ANALYSIS | WHY BREAKING QE ADDICTION IS SUCH A STRUGGLE'
0Analysis | Why Breaking QE Addiction Is Such a Struggle'
Few in Britain want to hear it. but the financial crisis that has rocked the country has a silver lining for the rest of the world. The Bank of England's dramatic intervention reminds us that quantitative easing. large scale bond purchases . commonly associated with low inflation rather than today's price hikes. will not go away in what seemed like a one off exercise rooted in the traumas of 2008. the European debt crisis a few years later. and post bubble Japan . is being introduced again and again. The UK is unlikely to be its last resurrection. The potential for a collapse in US Treasury trading is worrying top officials. with Treasury Secretary Janet Yellen going public with her concerns last week after complaining about adequacy of liquidity Worried about the worst market crisis in decades bolstered by the Federal Reserve's efforts to dump some of the bonds it purchased during its Covid stimulus. As I watched the BOE roll in and calm the market. I recalled a powerful message from Raghuram Rajan. a former Reserve Bank of India governor. at a conference a year ago. Inflation began to build around the world. and central banks considered how to begin gently draining the vast sums pumped into the financial system during the pandemic. Should QE return to the archives? Rajan was skeptical. telling a panel that buying assets is like 'a whirlpool' that's easy to fall into but much harder to escape from. QE looked like yesterday's hero – and villain. Rajan stands by his October 2021 warning. In theory. he says. the process is simple: During QE. central banks buy bonds and expand their balance sheets. When the economy has recovered and it's time to end the stimulus. simply do the opposite and release the bonds into the market. QE becomes quantitative tightening or QT. 'That's the narrative that says it's very easy to get in and very easy to get out.' Rajan. a professor at the University of Chicago. told me recently. “The problem is things happen along the way.” Providing liquidity in tough times makes perfect sense. “but the private sector is getting used to it and you have to keep coming back in. It's a drug. it's addictive. The private sector cannot escape this addiction.” Once seen as an exotic slice of Japan. QE was unleashed by the Fed during the 2007 2009 global financial crisis. On the other hand. it pursued a policy of QE – albeit only in emergency situations and of short duration – that was associated with deflationary risks. And who can doubt that officials. once intervened. will return? One of the defining characteristics of QE isn't just about buying bonds per se. It's about signaling that interest rates will remain low for quite some time. The punch is stronger when combined with a forward leadership that commits to simple politics as far and as long as possible. That was the case after the collapse of Lehman Brothers Holdings Inc. and through much of the pandemic.'
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