Quantitative Easing (QE): Major Instances in History

The policy of Quantitative Easing (QE) is relatively nascent to the world economics. Despite is recent birth this policy has seen widespread usage in different countries of the world. An understanding of Quantitative Easing (QE) would therefore also imply understanding its usage in different parts of the world at different times. In this article, we have listed down the major instances wherein Quantitative Easing (QE) was used. They are as follows:

Quantitative Easing (QE) - Japan 2001

Japan has literally been the birthplace of Quantitative Easing (QE). It is here in 2001 that this economic policy was first implemented. The intent of this policy implementation was to ensure that the Japanese crisis which included deflation and continuously falling growth rates was effectively managed and remedied.

For over a period of 5 years, the Japanese Central Bank i.e. Bank of Japan (BOJ) persistently pumped money into the market. Estimates state that Japan had pumped more money into the market as compared to the United States. This figure is mind numbing given the fact that the US economy is at least three times larger than the Japanese economy.

However, in retrospect, most experts consider the Japanese experiments with Quantitative Easing (QE) to be a failure. Almost a decade after the fierce implementation of the policy, the Japanese economic situation remains almost the same. However, the Bank of Japan is still persistent and continues to use the policy of Quantitative Easing (QE). Many critics believe that continued use of this policy will ultimately lead to the collapse of the Japanese monetary system.

Quantitative Easing (QE) 1

The Federal Reserve i.e. the Central Bank of United States took a leaf out of the book of Bank of Japan and implemented the Quantitative Easing (QE) policy for the first time in the United States in the aftermath of the subprime mortgage crisis i.e. in 2008. The decision to use this policy came under heavy fire from an already hostile media. The failure of the Bank of Japan to make any significant dent in its economic situation was widely cited by many critics to deter the Fed from pursuing this policy.

However, the Fed remained undeterred. This is to say that it did implement Quantitative Easing (QE) and did so on a large scale. In the first round of Quantitative Easing (QE), the Fed purchased the troubled assets i.e. bonds of government agencies like Freddie Mac, Ginnie Mae and Sallie Mae as well as private mortgage backed securities that were available in the market.

The logic behind the bailout was simple. All types of mortgage backed securities simply had no market! Once the high risk associated with these securities came to light, no one was willing to invest in these securities. Hence, the Fed took the entire market on its own balance sheet! The financial implications of this action are yet to be known. However, one thing is for sure. The Quantitative Easing (QE) policy round one used by United States central bank allowed it to avoid a catastrophe of historical proportions as well as the economic and geopolitical implications that it would have resulted in.

Quantitative Easing (QE) 2 and Quantitative Easing (QE) 3

The United States central bank i.e. the Federal Reserve continued to use the Quantitative Easing (QE) policy unabated in the years following the crisis. In 2010, the Fed launched Quantitative Easing (QE) 2. This time the Fed was using the money plowed back from investments in 2008 as well as some more of its own money. The target was to buy as many Treasury securities as the Fed could lay its hands on. This was being done with a view to stabilize the government’s finances which had been stretched given the recent crisis. A similar program was undertaken in 2012 and was expected to continue till the end of 2015. This is known as Quantitative Easing (QE) 3 and it has been nicknamed as Quantitative Easing (QE) infinity because of the long lasting nature of this program.

UK Quantitative Easing (QE)

In 2009, the Bank of England also followed the Federal Reserve and created its own Quantitative Easing (QE) policy. Like United States, UK was also bordering on the verge of a recession. The Bank of England figured that it would be easier to pump money in the system and avoid the catastrophe in the moment. Later, as the markets cool down, the losses can be spread out and absorbed on a daily basis instead of one catastrophic blow that would inevitably lead to economic collapse.

Hence, in 2009, the Bank of England dropped the interest rates to 0.5%. Also, the bank purchased about GBP 200 billion worth of assets from the open market. This number is staggering if you consider the fact that it accounts for 14% of the British GDP during the same year! The government purchases were literally flooding the market and buying everything in sight to make up for the loss due to absence of confidence in the private investors.

Over a period of time, the Bank of England has continued to pump in more and more money. The latest reported figures state that the Bank still has about GBP 375 billion worth of assets on its books. The unwinding of these assets is what is expected to cause mayhem in the markets a few years from now.

European Quantitative Easing (QE)

The Central Bank of Europe which has been facing several problems at the same time has also used Quantitative Easing (QE). The use has been done to provide the local economies with a new lease of life given the debt crisis and the subprime crisis that were looming large at almost the same time. The Quantitative Easing (QE) program followed by European Central Bank has not been as huge as the ones used by its peers.

The history of Quantitative Easing (QE) therefore shows that this policy is largely untested. The effectiveness or ineffectiveness of this policy can only be gauged once the results of some of these instances become known.