Talk:Quantitative easing

The "Out of nothing" point of view saturates this article

The lede and much entire article is written from a point of view: the one advocating that money should be backed by a physical commodity, otherwise it is "out of nothing". That advocacy would be rejected by a consensus of editors in a mainstream financial article like "Monetary policy", but here we have a cozy corner of the Wikipedia where it might not get the notice it should have.

Out of Nothing? That's certainly a criticism of the policy and central banking in general, but in this article it gets woven into the lede, the definition, its history, and the explanations of "Quantitative Easing". Who is characterizing this policy as "extreme" by the way? The repetition of "out of nothing" is tedious and conceptually this has more to do with fractional-reserve banking and fiat money than an specific central bank policy, money supply policy, or monetary policy.

I am flagging this article as having WP:COATRACK problems. A coat rack for those unfamiliar with the term is when editors create a coat rack (in this case Quantitative easing as a place for their coats (advocacy of currency backed by physical commodity). The article cries out as well, for some copyediting and structuring according wiki guidelines. patsw (talk) 14:41, 29 March 2010 (UTC)

I see what you mean about the point of view and the over-repetition of the "out of nothing" concept in the lede. I have removed the word extreme for now, but it seems the lede could be simplified. As to what sources write about "Quantitative easing", I notice this BBC page writes "out of thin air" (so I added it as a cite) and "economists would still argue that QE is the same principle as printing money". The Bank of England also writes "does not involve printing more banknotes. Instead the Bank pays for these assets by creating money electronically", and their explanatory pamphlet on QE appears to be quite informative. I also moved the BBC cite to the clause it supports and added a {{clarify}} request after the mention of deposit multiplication. Maybe the BofE document could serve as a guide for a rewrite? -84user (talk) 20:45, 29 March 2010 (UTC)

As you can see from the sections of talk above, I tried several times to fix this article, but Vexorg and others kept changing it back. Eventually, I gave up. The essential point of quantitative easing is that the central bank has to set a target for the money supply rather than for interest rates because the interest rate is already pinned at zero. JRSpriggs (talk) 12:13, 30 March 2010 (UTC)

And I will keep fixing the article by including the factual concept that the money is created out of 'thin air', or 'out of nothing' - It's important for the reader of this article to understand that the money is created out of nothing and jargon like Ex-Nihalo needs an in place explanation. Vexorg (talk) 14:07, 19 July 2010 (UTC)

And @ patsw - the 'Out of nothing' is NOT a criticism of policy and nor is it POV. It is simply a factual explantion of how the money is created. Vexorg (talk) 14:44, 19 July 2010 (UTC)

All liabilities are created "out of nothing" (but secured by collateral), central bank money is no different. The article is misleading in that it suggests that when the central bank creates "money out of nothing", it actually creates value or an asset for itself. That is not the case. It creates a liability and at the same time the asset which is bought with that liability increases the bank's asset by the same amount as the liabilities that were created in the process (as is the case in any other purchase). In other words, creating money does not mean creating value "out of nothing" as the article suggests (see here). Thewolf37 (talk) 00:18, 25 September 2010 (UTC)

If we are to approach this from "all liabilities" and work backwards to QE, you would be mistaken to believe that they are secured with collateral and hence in QE's case also. Banks, run of the mill ones, create credit/debt from thin air every day. That privilege is given to them with one caveat: what they create they must also destroy with a precise set of books. The collateral you mention is an illusion since it's never secured first but only follows the transaction and is in fact dependent upon the act of the transaction to become collateral (neither the bank nor the loan applicant own the home in question - it is not secured till the credit is created with a contract magically). You believe that what you call "liability" (which is a book keeping method, nothing more) is balanced out by an "asset". What you miss is that the whole formulation, the line on that ledger - "liability" and "asset" were created out of thin air when the credit is created. And that line must be made to extinguish itself - cancel out - which is entirely different than balancing out (as if these things existed as financial entities outside of a loan contract). What separates the banks actions from the Fed is the limit of the fractional reserve requirement but that is all. They both have essentially the same power (on different scales of course) to create.

Now you may believe that the "collateral" in QE's case is truly a tangible item - like say a security or treasury - in possession of one party or the other. Yet if you peek into this class of asset you discover it's merely another claim on debt - part of a pyramid of claims on debt rather than something of "value" like say a manufactured good. These are liquid in varying degrees and they can be considered a form a "money" but that is all these are as assets. And the grounding to their value is dependent upon all other forms of money and confidence - not as an intrinsic quality - and how much new credit is created alongside these "assets". Just because bookkeeping is involved doesn't in that respect mean this is an invulnerable setup of cut and dried relationships.

QE is simply creating credit (out of thin air, yes - lets not confuse the issue by introducing the notion of "value" yea or nea) to execute monetary policy rather than create credit for its own purpose of directly facilitating commercial activity. The Federal Reserve System or any central bank for that matter is not subject to the reserve requirement of its children. It's really that simple. There are no limits other than the confidence others have in your government's ability to make good on its future debts. You can buy all the securities,MBS,treasuries etc you want because you create 000000's from thin air. You secure them with nothing on your end as the Fed. When you're finished with your "policy" then you can return them back into the ether you conjure those 00000's to start with. Debt extinguishing.

The problem with QE isn't the mechanics which is just another level of what the Fed does every day albeit by bloating its balance sheet. The problem is that it introduces crisis policy into the dynamic. By mere scale of intervention it attempts to engineer outcomes through the pretense of neutral monetary policy. It has other designs apart from making credit available where it really is needed and appropriate. And that is just an opinion.Edsdet (talk) 15:05, 9 October 2010 (UTC)

Recent reversions

An IP editor has made a change to the article and has been reverted multiple times by multiple editors. I'm hoping this section will prompt some discussion from the IP and responses from the various editors about this before it devolves into an edit war.

Original text:

1. The national bank declares an extremely low rate of interest, for example 0.5%.

2. The national bank issue government bonds and gilt to banks and other lending institution

3. The Government borrows money which is then used to buy back the issued government bonds from financial firms such as banks, insurance companies and pension funds.

Revised text:

1. The national bank declares an extremely low rate of interest, for example 0.5%.

2. The national bank credits its own bank account with money created from 'thin air', probably just by adding to a number on its computer.

3. The newly created money is then used for buying government bonds from financial firms such as banks, insurance companies and pension funds.

Ravensfire (talk) 16:43, 19 May 2010 (UTC)

The initial text was actually the "Revised Text" until someone changed it. It now keeps getting reverted to the incorrect version. Point 2 in "Original Text": "2. The national bank issue government bonds and gilt to banks and other lending institution" This is not part of the quantitative easing process but part of the general process of selling bonds (also they are not issued they are sold") Point 3 in "Original Text": "The Government borrows money which is then used to buy back the issued government bonds" This is incorrect as the money is not borrowed but created by adding to a number on a computer. See here: http://news.bbc.co.uk/1/hi/business/7924506.stm and here I have reverted the change to the correct version (which was in for months before it was edited by one person and then not allowed to be reverted. Please don't revert it again until you actually check how Quantitative Easing works! —Preceding unsigned comment added by 88.106.67.186 (talk) 08:32, 20 May 2010 (UTC)

"How" section

The HOW section which was possibly the most clear section in the entire article with numbered steps as now been removed by Jarry1250. This and other edits he has made have made the article go from easily understandable to almost incomprehensible. For example the reason the the government is not creating money to directly pay off the debts as it is against the Maastricht Treaty rules but is instead buying guilts from banks with newly created money. Can someone stop this person from editing articles to make the clear unclear? —Preceding unsigned comment added by Caparn (talk • contribs) 14:20, 17 July 2010 (UTC)

Ouch. Well, to explain a little (and please do feel free to boldly go and change anything you disapprove of), the article contained, in my view, a lot of duplication. Minimising this duplication was the aim of my edits.

In the lead, we retain a simple overview. "The central bank purchases financial assets, including government paper and corporate bonds, from banks and other financial institutions using money it has created ex nihilo (Out of Nothing)." (As I recall, I made no major revisions to the lead.)

In the rest of the piece, I have attempted to merge the very simple in with the very complicated, such that both retain their value. I accept that it takes time to find the right balance. Can we open a discussion on how best to clarify?

As I see it, we have "Concept" paragraphs 1 and 2 as layman-friendly. Then, we have paragraph 3, which I have not edited significantly, as the more in-depth look at the specifics of the mechanism. After that, we return to the less technical, about restrictions on QE, from which you paraphrase above. All I can say is that I have no problem understanding it, but then, I wouldn't, would I? - Jarry1250 ^{[Humorous? Discuss.]} 16:38, 20 July 2010 (UTC)

I'm going to reinstate the "HOW" section as I believe it gives a very clear description of the QE process in a few very easily understandable short steps. At the moment anyone wishing to find out what QE is and how it is implemented will find themselves awash with non-direct information and unnecessary technical term. Caparn (talk) 18:02, 23 July 2010 (UTC)

Added section heading and indents to previous.I'd rather we could work to improve the existing... But going with you for a moment, even if I agreed with you, "How" is now after both "Concept" and "History" - if readers are daunted by "Concept" they're not going to get that far. Maybe we can think about rewriting the lead instead? I'll have a go incorporating it now.EDIT: Done - what do you think? Why don't I like that "How" section? Because I feel that far from providing a useful summary, it is deceptively simplifying matters. Point #1 isn't even QE at all! The other two points would make much more sense as prose e.g. in the lead.

Now, back to my proposed solution. Splitting your point into two, a) non-direct information and b) unnecessary technical terms - could you give examples of both? I'm happy to work with you to thrash out a better piece of prose for the "Concept" section if it is too daunting. - Jarry1250 ^{[Humorous? Discuss.]} 18:51, 23 July 2010 (UTC) edited 18:59, 23 July 2010 (UTC).

I don't believe that the 'how' section over simplifies the process, I would say it neatly sums it up, you seem to be surprised that that's all the QE process is? The underlying ideas about its effect could be argued either way for pages but the process of QE is as simple as the 'how' section describes. What I find more interesting is that while the QE process was taking place and bonds were being bought back with newly created money, bonds were also being sold, this could be seen as a mechanism, in the UK, for bypassing the Maastrict Treaty law that prevents governments printing money to fund state spending. —Preceding unsigned comment added by Caparn (talk • contribs) 23:01, 12 August 2010 (UTC)

I would rather see this described in the lead, rather than duplicated in the article content. If you disagree, we probably ought to solicit a third opinion. (And no, I don't believe "that's all QE is" in the same way mathematics cannot be simplified to merely "1+1=2". And honestly, I don't think anyone thinks QE is bypassing Britain's commitments under Maastricht, for the reasons fairly well explained in the prose.) - Jarry1250 ^{[Humorous? Discuss.]} 09:09, 13 August 2010 (UTC)

What specific QE process do you think is left out of the 'how' section? It is not meant to describe the effects of QE just the method for doing it; creating money, buying bonds back from banks. I think you are being ridiculous saying it's like summarising the massive subject of mathematics to 1+1=2. —Preceding unsigned comment added by Caparn (talk • contribs) 15:05, 13 August 2010 (UTC)

(indent previous) Vexorg seems to agree about the superfluousness of the section. My point is, the presentation of QE requires sufficient background and understanding. You can't just abstract out these short snippets. The lowest level were should go to is the lead. - Jarry1250 ^{[Humorous? Discuss.]} 12:11, 14 August 2010 (UTC)

Jarry1250, The current revision with the movement of the 'how' points to the paragraph at the beginning of the article is better, however, being mathematically trained I do like to see things generalized in the simplest form and the 'how' section did have the set of steps described to perform QE expressed in very simple form that anyone could understand. w.r.t. your last comment you never got back to say what other processes were involved in performing QE that were not in the how section? I am a bit concerned about the lengthy reference in the opening paragraph to fractional reserve banking, I feel this is unnecessary and not part of the QE process. It would be better to remove the references to FRB and money-multiplication in the opening paragraph and just say that the money banks receive from selling the bonds should enable them to lend more money to their customers, increase the overall money supply and allow banks to increase their reserves. I am also not sure that the national bank does buy mortgage based securities as part of the QE process, is there any reference containing the proportions of the QE budget has gone into buying government bonds, corporate bonds and mortgage based securities?

Clarification required: interbank, deposit and bank rates

What precisely is the difference between the bank rate and deposit rate? They seem pretty much the same. Also, are interbank rates actually used to determine whether or not to use QE? My impression was that if the supply of money needs increasing and the bank rate cannot be lowered any more, then QE is brought in. Although I see that the Fed Funds Rate is a set rate like the BoE rate, but is an interbank rate, so I'm guessing it's dependant on the particular systems around the world?

As an aside, I'd appreciate if someone more economically literate than I check over the top 5 paragraphs to make sure I've not oversimplified, over-summarised, omitted something or added something incorrectly.

--SG Gower (talk) 14:44, 12 July 2010 (UTC)

In the UK the BoE interest rate is the overnight interest rate that a bank will pay for very safe assets such as government bonds. This clearly has to be less than the interest rates on government bonds as people would be able to buy bonds and then get their money back and earn interest by putting the bonds back in the bank and obtaining the BoE interest rates. In the UK the Interbank (or LIBOR) rates are the rate at which one bank will lend money to another bank at. —Preceding unsigned comment added by 88.106.66.230 (talk) 11:53, 18 July 2010 (UTC)

FT cite for creating money

The central bank need only arbitrarily credit its own bank account to create the money used for quantitative easing.

References

The above was removed from the article, but still might be useful as a supporting cite for how central banks create the money. Note that the FT video requires subscription but it is free for the first 10 views in any 30 day period. -84user (talk) 14:39, 20 July 2010 (UTC)

Central banks do not "first credit their account with money they created ex nihilo"

I find the following sentence from the article seems imprecise and misleading, if not plain wrong:

"A central bank implements QE by first crediting its own account with money it has created ex nihilo ("out of nothing").[1]"

In open market operations, central banks buy assets simply by creating central bank liabilities. The net worth of the central bank is not affected since through the purchase, both assets and liabilities are increased by the same amount.

Central banks do not "first credit their account with money created ex nihilo" to make purchases simply because central bank money is not an asset of the central bank, but rather its liability. It is an asset for commercial banks and non-banks, of course. But not for the central bank, as one look at the balance sheet of any central bank will clarify at a glance. "Federal Reserve Notes" are on the liabilities side of any Federal Reserve Bank (see here).

The only exception to this are coins, which indeed are assets for the central banks as well. But their quantity is neglegible, and they are not used for open market operations.

I suggest rewriting the sentence above as follows:

"A central bank implements QE by buying assets it would normally not buy. In this transaction, the central bank's assets increase, while its liabilities (which equal the "newly created" central bank money) increase by the same amount. In this balance sheet extension, the central bank's net worth remains identical." Thewolf37 (talk) 00:06, 25 September 2010 (UTC)

For the WP:LEAD this might be overly technical. I for one don't understand exactly what you're saying. Greg Ip, in his publication The Little Book of Economics, words it like this "Between 2008 and 2010, [the Fed] bought $ 1.75 trillion worth of Treasury bonds and mortgage-backed securities by printing money. Its balance sheet ballooned from under $1 trillion to over $2 trillion and banks' reserves skyrocketed from almost nothing to more than $ 1 trillion. When a central bank shifts its focus to expanding its balance sheet through bond purchases rather than targeting short-term interest rates, it is called quantitative easing."[1] I think it is more accessible to omit asset/liability wording from the lead, unless we can make it accessible. Why not just say "A central bank implements QE buying bonds with money it has created ex nihilo ("out of nothing")"? Thanks. -Shootbamboo (talk) 16:21, 25 September 2010 (UTC)

Ok, my version might be overly technical for the WP:LEAD. I find the version you suggest more accurate than "A central bank implements QE by first crediting its own account with money it has created ex nihilo.". Sounds ok to me for the WP:LEAD.

Still, "creating money ex nihilo" will probably be misleading for most people because they assume that central bank money always is an Asset. That is true for all non banks and commercial banks, but not for the central bank. The money a central bank creates is a liability (financial accounting) of the central bank, as a quick glance at any central bank's balance sheet will easily clarify. Federal Reserve Notes, for example, are found on the liabilities side of the Fed's balance sheet.

A lot of people assume that central bank money will be an asset for the central bank simply because they know it represents an asset on the balance sheets of individual businesses and commercial banks (which they are familiar with), but they never took a close look at a central bank's balance sheet. The phrase "money created ex nihilo" suggests the central bank can create assets or value for itself "out of nothing", which is not the case. What the central bank creates "out of nothing" is its liabilities (=central bank money, which are claims against the central bank). The phrase you cite from "The Little Book of Economics" is imprecise and misleading. The Fed bought treasuries and mortgage-based securities not by "printing money", but by creating central bank liabilities. Its balance sheet "ballooned" because both assets and liabilities were increased by the same amount as a result of the purchase. The net assets (assets minus liabilities) remained the same, though. Thus, money creation does not imply the creation of "value" out of nothing.

I think it would be a good idea to clarify this, as it is a source of many inaccurate misconceptions about money creation. If not in the WP:LEAD, then maybe in the section "concept": "When the central bank purchases assets in order to implement quantitative easing, those assets are paid for by creating central bank liabilities which equal central bank money. While this increases both the assets and liabilities side of the central bank's balance sheet by the value of the asset that was purchased, it does not change the central bank's equity (net assets = assets minus liabilities)." Thanks, Thewolf37 (talk) 21:54, 25 September 2010 (UTC)

Accounting: "A central bank implements QE by first crediting its own account with money it creates ex nihilo ("out of nothing").[1] It then purchases..."

So the debit is the purchase of, for example, Treasury Securities; and the credit is?

Dr. Treasury securities $xxxxx

Cr. money "out of nothing"? $xxxxx

Can someone make sense of this? —Preceding unsigned comment added by 132.216.129.29 (talk) 19:39, 13 October 2010 (UTC)

A central bank creating money has: Asset side: "Bonds" - Liabilities side: "Demand deposits of commercial banks at the central bank" (also known as "reserves"). If it physically prints the money, it has: Asset side: "Bonds" - Liabilities side: "Currency in circulation".
A commercial bank creating money (not deposited in it) has: Asset side: "Bonds" - Liabilities side: "Demand deposits of non-banks". The demand deposits are money because people pay by means of them. It is that simple. Economist789 (talk) 02:25, 21 October 2010 (UTC)

The credit, to "bank reserves," is not a liability since their is no obligation of the central bank to, in the future, decrease an asset or disburse cash or cash equivalents. The equity "Reserve account" appears to be a "equity control account"; i.e., it is the aggregate of all of the individual bank's reserve accounts. When banks have increased reserves, then they can lend more, and that, in turn, purportedly stimulates economic activity. —Preceding unsigned comment added by 132.216.129.29 (talk) 22:56, 27 October 2010 (UTC)

According to The Economist the credit, ("out of nothing"), is: "electronic money in the form of bank reserves." The previous comment said that this is a liability account in the Federal Reserve's General Ledger? These assertions are, of course, not inconsistent. So, by "reserve account" is meant an equity account in The Fed's (or other central bank's) general ledger or, indeed, a liability? If there is not a certain obligation resulting in future cash outflow, then this is not a "liability account" but rather an "equity account." So the previous comment, above, is in error.

And the article is not sufficiently U.S. focused.

There's no money created out of nothing, it's just the depository balanced are used to buy things with. Fed net impact on fed balance sheet is zero.http://www.frbsf.org/education/activities/drecon/2010/0310.html —Preceding unsigned comment added by 155.188.247.6 (talk) 21:37, 3 November 2010 (UTC)

Let me try to put this in words a non-economist can understand.

• I want to buy a new car.
• I write on a scrap of paper: Asset, new car, $50,000.
• At the same time I write: Liability, new car loan, $50,000.

Now I get a car? No. I have to pay for it. I give the dealer a check for 50,000 and he's going to try to cash it. When he does, no one is going to give him 50,000 cash just because I wrote "Liability, new car loan" somewhere. So, when the government's bank buys assets, where does the money come from to pay for them? How does the seller get paid? Don't just explain it to me here... explain it in the article. Thanks. 68.110.104.80 (talk) 12:46, 6 November 2010 (UTC)

Intro unclear

The introduction states:

"The purchases, by way of account deposits, give banks the excess reserves required for them [emphasis added] to create new money, and thus hopefully induce a stimulation of the economy..."

Does this refer to the "member banks" of the Federal Reserve? And when the Fed acquires Treasury securities, as the proposed $600B QE2, does it do so at face value or market value (i.e., at a premium or discount)? If transactions occur at market value, then are gains or losses on disposition recorded? If so, I would presume that realized gains by the member banks, and corresponding losses by the Fed, would be stimulative; whereas the converse would be anti-stimulative? —Preceding unsigned comment added by 132.216.129.14 (talk) 02:06, 5 November 2010 (UTC)

QE2

The financial news media readily use this term to signify "Quantitative Easing - Round 2". I suggest this article discuss these "rounds". __meco (talk) 09:13, 16 October 2010 (UTC)

Question

I have always thought that the Fed controls the interest rates (the federal funds rate) primarily by open market operations, i.e. by buying bonds (assets) using newly created central bank liabilities (i.e. money). In other words, I have always thought that saying that the Fed decreases the interest rates actually means that the Fed increases the money supply by open market opearations first. If this is correct, how does quantitative easing differ from this "everyday" procedure consisting in changing the money supply by open market operations (except that the interest rate cannot decrease anymore because it is already zero)?? I think I am not the only one who is confused by this issue. I would be happy if anyone knowledgeable in this matter could help me with this question.Economist789 (talk) 02:25, 21 October 2010 (UTC)

In my humble opinion QE is making money available and abundant vs. more affordable and accessible by normal central bank operations. The reason is under tough situations many entities become cautious even though interest is near zero. QE would infuse money into the system and everyone is forced to find a way to use it. That's why all other countries especially Asian ones are so worried about the newly created "hot money" entering and shaking their systems. --Maikaubay (talk) 18:24, 9 November 2010 (UTC)

"The Fed"

Could all references to "The Fed" be altered to just "central banks" to ease the US-centric focus?--Hooperbloob (talk) 19:13, 4 November 2010 (UTC)

Question

I'm not an economist of any sort, but this can't be right:

"The annual rate of inflation above the central bank´s target indicates how much fiat money has been created in excess of what is considered by the central bank as required in the economy."

The annual rate of inflation can't depend on the central banks opinion surely? It can depend on it's actions but how on its opinion? If this is right it should be rephrased so that its clear Domminico (talk) 23:53, 9 November 2010 (UTC)