Charts That Count: How central banks used QE to stop another financial crisis

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Lehman Brothers crashed 10 years ago ushering in the worst financial crisis in living memory. Now, the task I've been given for today is to sum up everything that has happened since that crisis in one shot. Now that, of course, is impossible.

But you can, I think, sum up a response to the crisis, the attempt to deal with it by the economic and monetary authorities in this chart because there really was one big policy that they used to combat the crisis. And it was called QE, which originally stood for quantitative easing, QED. That's what they attempted to do.

Now, the idea behind QE is that central banks buy assets, primarily 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 push down interest rates in the economy. That is likely to bring inflation back. It's likely to make it easier for people to borrow. It's likely to make it easier and more encouraging for people to take risks.

Those were all the things they wanted to do. But it also involves a very direct and aggressive involvement manipulation, arguably, of markets, which is why central banks have not done it before. Now, in each case, these lines are set for 100 at the beginning of 2008, and show you how the balance sheets, the total amount of assets that the central banks held expanded after that.

This blue line is the Bank of Japan. The red line here is the Federal Reserve of the US. And this line down here is the European Central Bank.

Now, obviously, you can see where Lehman happens in 2008. And you can see QE1 very clearly, this very sharp increase in the Fed's balance sheet as they buy bonds to try to keep markets liquid, to try to tide through the crisis without markets drying up all together.

Now, they succeeded in that. They didn't succeed in sparking any great life into the economy. So in late 2010, you get QE2, as it was called, another expansion. And then much more controversially, in late 2012, we've already got quite a significant market rally going on here, but we have what was dubbed QE infinity because it was indefinite. There was no end date for this huge asset buying programme, which was steadily tapered off and carried on until 2015.

And you can see, the Fed was far, far, far more aggressive than the other central banks. The Bank of Japan invented QE back in the 90s. Didn't really want to do it.

But that's changed once you had the arrival of Shinzo Abe as prime minister and his big idea of Abenomics. That led to, as you can see, this very aggressive expansion in the BOJ's balance sheets. And that wasn't just bonds. They were prepared to buy stocks and ETFs, as well. At this point, the BOJ has actually managed to overtake the Fed as the most aggressive of the central banks.

Finally, the European Central Bank is the successor, the intellectual heir of the Bundesbank, which is still very much preoccupied by the cultural memory of the Weimar Republic's hyperinflation. So they're much more conservative at first, but as Europe sees its sovereign debt crisis taking over, so you do see an expansion in the balance sheet.

Then, being as conservative as they are, you see they actually try to crimp their balance sheet back down again to tighten conditions. That turns out to be a mistake. You lapse into a deflationary scare, very sluggish market, and the economy in the eurozone. And so for the last few years, you've seen the ECB also very aggressively expanding.

Now, we know the broad results for this, of course, we've seen asset prices shoot up, particularly in the US. But you haven't seen any great amount of inflation. And you've not seen the kind of broad based economic growth that makes populations much happier.

The big question for the next decade is what is going to happen once these lines start to go down again.