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Lehman Brothers crashed 10 years ago, causing the worst financial crisis in life. Now, the task entrusted to me today is to summarize in one fell swoop everything that has happened since this crisis. Now, of course, it is impossible.
But you can, I think, sum up an answer to the crisis, the attempt to treat them in this table by the economic and monetary authorities, because there was really a great policy to fight against the crisis. And it was called QE, which was originally QED (Quantitative Easing). That's what they tried to do.
The idea behind QE is that central banks buy assets, mainly 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 lower the interest rates in the economy. This is likely to bring down inflation. It is likely that this will facilitate borrowing for people. It is likely that it makes it easier and more encouraging for people to take risks.
These were all things that they wanted to do. But it also involves very direct and aggressive market manipulation, which is why central banks have never done it before. Now, in each case, these lines are set at 100 in early 2008 and show you how the balance sheets, the total amount of assets held by central banks have subsequently increased.
This blue line is the Bank of Japan. The red line here is the Federal Reserve of the United States. And this line is the European Central Bank.
Now, of course, you can see where Lehman is in 2008. And you can see very clearly QE1, this very strong increase in the balance sheet of the Fed as they buy bonds to try to keep the liquid markets. dry all together.
Now they have succeeded. They have failed to give a great life to the economy. So at the end of 2010, you get QE2, as we called it, another extension. And then, a lot more controversial at the end of 2012, we already had a pretty big market rally, but we did have what we called infinite QE because it was undefined. There was no end date for this huge asset purchase program, which was gradually reduced and continued until 2015.
And you can see that the Fed was much, much, much more aggressive than the other central banks. The Bank of Japan invented QE in the 1990s. I did not really want to do it.
But that changed once you had the arrival of Shinzo Abe as Prime Minister and his great idea of Abenomics. This has led, as you can see, to this very aggressive expansion of the BoJ's balance sheets. And it was not just links. They were willing to buy stocks and ETFs. At this point, the Bank of Japan has managed to overtake the Fed as the most aggressive central bank.
Finally, the European Central Bank is the successor, the intellectual heir to the Bundesbank, who remains very concerned about the cultural memory of the hyperinflation of the Weimar Republic. So they are much more conservative at first, but as Europe sees its sovereign debt crisis take over, you see an expansion of the balance sheet.
So, conservative as they are, you see that they are trying to reduce their balance sheet to tighten conditions. This turns out to be a mistake. You are falling into a deflationary fear, a very gloomy market and an economy of the euro zone. And so, in recent years, you have seen the ECB grow very aggressively.
Now we know the overall results, of course we have seen asset prices soar, especially in the United States. But you have not seen a lot of inflation. And you have not seen the kind of widespread economic growth that makes people much happier.
The big question for the next decade is what will happen once these lines start to fall again.
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