stress tests | LIAM HALLIGAN

“The final word on quantitative easing will have to wait for historians,” wrote Ambrose Evans-Pritchard last week. Now the US Federal Reserve has apparently ended QE, I’d like to take a cue from my esteemed Telegraph colleague by suggesting what future historians might say.

Last Wednesday, the Fed terminated QE3 – the latest incarnation of its money-creation programme. The American version of this highly unorthodox policy began in late 2008, with the Fed creating virtual balances ex nihilo and purchasing assets such as government debt and mortgage-backed securities, often from bombed-out banks.

The US authorities originally billed QE as a $600bn exercise. By unlocking frozen interbank markets, it was supposed to spur growth, breaking the credit crunch. As meaningful recovery remained elusive, though, QE2 was launched in 2010, with its successor two years later.

In sum, the world’s most important central bank has fired $3,700bn from its monetary bazooka. America’s QE has been six times bigger than envisaged. The Fed’s balance sheet has grew more than three-fold in just over half a decade – an unprecedented monetary expansion. And it’s not just America, of course.
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So, now we know what the latest euro-crisis summit has to offer. The fifth comprehensive effort to stabilize to eurozone in nineteen months, this latest Brussels gab-fest produced a slew of headlines and initiatives. But what did it really achieve? The single currency remains just as incoherent as it was last weekend, just as vulnerable to systemic collapse. The region’s banks and governments are still very highly indebted. Eurozone leaders are deluded if they think some diplomatic sticking plaster, and a lot of bluster, can hold together an inherently unstable structure.

What’s more, to use a combination of borrowed and printed money to bail-out cash-strapped governments, which are insolvent largely because they, in turn, are standing behind insolvent banks, is to treat the symptoms of the crisis, not the cause. This historic policy error – tackling the results of the problem rather than the problem itself – has characterized the West’s response to this sub-prime fiasco from the very beginning, not just in the eurozone but the UK and US too. Europe’s predicament is so much worse, though, given the restrictions imposed by the single-currency straitjacket.
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