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when a central bank creates a supply of new money to put into a banking system which is in serious difficulty
'Quantitative easing: What is it? And will it work? … With interest rates now at 0.5%, the Bank of England can't make money much cheaper. All they can do now is make it more plentiful. … Printing money, quantitative easing or extraordinary measures – call it what you want but one thing is clear. The UK economy and the Bank of England have entered uncharted waters.'Financial Director8th March 2009
On 5th March 2009, the Bank of England lowered official interest rates to just 0.5% – the lowest in the Bank's 315 year history. However it also did something else – it released £75 billion of cash into an ailing banking system, a measure which is now described as quantitative easing.
Ben Bernanke, chairman of the US Federal Reserve, famously likened it to dropping large amounts of cash from helicopters in the sky
The expression quantitative easing refers to a procedure whereby a central bank creates new money from nothing, quite literally out of 'thin air', to inject into the banking system. It is therefore simply a mechanism for boosting the supply of money when a financial system is under extreme pressure and the normal process of cutting interest rates isn't helping – usually when interest rates are so low that it's impossible to cut them further. The theory is that, flush with extra cash, banks will be able to start lending again and get money flowing around the economy – quantitative easing is therefore a sort of antidote to the effects of the credit crunch.
Although in some financial commentary it's often described as 'turning on the printing press' (Ben Bernanke, chairman of the US Federal Reserve, famously likened it to dropping large amounts of cash from helicopters in the sky) quantitative easing does not mean that central banks are actually printing crisp, new banknotes. Instead, they have the power to simply wave a magic wand and 'create' money electronically, money which is then given to banks in exchange for assets.
Though awkward to type and even more tricky to pronounce, the phrase quantitative easing has suddenly been splashed all over the media, who have been at pains to explain the workings of the concept to the financially-uninitiated man on the street. Quantitative easing, now often simply referred to by the abbreviation QE, is very much viewed as a 'last resort' in a situation where financial systems on both sides of the Atlantic are not responding to more conventional monetary policy.
Economist Richard Werner, currently a professor at the University of Southampton, lays claim to the coining of the expression quantitative easing in the mid-nineties. At the time, Werner was chief economist at Jardine Fleming Securities (Asia) Ltd. and Assistant Professor at Tokyo's Sophia University. The expression, a literal translation of Werner's use of Japanese ryoteki kinyu kanwa, hit mainstream exposure in 2001 when the process was adopted as official policy by the Bank of Japan in an attempt to combat domestic deflation.
In the phrase, quantitative is used to refer to the idea of 'involving amounts' (of money), and easing refers to the desire to 'reduce' (ease) pressure on banks. The adjective quantitative has a spelling variant, quantitive, and so there is some evidence for a corresponding variant quantitive easing.
The adjective quantitative is conventionally contrasted with the orthographically similar adjective qualitative, meaning 'concerning quality'. We therefore often talk about a quantitative analysis (an analysis which places emphasis on amounts) as opposed to a qualitative analysis (an analysis which is based on quality). Following this pattern, there is also some evidence for the phrase qualitative easing, which refers to a change in the kind of assets held by a central bank, usually towards less liquid assets (assets less easily exchanged for cash) or riskier assets.
This article was first published on 24th March 2009.