Quantitative easing (QE) is a simple electronic method by which a government or central bank “prints more money” to support private banks. In short, another bank bailout.
The money is not actually physically printed at a mint or based on the value of gold or anything else; it is, believe it or not, created out of thin air and the value of it is established in a form of promissory notes, or bonds, which are available only through the banks who have, of course, received the quantitative easing.
The basic concept of quantitative easing is to increase the excess reserves of private banks. There is no other benefit to quantitative easing.
Keep in mind, at this time, that private banks in the West (U.S. and Europe) can borrow public money at 0% (zero percent) or close to it and lend it back (maybe) to the public at around 5% interest and up to 30% in some instances through credit multipliers. Thus private banks get money for nothing (no interest) AND get quantitative easing (which cost nothing to create) AND their success is guaranteed by the public, the latter known as public debt.
In Simple Terms
Imagine this: your acquaintance logs into his internet banking account, he wants more money, he changes his bank balance himself (something which you can’t do with your bank account). He transfers you an amount but asks for it back immediately. If you can not give him “his money” he sues the crap out of you and, God forbid, start foreclosure on your house. There, your acquaintance is a quantitative easer.
Quantitative Easing Debate
The practice of quantitative easing has raised a lot of debate – and not without reason. To date, quantitative easing has not stimulated any economy anywhere at any time in history, yet. It did, however, add significantly to bank profits. The Rolling Stone’s Matt Taibbi calls quantitative easing “The Hidden Government Subsidy for Banks.” Ellen Brown points out that “adding more reserves to a banking system that already has more reserves than it can use has no net effect on the money supply.” Robert Skidelsky says that “what matters is not printing money, but spending it.” David DeGraw feels that quantitative easing violates the rule of law.
As with all debates there are, obviously, two sides to the story. Quantitative easing does have support from some economists. But in general the public – the people who guarantee these funds – feel that the trillions of bailout dollars could be better spent elsewhere. And since you are the guarantor you surely should know what a trillion dollars look like. (Hint: just one trillion dollars in $1000 bills is 65 miles high, ala USA Watchdog. The bailouts total many trillions of dollars – nobody actually knows the precise amount.)
Quantitative Easing Explained Easily
Still unsure how quantitative easing works? The BBC explains how money is created out of nothingnobody really knows if this works. But the most fun explanation of quantitative easing is by video:
tp://www.youtube.com/watch?v=PTUY16CkS-k
History of Quantitative Easing
Quantitative easing was used unsuccessfully by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s. During the global financial crisis of 2008–the present, policies announced by the US Federal Reserve under Ben Bernanke to counter the effects of the crisis are a form of quantitative easing. Its balance sheet expanded dramatically by adding new assets and new liabilities without "sterilizing" these by corresponding subtractions. In the same period the United Kingdom used quantitative easing as an additional arm of its monetary policy in order to alleviate its financial crisis.
The European Central Bank has used 12-month long-term refinancing operations (a form of quantitative easing without referring to it as such) through a process of expanding the assets that banks can use as collateral that can be posted to the ECB in return for euros. This process has led to bonds being "structured for the ECB". By comparison the other central banks were very restrictive in terms of the collateral they accept: the US Federal Reserve used to accept primarily treasuries (in the first half of 2009 it bought almost any relatively safe dollar-denominated securities); the Bank of England applied a large haircut.
In Japan's case, the BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. With quantitative easing, it 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.The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities and equities, and extended the terms of its commercial paper purchasing operation.
Origin of The Term
The original Japanese expression for "quantitative easing" (量的金融緩和, ryōteki kin'yū kanwa), was used for the first time by a Central Bank in the Bank of Japan’s publications. The Bank of Japan has claimed that the central bank adopted a policy with this name on 19 March 2001. However, the Bank of Japan's official monetary policy announcement of this date does not make any use of this expression (or any phrase using "quantitative") in either the Japanese original statement or its English translation. Indeed, the Bank of Japan had for years, including as late as February 2001, claimed that "quantitative easing … is not effective" and rejected its use for monetary policy.ex post, hardened the subsequent official Bank of Japan stance that the policy adopted by the Bank of Japan on March 19, 2001 was in fact quantitative easing. This became the established official view, especially after Toshihiko Fukui was appointed governor in February 2003. The use by the Bank of Japan is not the origin of the term "quantitative easing" or its Japanese original (ryoteki kinyu 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 International Banking at the School of Management, University of Southampton (UK). 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 (reference: Richard A. Werner, 1991, The Great Yen Illusion: Japanese foreign investment and the role of land related credit creation, Oxford Institute of Economics and Statistics Discussion Paper Series no. 129), he coined the expression in 1994 during his numerous presentations to institutional investors in Tokyo. It is also, among others, in the title of an article published on September 2, 1995 in the Nihon Keizai Shinbun (Nikkei).
According to its author, he 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 also claimed would be ineffective). Instead, Werner argued, it was necessary and sufficient for an economic recovery to boost ‘credit creation’, through a number of measures. He estimated at the time that the incipient bad debt problem of the Japanese system (i.e. including future bad debts) amounted to about ¥100 trillion, or 20% of annual Japanese GDP, and that this had increased banks’ risk aversion. The subsequent slowdown in bank credit extension was the major problem, because commercial banks are the main producers of the money supply, through the process of credit creation. He thus recommended as a solution policies such as direct purchases of non-performing assets from the banks by the central bank, direct lending to companies and the government by the central bank, purchases of commercial paper (CP) and other debt, as well as equity instruments from companies by the central bank, as well as stopping the issuance of government bonds to fund the public sector borrowing requirement and instead having the government borrow directly from banks through a standard loan contract All of these, Werner claimed, would stimulate credit creation and hence boost the economy. Many of these policies have recently been adopted by the US Federal Reserve under Chairman Bernanke, who was familiar with the debate on Japanese monetary policy, under the expression of "credit easing" (see below).
However, while Werner used and explained the concept of credit creation in his speeches and articles, he often chose not to use it initially or in the titles of articles, as too few listeners or readers would be familiar with it and alternative expressions were associated with flawed or failed policy prescriptions. Werner preferred to coin a new phrase. In his subsequent writings, including his bestselling book on the Bank of Japan (Princes of the Yen, M. E. Sharpe, and his 2005 book New Paradigm in Macroeconomics: Solving the Riddle of Japanese Macroeconomic Performance, Palgrave Macmillan), Werner argues that the Bank of Japan’s usage of his expression ‘quantitative easing’ may be misunderstood. While suggesting it was adopting the policy suggested by a leading critic, the Bank of Japan implemented the standard monetarist expansion of bank reserves and high powered money, which Werner had predicted would fail It is not obvious why the Bank of Japan chose to use Mr Werner’s expression, and not the already existing and widely used expressions ‘expansion of high powered money’, ‘expansion of bank reserves’ or, simply, ‘money supply expansion’, which more accurately describe its adopted policy at the time.
The final Curious © phrase:
«They were a people so primitive they did not know how to get money, except by working for it»
(Joseph Addison)
