carried out by the central banks of developed nations. They share the argument that such actions amount to protectionism and competitive devaluation. As net exporters whose currencies are partially pegged to the dollar, they protest that QE causes inflation to rise in their countries and penalizes their industries.[103][104][105][106]

The world's leading emerging economies have urged Western governments[107] to pursue "responsible" economic policies, in particular referring to quantitative easing. In a joint statement leaders of Russia, Brazil, India, China and South Africa, collectively BRICS, have condemned the policies of western economies saying "It is critical for advanced economies to adopt responsible macro-economic and financial policies, avoid creating excessive liquidity and undertake structural reforms to lift growth" as written in the Telegraph.[108]

Another criticism prevalent in Europe,[109] is that it creates moral hazard for governments. Central banks’ purchases of government securities artificially depress the cost of borrowing. Normally, governments issuing additional debt see their borrowing costs rise, which discourages them from overdoing it. In particular, market discipline in the form of higher interest rates will cause a government like Italy’s, tempted to increase deficit spending, to think twice. Not so, however, when the central bank acts as bond buyer of last resort and is prepared to purchase government securities without limit. In such circumstances, market discipline will be incapacitated.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, warned in 2010 that QE carries "the risk of being perceived as embarking on the slippery slope of debt monetization. We know that once a central bank is perceived as targeting government debt yields[93] at a time of persistent budget deficits, concern about debt monetization quickly arises." Later in the same speech, he stated that the Fed is monetizing the government debt: "The math of this new exercise is readily transparent: The Federal Reserve will buy $110 billion a month in Treasuries, an amount that, annualized, represents the projected deficit of the federal government for next year. For the next eight months, the nation's central bank will be monetizing the federal debt."[110] Ben Bernanke remarked in 2002 that the US government had a technology called the printing press (or, today, its electronic equivalent), so that if rates reached zero and deflation threatened, the government could always act to ensure deflation was prevented. He said, however, that the government would not print money and distribute it "willy nilly" but would rather focus its efforts in certain areas (e.g., buying federal agency debt securities and mortgage-backed securities).[111][112] According to economist Robert McTeer, former president of the Federal Reserve Bank of Dallas, there is nothing wrong with printing money during a recession, and quantitative easing is different from traditional monetary policy "only in its magnitude and pre-announcement of amount and timing".[113][114]

Professor Willem Buiter of the London School of Economics has proposed a terminology to distinguish quantitative easing, or an expansion of a central bank's balance sheet, from what he terms qualitative easing, or the process of a central bank adding riskier assets to its balance sheet:

Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase [in its] monetary liabilities (base money), holding constant the composition of its assets. Asset composition can be defined as the proportional shares of the different financial instruments held by the central bank in the total value of its assets. An almost equivalent definition would be that quantitative easing is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities that holds constant the (average) liquidity and riskiness of its asset portfolio. Qualitative easing is a shift in the composition of the assets of the central bank towards less liquid and riskier assets, holding constant the size of the balance sheet (and the official policy rate and the rest of the list of usual suspects). The less liquid and more risky assets can be private securities as well as sovereign or sovereign-guaranteed instruments. All forms of risk, including credit risk (default risk) are included.[115]

In introducing the Federal Reserve's response to the 2008–09 financial crisis, Fed Chairman Ben Bernanke distinguished the new program, which he termed "credit easing", from Japanese-style quantitative easing. In his speech, he announced,

Our approach—which could be described as "credit easing"—resembles quantitative easing in one respect: It involves an expansion of the central bank's balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank's balance sheet is incidental. Indeed, although the Bank of Japan's policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses.[116]

Credit easing involves increasing the money supply by the purchase not of government bonds but of private-sector assets, such as corporate bonds and residential mortgage–backed securities.[117][118] In 2010, the Federal Reserve purchased $1.25 trillion of mortgage-backed securities to support the sagging mortgage market. These purchases increased the monetary base in a way similar to a purchase of government securities.[119]

Quantitative easing has been nicknamed "printing money" by some members of the media,[120][121][122] central bankers,[123] and financial analysts.[124][125] Stephen Hester, chief executive officer of the RBS Group, said:

What the Bank of England does in quantitative easing is it prints money to buy government debt, ... So the Quantitative Easing has enabled governments, this government, to run a big budget deficit without killing the economy because the Bank of England has financed it.[126]

Central banks in most developed nations (e.g., the United Kingdom, the United States, Japan, and the Eurozone) are prohibited from buying government debt directly from the government and must instead buy it from the secondary market.[119][127] This two-step process, where the government sells bonds to private entities that in turn sell them to the central bank, has been called "monetizing the debt" by many analysts.[119]

However, QE is a very different form of money creation than it is commonly understood when talking about "money printing". Indeed, the term printing money usually implies that newly created money is used to directly finance government deficits or pay off government debt (also known as monetizing the government debt). With QE, the newly created money is usually used to buy financial assets other than government bonds.[120] Also, the Federal Reserve has mostly "sterilized" its bond purchases by paying interest to banks for reserve deposits. This removes money from circulation previously added by the Fed's bond purchases. The net effect is to raise bond prices, lowering borrowing rates for mortgages and other loans, without an inflationary increase in the money supply.[128]

The distinguishing characteristic between QE and debt monetization is that with the former, the central bank creates money to stimulate the economy, not to finance government spending (although an indirect effect of QE is to lower rates on sovereign bonds). Also, the central bank has the stated intention of reversing the QE when the economy has recovered (by selling the government bonds and other financial assets back into the market).[120] The only effective way to determine whether a central bank has monetized debt is to compare its performance relative to its stated objectives. Many central banks have adopted an inflation target. It is likely that a central bank is monetizing the debt if it continues to buy government debt when inflation is above target and if the government has problems with debt financing.[119]

In response to concerns that QE is failing to create sufficient demand, particularly in the Eurozone, a number of economists have called for "QE for the people". Instead of buying government bonds or other securities by creating bank reserves, as the Federal Reserve and Bank of England have done, some suggest that central banks could make payments directly to households (in a similar fashion as Milton Friedman's helicopter money).[129] Economists Mark Blyth and Eric Lonergan argue in Foreign Affairs that this is the most effective solution for the Eurozone, particularly given the restrictions on fiscal policy.[130] They argue that based on the evidence from tax rebates in the United States, less than 5% of GDP transferred by the ECB to the household sector in the Eurozone would suffice to generate a recovery, a fraction of what it intends to be done under standard QE. Oxford economist, John Muellbauer, has suggested that this could be legally implemented using the electoral register.[131]

On 27 March 2015, 19 economists including Steve Keen, Ann Pettifor, Robert Skidelsky, and Guy Standing have signed a letter to the Financial Times calling on the European Central Bank to adopt a more direct approach to its quantitative easing plan announced earlier in February.[132]

In November 2015, a group of NGOs led by Positive Money launched a campaign 'Quantitative Easing for People' more than 65 economists[133] supported the campaign, stating that: "Instead of flooding financial markets, money created through QE should be spent into the real economy, on essential public investment such as green infrastructure, affordable housing and/or distributed as a citizens’ dividend to all residents." Those ideas were also discussed at the European Parliament on 17 February 2016[134][135] A few months later, the ECB recognized that helicopter money could be a feasible option under condition that such programme do not substitute to "obligation of the public sector vis-à-vis third parties."[136]

A variant of QE for the people is People's Quantitative Easing, a policy proposed by Jeremy Corbyn during the 2015 Labour leadership election, which would require the Bank of England to create money to finance government investment via a National Investment Bank.[137]

Based on research by economist Eric Swanson reassessing the effectiveness of the US Federal Open Market Committee action in 1961 known as Operation Twist, The Economist has posted that a similar restructuring of the supply of different types of debt would have an effect equal to that of QE.[138] Such action would allow finance ministries (e.g., the US Department of the Treasury) a role in the process now reserved for central banks.[138]

Neo-Fisherism, based on theories made by Irving Fisher reasons that the solution to low inflation is not quantitative easing, but paradoxically to increase interest rates. This is due to the fact that if interest rates continue to decline, banks will lose customers and less money will be invested back into the economy.

In a situation of low inflation and high debt, customers will feel more secure holding on to cash or converting cash into commodities, which fails to stimulate economic growth. If the money supply increases from quantitative easing, customers will subsequently default in the face of higher prices, thus resetting the low inflation and worsening the low inflation issue.[139][140]

Keynesian economics became popular after the Great Depression. The idea is that in an economy with low inflation and high unemployment (especially technological unemployment), demand side economics will stimulate consumer spending, which increases business profits, which increases investment. Keynesians promote methods like public works, infrastructure redevelopment, and increases in the social safety net to increase demand and inflation.