What is quantitative easing? How was it used after the 2008 financial crisis?

Quantitative easing (QE) has been in existence since the Japanese central bank introduced it at the turn of the millennium. The simplest way to think about it is this: when interest rates can't go down anymore and play their normal role of stimulating growth, central banks try to expand the money supply. So, they're expanding the quantitative amount of money they put into the system. 

Of course, after 2008 because of the scale of the financial and economic collapse, many Western countries resorted to QE. Some have never gotten rid of it. Others have started to, but as a result of this crisis, have gone straight back to that playbook.

33 million Americans have now filed for unemployment and one in five American workers have lost their jobs due to COVID-19. These are levels not seen since the Great Depression. You recently called for G20 countries to provide income support for all citizens. Why is this so urgent to implement now?

It is incredible to reflect back on the short time since I published that piece. I entitled it the need for a so-called people's QE, and in some ways a number of European countries, including the UK, have executed some aspects of what I was suggesting. 

The United States has not, even though the absolute amounts of money the US authorities have put through their fiscal system to try and support the economy is actually bigger as a percentage of GDP than many in Europe. 

What they haven't done is support ongoing employment through various schemes that many European countries have done, of which the UK has, to some degree, been one of the most ambitious.

That’s partly why you see such enormous filing for unemployment claims in the US. There’s no direct support to encourage employers to keep their employees on, in complete contrast to what you see in many Scandinavian countries who were the first to do it in Europe, and something the UK has since done. 

On a practical level, what might a smart people’s QE look like? 

We are living in an extraordinary time. Like many others in my generation, it’s nothing that any of us have gone through. Perhaps economically, the only parallel one can find is from the 1920s and 1930s.

It became obvious to me in early March that governments are going to have to essentially force as many of us as possible, if we weren't doing absolutely crucial necessities, to stop working or to work from home. It was pretty obvious that the consequences could be horrific. 

So, the idea of a people's QE that I suggested then, some would have regarded as quite audacious. The most dramatic thing that could be done was, to put it simply, governments effectively pay for every business and every employee to have a two month paid holiday. Obviously, this would cost a very large amount of money for governments, but it would be the least disruptive way of getting us all to stay home.

And when the time is right to start letting us get back to anything vaguely like normality, there wouldn't be as much permanent disruption. I think about six weeks have passed since I wrote that piece. Actually, given the policies many governments have announced, I'm not sure undertaking the audacity in generosity of what I suggested would have cost any more. Over the long term, it might have actually turned out to be less. 

Of course, there are ethics issues around whether the system could be gamed or not, amongst other issues. But six weeks later, I still believe that would have been the smartest thing to do. It certainly would have been much better than trying to encourage many businesses, particularly smaller ones, to take out loans.

A couple of countries got close to what I was suggesting – Germany and Switzerland were very quick to give 100% government guarantees to business, as well as generous wage support systems. But a number of other countries haven't, like the US, even though they wrote a $1200 check for each citizen. 

Should a people’s QE involve the purchase and write off of consumer debt and student debt by a central bank? 

I think these things might have to be considered. I remember being on a conference call to Chatham House members where we discussed what would be the likely economic consequences and what policymakers should do. One person on the call was talking about quite conventional forms of policy just through various forms of standard QE. 

During the Q&A, someone asked whether we thought the US Federal Reserve might end up buying equities. And I said, well, why not? Eventually, it might come to that. 

Actually, before that discussion was over, the Fed coincidentally announced they were going to buy high-yield corporate bonds, or very risky company debt. This is something that would have been unheard of even by the playbook of 2008. 

So, I don't think ideas like a kind of provision to help student debtors is entirely crazy. These are things that our policymakers are going to have to think about as we go forward in the challenging and unpredictable days and weeks ahead. 

Poorer countries like El Salvador have gone as far as cancelling rent and major utility bills for its citizens. Do you think countries like the US and UK have gone far enough to help people during the crisis?

Going one step further than a people’s QE and postponing major payments is a pretty interesting concept. I think in reality, it would be very disruptive to the medium to long-term mechanism of our societies. It could be very, very complicated. 

But, of course, some parts of the G20 nations, including the UK, have moved significantly in these areas as it relates to rent payments or mortgage payments. There have been significant mortgage holidays being introduced for many sectors of our community. I think the British government has been quite thoughtful about it without doing the whole hog of potentially getting rid of our transaction system for two months or beyond.

You know, this may well be something that has to be considered if, God forbid, there is a second peak of the virus. If countries come out of a lockdown and all that results in is a dramatic rise in infections and then death again, we're going to end up right back where we are. Policymakers may have to implement more generous versions of what we've done already, despite what the long term debt consequences could be.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act in the US has been criticized as a corporate bailout while offering little to the American people. It was recently reported that hedge fund managers are applying for bailouts as ‘small businesses.’ Do you think more oversight is needed in how the stimulus funds are allocated? 

The speed at which many countries have responded and introduced policies means that there's going to be some gaping holes which allow people to unfairly benefit from the system. And if indeed, that were to be the case, I cannot see why a hedge fund should benefit from government generosity.

A true hedge fund is supposed to be a form of investment manager that thrives in times of great volatility, and knows how to better navigate such financial markets than more conventional funds. So this shouldn’t be an environment where hedge funds seek the same kind of help as small businesses. That is certainly something the government should be very careful about.

Some economists argue that central banks are not independent as they finance fiscal spending through purchase of government bonds. Do the strong measures taken by central banks in response to the crisis undermine the argument for central bank independence? 

In my view, an effective central bank has to do whatever is necessary, including doing very unconventional things, when the society in which that central bank operates needs it. 

Most of the time, central banks are pretty boring places, but they really become crucial organizations when we go through times like the 1920s, 1930s, 2008, and of course, this current crisis. If they want to maintain their legitimacy, whatever the true parliamentary or congressional legal standing is, they have to do things quickly and as we've seen in this case, differently than the convention in order to do what our societies need. 

Somebody was asking me just last week whether the Fed buying high grade debt was legal or not. I think that’s a pretty irrelevant conversation because if it’s not legal now, it will be made legal tomorrow. So, I think central banks have to keep their legitimacy and they have to do what is necessary when the time requires it. In that sense, I think most central banks have handled this crisis so far pretty well.

In the wake of the Paris attacks and the destruction of a Russian plane by a bomb in Sinai, Russia had been once more calling for a new level of engagement with Western partners over operations in Syria. Even an ‘anti-terrorism coalition’ appeared to gain traction after the terrorist attacks in Paris. But Russian attacks on Western-backed opposition groups in Syria and continuing violation of Turkish airspace narrowed the window of opportunity for engagement between NATO member states and Russia in Syria, and Tuesday’s incident – where Turkey shot down a Russian bomber − fundamentally challenged this option. NATO allies and Secretary General Jens Stoltenberg were quick to call for ‘calm and de-escalation’ of the situation. But they face a problem: in the absence of a strategy, NATO lacks a mechanism—a form of transparent process for crisis resolution—between member states and partner nations when and if a dispute or disagreement arises.

NATO has three essential core tasks—collective defence (Article 5), crisis management and cooperative security; it does not prioritize one task over the other. Whereas collective defence applies to member states like Turkey, cooperative security involves engagement with partner nations, such as Russia, to assure Euro-Atlantic security. NATO’s role, in this sense, goes beyond protecting a member’s state’s sovereignty. This aspiration to provide enduring cooperation and cooperative security beyond members lies behind the now-obsolete NATO-Russia Founding Act on Mutual Relations, Cooperation and Security, signed in 1997.

NATO’s balance between these tasks and its role vis-à-vis partner states is ill-defined, and among the core issues the Alliance must consider at or before its next summit in Warsaw in July 2016. These discussions must include prioritizing and grouping partner nations—Russia and Sweden, for instance, are clearly not partners in equal terms – and clarifying the role of the NATO-Russia Council (NRC). The NRC is a venue for political dialogue that includes consultation, cooperation and joint action, but does not have a crisis resolution mechanism. From 2014 onwards, the NRC has not functioned, yet it is the only venue where NATO and Russia could have discussions regarding the future of Syria, focusing on ISIS as a major threat both to the Alliance and to the partner nations. Neither Russia nor the Alliance will benefit from escalation; thus, both sides should bear in mind that a troubling partnership is better than an adversarial relationship.

This is even more important because NATO member states do not have a cohesive strategy regarding Syria’s future. For some countries, like Germany, the efforts lie on refugee relief policies, while for others, such as France, the focus is the military fight against ISIS. Russia is clearly testing NATO’s response mechanisms through hybrid warfare techniques. Yet, NATO also does not have a coherent policy regarding Russia’s assertiveness in Ukraine, involvement in Syria and its annexation of Crimea.  NATO officials are in general agreement that there can be ‘no grand bargain with Russia’ as long as it continues to violate international treaties and norms. Russian aggression and assertiveness is a long-term problem for the Alliance to tackle. So far, though, NATO benefits from ‘avoid[ing] that situations, incidents and accidents spiral out of control’, as the NATO secretary general noted in his speech after the extraordinary North Atlantic Council meeting. Solidarity among allies and protecting Turkish territorial integrity is a clear role for NATO, but the Alliance’s response mechanism in crisis situations should not be exhausted and undermined with small-scale, bilateral disagreements and disputes.

NATO could move to incorporate a crisis resolution mechanism, in specified non-escalatory terms and processes, between member states and partner states, where NATO member states and Russia meet together as equals in case of a crisis. This could re-establish a communication channel between NATO and Russia in particular, especially when the NRC is not functioning. If such a mechanism were in existence today, Turkey could have taken the issue to NATO’s crisis management system and pointed out its concerns over airspace violations, rather than shooting down the Russian bomber. This could have enabled the Alliance and Russia to participate in a dialogue that has been silent for more than a year. Instead, this incident demonstrates the delicate strategy of balancing deterrence policies with engagement between a member state and a rather troubling partner nation.

When Syria’s future is discussed, as it will be, at the Warsaw summit, Russia will be an unavoidable part of the discussion. But until there is a way to de-escalate these small-scale incidents, it will be increasingly difficult for Russia and NATO to determine whether they do in fact have any scope for cooperation, or at the least collaboration, on shared challenges and threats.

To comment on this article, please contact Chatham House Feedback

The leaked record of the five meetings of the UK–US Trade & Investment Working Group held in 2017–18 has led to a controversy in the UK election campaign around the claim that ‘the NHS is up for sale’.

But a careful reading of the leaked documents reveals how remarkably little concerns the NHS – in five meetings over 16 months, the NHS is mentioned just four times. The patent regime and how it affects medicines is discussed in more depth but largely in terms of the participants trying to understand each other’s systems and perspectives. For the most part, the discussions were overwhelmingly about everything else a trade deal would cover other than healthcare – matters such as subsidies, rules of origin and customs facilitation.

But this does not mean there will be no impact on Britain’s health service. There are three main concerns about the possible implications of a US–UK trade deal after Brexit – a negotiation that will of course only take place if the UK remains outside the EU customs union and single market and also does not reach a trade agreement with the EU that proves incompatible with US negotiating objectives.

One concern is that the US aim of securing ‘full market access for US products’, expressed in the US negotiating objectives, will affect the ability of NICE (The National Institute for Health and Care Excellence) to prevent the NHS from procuring products that are deemed too expensive in relation to their benefits. It could also affect the ability of the NHS to negotiate with companies to secure price reductions as, for instance, happened recently with Orkambi, a cystic fibrosis drug.

A peculiarity of the main US government healthcare programme (Medicare) is that it has historically not negotiated drug prices, although there are several bills now before Congress aiming to change that. US refusal to negotiate or control prices is one reason that US drug prices are the highest in the world.  

A second concern is that the US objective of securing ‘intellectual property rights that reflect a standard of protection similar to that found in US law’ will result in longer patent terms and other forms of exclusivity that will increase the prices the NHS will have to pay for drugs.

However, it is not immediately apparent that UK standards are significantly different from those in the US – the institutional arrangements differ but the levels of protection offered are broadly comparable. Recent publicity about a potential extra NHS medicine bill of £27 billion resulting from a trade deal is based on the NHS having to pay US prices on all drugs – which seems an unlikely outcome unless the UK contingent are extraordinarily bad negotiators.

Nevertheless, in an analysis section (marked for internal distribution only), the UK lead negotiator noted: ‘The impact of some patent issues raised on NHS access to generic drugs (i.e. cheaper drugs) will be a key consideration going forward.’

A third concern is that the US objective of providing ‘fair and open conditions for services trade’ and other US negotiating objectives will oblige the UK to open up the NHS to American healthcare companies.

This is where it gets complicated. At one point in a discussion on state-owned enterprises (SOEs) the US asked if the UK had concerns about their ‘health insurance system’ (presumably a reference to the NHS). The UK response was that it ‘wouldn’t want to discuss particular health care entities at this time, you’ll be aware of certain statements saying we need to protect our needs; this would be something to discuss further down the line…’

On this exchange the UK lead negotiator commented:  ‘We do not currently believe the US has a major offensive interest in this space – not through the SOE chapter at least. Our response dealt with this for now, but we will need to be able to go into more detail about the functioning of the NHS and our views on whether or not it is engaged in commercial activities…’

On the face of it, these documents provide no basis for saying the NHS would be for sale – whatever that means exactly. The talks were simply an exploratory investigation between officials on both sides in advance of possible negotiations.

But it is a fact that US positions in free trade agreements are heavily influenced by corporate interests. Their participation in framing agreements is institutionalized in the US system and the pharmaceutical and healthcare industries in the US spend, by a large margin, more on lobbying the government than any other sector does. Moreover, President Donald Trump has long complained about ‘the global freeloading that forces American consumers to subsidize lower prices in foreign countries through higher prices in our country’.

It is when (and if) the actual negotiations on a trade deal get under way that the real test will come as the political profile and temperature is raised on both sides of the Atlantic.

What is quantitative easing? How was it used after the 2008 financial crisis?

Quantitative easing (QE) has been in existence since the Japanese central bank introduced it at the turn of the millennium. The simplest way to think about it is this: when interest rates can't go down anymore and play their normal role of stimulating growth, central banks try to expand the money supply. So, they're expanding the quantitative amount of money they put into the system. 

Of course, after 2008 because of the scale of the financial and economic collapse, many Western countries resorted to QE. Some have never gotten rid of it. Others have started to, but as a result of this crisis, have gone straight back to that playbook.

33 million Americans have now filed for unemployment and one in five American workers have lost their jobs due to COVID-19. These are levels not seen since the Great Depression. You recently called for G20 countries to provide income support for all citizens. Why is this so urgent to implement now?

It is incredible to reflect back on the short time since I published that piece. I entitled it the need for a so-called people's QE, and in some ways a number of European countries, including the UK, have executed some aspects of what I was suggesting. 

The United States has not, even though the absolute amounts of money the US authorities have put through their fiscal system to try and support the economy is actually bigger as a percentage of GDP than many in Europe. 

What they haven't done is support ongoing employment through various schemes that many European countries have done, of which the UK has, to some degree, been one of the most ambitious.

That’s partly why you see such enormous filing for unemployment claims in the US. There’s no direct support to encourage employers to keep their employees on, in complete contrast to what you see in many Scandinavian countries who were the first to do it in Europe, and something the UK has since done. 

On a practical level, what might a smart people’s QE look like? 

We are living in an extraordinary time. Like many others in my generation, it’s nothing that any of us have gone through. Perhaps economically, the only parallel one can find is from the 1920s and 1930s.

It became obvious to me in early March that governments are going to have to essentially force as many of us as possible, if we weren't doing absolutely crucial necessities, to stop working or to work from home. It was pretty obvious that the consequences could be horrific. 

So, the idea of a people's QE that I suggested then, some would have regarded as quite audacious. The most dramatic thing that could be done was, to put it simply, governments effectively pay for every business and every employee to have a two month paid holiday. Obviously, this would cost a very large amount of money for governments, but it would be the least disruptive way of getting us all to stay home.

And when the time is right to start letting us get back to anything vaguely like normality, there wouldn't be as much permanent disruption. I think about six weeks have passed since I wrote that piece. Actually, given the policies many governments have announced, I'm not sure undertaking the audacity in generosity of what I suggested would have cost any more. Over the long term, it might have actually turned out to be less. 

Of course, there are ethics issues around whether the system could be gamed or not, amongst other issues. But six weeks later, I still believe that would have been the smartest thing to do. It certainly would have been much better than trying to encourage many businesses, particularly smaller ones, to take out loans.

A couple of countries got close to what I was suggesting – Germany and Switzerland were very quick to give 100% government guarantees to business, as well as generous wage support systems. But a number of other countries haven't, like the US, even though they wrote a $1200 check for each citizen. 

Should a people’s QE involve the purchase and write off of consumer debt and student debt by a central bank? 

I think these things might have to be considered. I remember being on a conference call to Chatham House members where we discussed what would be the likely economic consequences and what policymakers should do. One person on the call was talking about quite conventional forms of policy just through various forms of standard QE. 

During the Q&A, someone asked whether we thought the US Federal Reserve might end up buying equities. And I said, well, why not? Eventually, it might come to that. 

Actually, before that discussion was over, the Fed coincidentally announced they were going to buy high-yield corporate bonds, or very risky company debt. This is something that would have been unheard of even by the playbook of 2008. 

So, I don't think ideas like a kind of provision to help student debtors is entirely crazy. These are things that our policymakers are going to have to think about as we go forward in the challenging and unpredictable days and weeks ahead. 

Poorer countries like El Salvador have gone as far as cancelling rent and major utility bills for its citizens. Do you think countries like the US and UK have gone far enough to help people during the crisis?

Going one step further than a people’s QE and postponing major payments is a pretty interesting concept. I think in reality, it would be very disruptive to the medium to long-term mechanism of our societies. It could be very, very complicated. 

But, of course, some parts of the G20 nations, including the UK, have moved significantly in these areas as it relates to rent payments or mortgage payments. There have been significant mortgage holidays being introduced for many sectors of our community. I think the British government has been quite thoughtful about it without doing the whole hog of potentially getting rid of our transaction system for two months or beyond.

You know, this may well be something that has to be considered if, God forbid, there is a second peak of the virus. If countries come out of a lockdown and all that results in is a dramatic rise in infections and then death again, we're going to end up right back where we are. Policymakers may have to implement more generous versions of what we've done already, despite what the long term debt consequences could be.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act in the US has been criticized as a corporate bailout while offering little to the American people. It was recently reported that hedge fund managers are applying for bailouts as ‘small businesses.’ Do you think more oversight is needed in how the stimulus funds are allocated? 

The speed at which many countries have responded and introduced policies means that there's going to be some gaping holes which allow people to unfairly benefit from the system. And if indeed, that were to be the case, I cannot see why a hedge fund should benefit from government generosity.

A true hedge fund is supposed to be a form of investment manager that thrives in times of great volatility, and knows how to better navigate such financial markets than more conventional funds. So this shouldn’t be an environment where hedge funds seek the same kind of help as small businesses. That is certainly something the government should be very careful about.

Some economists argue that central banks are not independent as they finance fiscal spending through purchase of government bonds. Do the strong measures taken by central banks in response to the crisis undermine the argument for central bank independence? 

In my view, an effective central bank has to do whatever is necessary, including doing very unconventional things, when the society in which that central bank operates needs it. 

Most of the time, central banks are pretty boring places, but they really become crucial organizations when we go through times like the 1920s, 1930s, 2008, and of course, this current crisis. If they want to maintain their legitimacy, whatever the true parliamentary or congressional legal standing is, they have to do things quickly and as we've seen in this case, differently than the convention in order to do what our societies need. 

Somebody was asking me just last week whether the Fed buying high grade debt was legal or not. I think that’s a pretty irrelevant conversation because if it’s not legal now, it will be made legal tomorrow. So, I think central banks have to keep their legitimacy and they have to do what is necessary when the time requires it. In that sense, I think most central banks have handled this crisis so far pretty well.

The leaked record of the five meetings of the UK–US Trade & Investment Working Group held in 2017–18 has led to a controversy in the UK election campaign around the claim that ‘the NHS is up for sale’.

But a careful reading of the leaked documents reveals how remarkably little concerns the NHS – in five meetings over 16 months, the NHS is mentioned just four times. The patent regime and how it affects medicines is discussed in more depth but largely in terms of the participants trying to understand each other’s systems and perspectives. For the most part, the discussions were overwhelmingly about everything else a trade deal would cover other than healthcare – matters such as subsidies, rules of origin and customs facilitation.

But this does not mean there will be no impact on Britain’s health service. There are three main concerns about the possible implications of a US–UK trade deal after Brexit – a negotiation that will of course only take place if the UK remains outside the EU customs union and single market and also does not reach a trade agreement with the EU that proves incompatible with US negotiating objectives.

One concern is that the US aim of securing ‘full market access for US products’, expressed in the US negotiating objectives, will affect the ability of NICE (The National Institute for Health and Care Excellence) to prevent the NHS from procuring products that are deemed too expensive in relation to their benefits. It could also affect the ability of the NHS to negotiate with companies to secure price reductions as, for instance, happened recently with Orkambi, a cystic fibrosis drug.

A peculiarity of the main US government healthcare programme (Medicare) is that it has historically not negotiated drug prices, although there are several bills now before Congress aiming to change that. US refusal to negotiate or control prices is one reason that US drug prices are the highest in the world.  

A second concern is that the US objective of securing ‘intellectual property rights that reflect a standard of protection similar to that found in US law’ will result in longer patent terms and other forms of exclusivity that will increase the prices the NHS will have to pay for drugs.

However, it is not immediately apparent that UK standards are significantly different from those in the US – the institutional arrangements differ but the levels of protection offered are broadly comparable. Recent publicity about a potential extra NHS medicine bill of £27 billion resulting from a trade deal is based on the NHS having to pay US prices on all drugs – which seems an unlikely outcome unless the UK contingent are extraordinarily bad negotiators.

Nevertheless, in an analysis section (marked for internal distribution only), the UK lead negotiator noted: ‘The impact of some patent issues raised on NHS access to generic drugs (i.e. cheaper drugs) will be a key consideration going forward.’

A third concern is that the US objective of providing ‘fair and open conditions for services trade’ and other US negotiating objectives will oblige the UK to open up the NHS to American healthcare companies.

This is where it gets complicated. At one point in a discussion on state-owned enterprises (SOEs) the US asked if the UK had concerns about their ‘health insurance system’ (presumably a reference to the NHS). The UK response was that it ‘wouldn’t want to discuss particular health care entities at this time, you’ll be aware of certain statements saying we need to protect our needs; this would be something to discuss further down the line…’

On this exchange the UK lead negotiator commented:  ‘We do not currently believe the US has a major offensive interest in this space – not through the SOE chapter at least. Our response dealt with this for now, but we will need to be able to go into more detail about the functioning of the NHS and our views on whether or not it is engaged in commercial activities…’

On the face of it, these documents provide no basis for saying the NHS would be for sale – whatever that means exactly. The talks were simply an exploratory investigation between officials on both sides in advance of possible negotiations.

But it is a fact that US positions in free trade agreements are heavily influenced by corporate interests. Their participation in framing agreements is institutionalized in the US system and the pharmaceutical and healthcare industries in the US spend, by a large margin, more on lobbying the government than any other sector does. Moreover, President Donald Trump has long complained about ‘the global freeloading that forces American consumers to subsidize lower prices in foreign countries through higher prices in our country’.

It is when (and if) the actual negotiations on a trade deal get under way that the real test will come as the political profile and temperature is raised on both sides of the Atlantic.