A policy of a central bank that is solely or nevertheless predominantly focused on the provision of a quantity of money that it has in mind, and not or hardly on interest rates. – In times of financial crises, such as in Japan after 1990 and globally in 2009, this policy seems to be the appropriate means to avoid a credit crunch and to cushion a recession. – In detail, there are several ways, namely the central bank – buys government bonds, which expands the money supply; at the same time, the increased demand on the capital market is intended to lower the yields on long-term paper and exert pressure on the interest rate level as a whole; – buys corporate bonds and commercial paper. In this way, the supply of liquidity to companies is guaranteed directly by the central bank despite a liquidity squeeze. This form of quantitative easing – in addition to the purchase of government bonds – was chosen by the U.S. Federal Reserve in the spring of 2009, even though it puts small and medium-sized companies that are not able to issue and are dependent on bank loans at a disadvantage, i.e. it obviously causes unfair competition; – buys covered bonds, the quality of which is subject to special requirements – such as rating level, eligibility as collateral at the central bank, size of the issue amount of the respective issue; institutions can use these interest-bearing securities to exchange them for central bank money. In July 2009, for example, the ECB bought EUR 60 billion in asset-backed bonds (covered bonds such as Pfandbriefe) from the banks; – it does not buy securities, but takes them as collateral for the provision of liquidity (central bank money) from banks. At the same time, it relaxes the requirements for eligible collateral (papers eligible for refinancing with central bank) and extends the time by which banks must repay these loans to the central bank (repo transactions). This type of quantitative easing was used by the ECB before it also purchased Pfandbriefe and covered bonds totaling EUR 60 billion in June 2009. The variant described is also known as “passive quantitative easing” (enhanced credit support policy). It is considered the best form of quantitative easing. The very fact that the liquidity-providing refinancing operations are limited in time means that the liquidity provided flows out of the system again at the end of the term, i.e. the money created returns to the central bank (automatic exit operation). Of course, the ECB believed that it would also have to buy up government bonds for the first time in May 2010 in the wake of the Greek crisis, because at that time a collapse of the financial system was imminent. – The drawback of any policy of quantitative easing is that banks often do not use the liquidity they receive – as intended by the measure – to grant loans to customers, but instead use it to pump up their financial reserves or even invest the cheap money abroad to earn interest. Ultimately, therefore, the money does not reach the real economy, as actually intended by the measure. In any case, investments are hardly stimulated by quantitative easing. What’s more, the artificially low interest rates mean a loss for savers. It has been calculated that, as a result of the dietary yields on bank deposits alone, German citizens lost 36 billion euros per year, which meant that they had to make a substantial contribution to overcoming the financial crisis that followed the subprime crisis. – Finally, financial history teaches beyond doubt that cheap money sooner or later leads to speculative bubbles. – See exaggeration, central banking, buyouts, central banking, bazooka, balance sheet adjustment, blood toll, carry trades, covered bonds, deficit financing ban, diet yield, three-year tender, European Monetary Union, fundamental error, financial crisis, burdens, Friedman thesis, moneylender of last resort, credit crunch, credit support, extended, Larghezza, liquidity trap, fixed rate tender, collateral, marketable, southern front, stealth policy, redistribution, central bank-induced, loss-loan relationship, full allotment, twelve-month tender. – Cf. Annual Report 2008 of the Deutsche Bundesbank, pp. 34 ff (provision of liquidity by the ECB during the financial crisis), Monthly Report of the ECB of March 2009, pp. 31 ff (overviews 2004-2008), Annual Report 2008 of the ECB, pp. 113 ff (presentation of measures taken in the course of providing liquidity during the financial crisis), Monthly Report of the ECB of June 2009, pp. 37 ff (measures taken by the ECB in detail; overviews), Monthly Report of the ECB of July 2009, pp. 85 ff (ECB monetary policy during the financial crisis; overviews), ECB Monthly Report of August 2009, p. 37 ff (effects of the first longer-term refinancing operation with a one-year maturity), Deutsche Bundesbank Monthly Report of August 2009, p. 46 (ECB purchases of covered bonds; overviews), ECB Monthly Report of December 2009, p. 39 ff (liquidity supply August 2007 to 2009; overviews), Deutsche Bundesbank Annual Report 2009, pp. 34 ff. (effect of quantitative easing; overviews), ECB Annual Report 2009, pp. 17 f. (enumeration and assessment of special measures), Financial Stability Report 2009, pp. 93 ff. (assessment of all special monetary policy measures; detailed presentation; many overviews), ECB Monthly Report of January 2010, pp. 67 ff. (ECB monetary policy in the financial crisis; enumeration and assessment of individual measures), ECB Monthly Report of June 2010. pp. 24 ff. and p. 33 ff. (dramatic situation on the financial markets made rapid intervention by the ECB necessary), ECB Monthly Report of August 2010, p. 34 ff.(covered bond purchase program assessed; overviews), ECB Annual Report 2010, p. 19 ff. (summary presentation of measures with justification), Financial Stability Report 2011, p. 21 f (full allotment in ECB refinancing operations maintained).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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