75 pivotal public policies: quantitative easing

QE, as it became known, came of age in the aftermath of the financial crisis of 2008, though it had been part of the central banking toolkit for years. The term “quantitative easing” was coined in 1995 by Richard Werner, a German economist, and the US Federal Reserve had, albeit belatedly, deployed the policy during the Great Depression of the 1930s. But after the collapse of Lehman Brothers forced governments to bail out the global banking system, QE played a vital role in helping the world economy recover from the subsequent Great Recession.

QE was deemed necessary because the traditionally preferred tool of central bankers facing a recession did not do the trick: they quickly cut interest rates to around zero and needed to find something more to turn things around. That something was QE: massive purchasing of government bonds or other financial assets to inject money into the banking system.

In November 2008, the Federal Reserve implemented the first of three rounds of QE, dramatically adding new assets and liabilities to its balance sheet without corresponding subtractions. Other leading central banks followed suit, some faster than others. (The European Central Bank was initially reluctant, worrying that QE might drive up inflation, and only embraced the policy wholeheartedly in 2015.)

The Federal Reserve initiated a fourth round of QE in late 2019, which was extended in response to the COVID-19 pandemic. The UK’s Bank of England and the European Central Bank also utilised QE as an additional arm of monetary policy to reduce the economic impact of the pandemic.

Critics of QE argue that, eventually, it may result in inflation. Equally, it will only work if those financial institutions from which central banks buy financial assets then deploy the money they receive to stimulate the real economy—which in practice, is by no means guaranteed. Some economists argue that fiscal policy can do a better, more targeted job of helping economies recover, but especially after the 2008 crash many governments felt constrained from using borrowing to increase public spending because of financial market demands for government fiscal “austerity”.


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