Quantitative Easing - Essay Example

Quantitative Easing Stimulating the economy of a country requires unconventional measures that involve monetary policies such as quantitative easing. In such a case, a country’s central bank purchases financial assets from banks and any other private sector business with new electronically created money in order to inject a pre-determined amount of money in the economy of the country (Mayer, 2010:266). Quantitative easing has policies that when well implemented can result to reduction of systematic risks and improve market confidence. Consequently, it can contribute to higher inflation than desired in case policy makers overestimate the amount of easing required (Gibbons, 2011:224). This essay will seek to explain the extent in which the practice of quantitative easing threatens the independence of policymakers. Quantitative easing is another bank bailout. Money created in form of promissory notes or bonds and is available to only those banks that have received the quantitative easing (Biefang-FrisanchoMariscal, and Howells, 2011:98). When the rate of interests is high, there is an alternative method of influencing the price of money circulating in the economy. This alternate solution is quantitative easing whose aim is to lower the rates of interests affecting companies and households where the central bank takes the most important step, QE, by generating new money for use in an economy. Therefore, quantitative easing, dubbed printing money, assumes the definition of unconventional monetary policy acquired by the central banks in view of stimulating the economy at times when the conventional monetary policy fails. Only the central bank has the mandate to practice quantitative easing because its money is acceptable as payment by everyone. In this instance, the central bank creates up-to-the-minute money at a stroke of a computer of a computer key. In effect, it increases the credit in its own account. The United Kingdom has a quantitative easing policy that revolves around operation, design, and impact. With response to the intensified financial crisis in autumn 2008, the Bank of England implemented the policy of loosening monetary policy by use of both conventional and unconventional policy measures (Hamilton, J. 2012). These unconventional measures had principle element in the United Kingdom whereby, their policy was to purchase assets with finances from the central bank, in short, quantitative easing (Howells and Hussein, 1997:378). Between March 2009 and January 2010, there were more than 200 billion Euros purchases of assets. Overwhelmingly, this amount comprised of government securities that ended up representing 14 percent of the annual Gross Domestic Product (Howells, 2010:314). The motivation and implementation of these central banks’ asset purchase had significant economical impacts and according to the Bank of England, quantitative easing made considerable uncertainty regarding magnitudes of the UK’s financial market (Douglas, 2011). Recently, the growth of broad money slowed dramatically within the economy of the United Kingdom since when recession commenced. Indicators of the recession were in part things like reduced borrowing by households and companies. Presumably, the Bank of England had to practice quantitative easing on behalf of Monetary Policy Committee in order to offset the UK’s economy from this weakness (Joyce, 2010). This practice boosted huge sums of money holdings into the economy. However, it threatened the independence of the policymakers since there is documented evidence from the monetary data depicted that the asset purchase program led to an increase in prices of assets (Biefang-FrisanchoMariscal, and Howells 2011:102). In addition, it ultimately contributed to increase in nominal demand in the UK’s economy making other evidence from other financial markets corroborative (Ellis, 2009:31). In 2009, the Monetary Policy Committee made a stern decision of making the economy of the United Kingdom an elaborate market with adequate and favorable conditions for trading activities. In order to achieve the formulation of that decision, the committee had no choice but to involve quantitative easing which expanded money supply into the market through large-scale purchase of assets (Yue, 2011:35). After that, the focus of monetary committee shifted towards the quantity of money and its price respectively since bank rate was actually close to zero (Boyes, & Melvin, 2010:305). Having witnessed the case of economic slump in Japan, Adam Posen, a member of monetary policy committee repeatedly voted for 50 billion euro increase in quantitative easing in order to protect the United Kingdom from sliding into Japan-style slump. Monetary policy committee members said that, the decline in prices of oil ever since the latest bout of market chaos has been, in the recent weeks, a positive aspect. These prices could however point to increased rate of inflation next year. This threatened the independence of the central bank. In 1997, the government granted the Bank of England permission to regulate interest rates. It is worht noting that, this mandate led to division of parties responsible for setting the rates of interest. It led to Hawks and Doves whereby the former pushed for high interest rates while the former advocated for favorable policies. This degree of independence of BoE contributed to disputes and conflicts, which threatened its independence as of then and in the future. BoE was however hoping for lowered interest rates. Nevertheless, the asset purchases came in as an additional stimulus to the nominal spending hence helped curb inflation. This happened due to quantitative easing and the availability of credit. Consequently, the practice of quantitative easing by Monetary Policy Committee reciprocated some threats since the practice was uncertain on pace and speed regarding what people would do with the money that they borrowed from banks and how it would feed through. In the 1990s, there was unusual persistence of recession in Japan that made the country’s economy undergo a series of serious economic crisis. Nevertheless, the presence of quantitative easing policy in the country made it possible for Japan to recover from that economic recession (Bowman, 2011:2). Moreover, most financial analysts pointed out that, if it were not for the Bank of Japan to initiate quantitative easing, even the other countries heavily affected countries would not have recovered from that economic recession (Nagayasu, 2003:15). Back then, the effectiveness of discount rates reduction became limited since negative rates were not feasible. On the other hand, the effects of liquidity trap increased the tendency of robbing the Bank of Japan’s impacts as rates fell below 1 per cent. The central bank of Japan resolved to the only remaining monetary policy tool- massive supply of money- that could only come in form of quantitative easing. Arguably, this quantitative practice resulted to some threats as some other economic analysts and researchers claimed that the move was ineffective (Cottle, 2012). In the United States of America, the practice of quantitative easing led to subsequent reduction in systematic risks. A report from the International Monetary Funds revealed that, quantitative easing practices undertaken by the central bank of America boosted the country’s economy. United States had to carry out quantitative easing due to the financial crisis of the late 2000 that crippled the country’s financial market as well as following the declaration of bankruptcy made by Lehman Brothers (Sun, 2010:58). The report also shown that those monetary policies American central bank considered and implemented improved the US market confidence and essentially bottomed out the country out of the economic recession of G7 economies experienced within the second half of 2009. Practicing quantitative easing makes bank rates more favorable. Through quantitative easing, it becomes possible to yield on gilts, that is, the rate by which the government needs in order to pay to convince investors to lend it finances hugely affects other borrowing rates. Therefore, when a central bank purchases gilts en masse, the bank pushes up the prices of gilt, which in turn pushes down the rate of yield. This is because; quantitative easing enables central banks to yield on gilts that are essential to rate cuts. Presumably, rate cuts are the main tools for banks in the plight of controlling the economy. An outstanding example of this case took place in Unite Kingdom where the Bank of England slashed down the bank rates up to 0.5 per cent between October 2008 and March 2009 (Stone, 2011:67). Hence, quantitative easing efforts of Bank of England helped push down yields on gilts below to an extent where they would otherwise be thus contributed to reduction of wider costs of borrowing. Despite people’s thought that the Federal Reserve of America and the United States government are master magicians whose routine of smoke and mirrors reeks of fraud and deceit, the Bank of America has worked tirelessly to end the country’s state where financial analysts depicted that the United States government was flat broke (Breslow, 2011). Actually, the remarks sparked a series of nice little euphemism that consistently worsened the situation by claiming that American government was in debt and the Feds continued to consume themselves with American citizens’ money. As a result, the country opted to the obvious monetary policy whereby, it exercised quantitative easing through purchase of assets. This in turn revolutionized the situation by stimulating the country’s state of bankruptcy. During this time, the United States government had an accumulated debt amounting to $100 trillion dollars. Agreeably, this kind of debt was out of control and fears of immediate economic collapse were presumable. As a matter of course, the United States of America resolved to practice quantitative easing. Quantitative easing threatens the independence of a policymaker to an extent that makes many critics resolve to call it a systematic destruction of economic stance. For instance, most bankers claim that quantitative easing has led to the rapid decline in the value of dollar hence deteriorating the economy of the United States (Beblay, 2011:47). Furthermore, the practice of quantitative easing has resulted to rapid increase in prices of commodities and its subsequent inflationary effects. Besides echoing about the good responses that it has brought into America’s domestic and international well being of the economy, it has also poised inevitable threats of inflation in the financial market. In conclusion, even though a large number of economists claim that practicing quantitative easing exposes a country’s economy to uncontrollable evils such as inflation, it is also restores a country’s benevolent state of economy (Smith & Wolfe, 2011:43). Frankly, the so-called money multipliers are plummeting however, credit is just not increasing. On the other, the national economy is falling off a stiff cliff implicating that many loans will seemingly sour. The question is how is it possible to increase lending in such an environment? According to financial market policymakers, the only option is to slosh huge sums of money into the system of a country’s economy. Clearly, this essay has explained the practice of quantitative easing and put across the possible threats that it poses for policymakers. Bibliography Beblay, M., et al. (2011). The Euro Area and the Financial Crisis. Cambridge: Cambridge University Press. Biefang-FrisanchoMariscal, I and Howells, P. 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Yue, H. (2011) The Effects of Quantitative Easing on Inflation tare: A possible Explanation on the Phenomenon. European Journal of Economics, Finance and Administrative Sciences, (41), pp. 34-40. Read More