QE QED | Charts that Count

Since the collapse of Lehman Brothers the story of the world’s attempts to stop the financial crisis turning into a Great Depression has been dominated by central banks’ balance sheets. John Authers describes how this averted total disaster and sparked a big rally for stock markets. Read more on the 10-year anniversary of the financial crisis at ft.com/financialcrisis.

Lehman brothers crashed ten years ago uttering in the worst financial crisis in living memory now the task i’ve been given for today is to sum up everything that has happened since that crisis in one chart now that of course is impossible but you can i think sum up the response to the crisis the attempt to deal with it by the economic and monetary authorities in

This chart because there really was one big policy that they used to combat the crisis and it was called qe which originally stood for quantitative easing qe d that’s what they attempted to do now the idea behind qe is that central banks buy assets primarily bonds when you buy an asset its price goes up which means that its yield goes down which means that if they

Buy enough bonds they push down interest rates in the economy that is likely to bring inflation back it’s likely to make it easier for people to borrow it’s likely to make it easier and more encouraging for people to take risks those were all the things they wanted to do but it also involves a very direct and aggressive involvement manipulation arguably of markets

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Which is why central bank’s had not done it before now in each case these lines are set for 100 in 2003 in of 2008 and show you how the balance sheets the total amounts of assets that the central banks held expanded after that this blue line is the bank of japan the red line here is the federal reserve of the us and this line down here is the european central

Bank now obviously you can see where lehman happens in in 2008 and you can see qe 1 very clearly this very sharp increase in the fed’s balance sheet so they buy bonds to try to keep markets liquid to try to tide through the graces without markets drying up all together now they succeeded in that they didn’t succeed in sparking any great life into the economy so

In late 2010 you get qe2 as it was called another expansion and then much more controversially in late 2012 we’ve already got quite a significant market rally going on here but we have what was dubbed qe infinity because there was it was indefinite there was no end date for this huge asset buying program which was steadily tapered off and carried on until 2015

As you can see the fed was far far far more aggressive than the other central banks the bank of japan invented qe back in the 90s didn’t really want to do it but that’s changed once you had the arrival of shinzo abe a s-sir as prime minister and his big idea of obey no mix that led to as you can see this very aggressive expansion in the bo j’s balance sheet and

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That wasn’t just bonds they were prepared to buy stocks and etfs as well at this point the boj has actually managed to overtake the fed is the most aggressive of the central bank’s finally the european central bank is the success of the intellectual heir of the blunders bank which is still very much preoccupied by the cultural memory of vimal republic’s err of

The vine republics hyperinflation so they’re much more conservative at this but as as europe sees its sovereign debt crisis taking over so you do see an expansion in the balance sheet then being as conservative as they are you see they actually try to crimp their balance sheet back down again to tighten conditions that turns out to be a mistake you lapse into

A deflationary scare very sluggish market and economy in the eurozone and so for the last few years you’ve seen the ecb also very aggressively expanding now we know the broad results for this of course you’ve seen asset prices shoot up particularly in the us but you haven’t seen any great amounts of inflation and you’ve not seen the kind of broad-based economic

Growth that makes populations much happier the big question for the next decade is what is going to happen once these lines start to go down

Transcribed from video
QE QED | Charts that Count By Financial Times

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