In the autumn of 2008, as the global financial crisis intensified, governments and central banks were confronted by the threat of a second great depression. They responded with an arsenal of higher public spending, tax cuts and record-low interest rates, and embarked on a monetary experiment that would have profound consequences over the next decade: quantitative easing (QE).
Colloquially known as “printing money”, QE in fact refers to electronically-created money used by central banks to buy governments bonds and other assets from financial institutions (it was pioneered by Japan in the early 2000s). By injecting hundreds of billions in new money into the economy, the programme is intended to reduce the interest rates on government bonds as well as on loans offered to households and businesses. As individuals and corporations are incentivised to borrow and spend more, they help stimulate economic growth and job creation.
QE was originally framed as an “emergency measure” that would be unwound once normal economic conditions returned. The problem was that they never did. As growth recovered at the slowest rate in recorded history and governments imposed harmful austerity, QE became a permanent life support machine for the economy.
More than a decade after QE began, the Bank of England still holds £435bn of government bonds, the US Federal Reserve retains $4.1trn (£3.1trn) of assets and the European Central Bank holds €2.7trn (£2.3trn), having restarted its programme in November 2019). Far from being a one-off response to the 2008 crisis, QE has become the default treatment for perpetual stagnation (critics have likened it to crack cocaine or heroin).
In the aftermath of the 2016 Brexit vote, the Bank of England bought a further £60bn of government bonds and £10bn of corporate bonds to counter the threat of a new recession. Such was QE’s ubiquity that it was blamed by conservative commentators for fuelling “millennial socialism” and was referenced in the Arctic Monkeys’ 2018 song “Science Fiction”. But has it succeeded?
QE is credited by most economists with helping to prevent a new depression and stimulating growth and job creation (UK employment recently reached a new record high of 76.2 per cent). David Blanchflower, who backed QE as a member of the Bank of England’s Monetary Policy Committee, has remarked of the programme: “It was the equivalent of 10,000 Warren Buffets showing up. Two people saved the world. Ben Bernanke [the former head of the US Federal Reserve] saved the world on the monetary front and Gordon Brown on the fiscal front.”
Though free-market economists warned QE could trigger runaway inflation, the programme has been accompanied by a decade of modest price increases (with UK inflation peaking at 4.5 per cent in 2011).
QE, however, is not an uncomplicated good. As well as keeping interest rates low, the policy drives up the price of housing and other assets, a fact that has led politicians of left and right to denounce it as inequitable. In her 2016 Conservative conference speech, for instance, Theresa May declared: “People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer. A change has got to come. And we are going to deliver it.”
In a 2018 paper, Bank of England researchers countered that, far from increasing wealth inequality, QE had narrowed it. As house prices rose, those on low and middle incomes saw a bigger proportional increase in their net worth than the wealthiest households did. The researchers did, however, concede that “the 10 per cent of least wealthy households are only estimated to have seen a marginal increase in their measured real wealth of around £3,000 between 2006-08 and 2012-14, compared to £350,000 for the wealthiest 10 per cent.”
Such findings have prompted some left-wing economists to advocate “people’s QE”, an idea Jeremy Corbyn floated during his 2015 Labour leadership campaign. Rather than creating new money to buy government bonds, central banks would use it to fund public infrastructure programmes (an idea also championed by proponents of Modern Monetary Theory).
But critics dismissed people’s QE as either dangerous or pointless. It would, some warned, profoundly undermine central bank independence, while others argued that, in an era of ultra-low interest rates, governments could easily afford to borrow for state investment (Labour swiftly ended its flirtation with “people’s QE”).
Few dispute that QE, in some form, has been necessary. The problem is that it has been insufficient. In an era of austerity across the West, expansive monetary policy has too often been treated as a substitute for fiscal stimulus (higher public spending and tax cuts), rather than as a partner. We are still living with the consequences of this choice. More than a decade after the crash, average earnings in the UK have yet to return to their pre-2008 peak.
QE was billed as an extraordinary policy for extraordinary times. Its normalisation is a testament to the decade that growth forgot.