Putting a stimulus into a declining economy to try to ensure that a horrible financial panic didn't turn into the second Great Depression was good sound policy. The way it was done wasn't.
When an economy slows down and there is spare capacity it is perfectly possible for a government to pump money into the economy and not generate inflation. Done with skill the stimulus can simply mean that people that were out of work get employed to provide enough extra services to exchange for the extra money. Money is simply a piece of paper or an electronic signal at a bank. We only want it because we wish to buy things and trust that other people will provide them in exchange. We can therefore create exactly as much money as there are services and goods produced to exchange for it.
So what has come to be called peoples' QE is a sound economic idea provided that it is used in the right circumstances for the right things. Investing in economic change, improving skills and education, enhancing resources that help the country to be more efficient and investment in reducing consumption whilst increasing standards of living all make sense. Provided that they are only done to the extent of the spare capacity of the economy.
Doing peoples' QE in several countries at once also makes huge sense. It is dangerous to print money to boost an economy if most of that money is spent on buying things from abroad. Around the early 1970s the global economy began to dwarf national economies. Since then there has been a dangerous tendency for any country that expanded its economy in isolation to discover that it boosts imports too much and raises domestic production too little and this does give rise to inflation. But a co-ordinated international effort to print money to invest in change can be very effective.
Despite everything we have been told about austerity and about inflation massive quantities of money were printed across the world after 2008 and pumped into the world economy at the same time and instead of getting inflation we got a significant decline in the rate of inflation. In fact we came desperately close to deflation. No free market monetarist economist can properly explain that. Any two bit Keynsian with an understanding of the changes in the speed of circulation of cash in a crisis can.
Because they were locked into a narrow minded obsession that free markets are always efficient and don't need managing the Western world found it very difficult after 2008 to accept the idea of printing money to invest. It smelled of fecklessness and didn't square with the economics they had learned at Mrs Thatcher's knee. Or Tony Blair's cabinet table. But they knew that they had to do something to stave off collapse. So settled on a policy of disguising the stimulus, telling us we had to have austerity and trying to quietly allocate all that lovely QE money to helping get the banks out of a crisis.
The way this worked was that the Bank of England created money electronically and then used it to buy 'assets' from banks in the form of bonds. The banks got cash in their tills as a replacement for long term investments. The Bank of England acquired long term illiquid bond 'assets' in exchange for the new cash.
What was supposed to happen then was that the now cash rich banks would lend the money to businesses, especially small and medium enterprises, who would expand rapidly and cure the crisis. Unfortunately, as any small business will tell you, the banks didn't do that. They are just as tough in lending money to small business as they always were and - in real terms - interest rates are as expensive as they've ever been. If you want to try and build up a business on borrowed money at the moment then you'll need to have a very strong business indeed.
The 'assets' that the Bank of England bought were, of course, largely those toxic long term bonds and complex derivatives of credit default swops squared. If you didn't understand that sentence don't be surprised. Nor did the people who issued these bonds in such numbers that there were more financial asset derivatives issued than the size of the entire world economy. All we need to know is that the central bank spent huge amounts of money on buying dodgy assets off the banks.
Many of the problems the world economy is now facing stem from what the banks did do with their new liquid assets. All that lovely cash had to make a profit to get them back into the black. So what they did with the vast majority of it was loaned it to people who bought property or shares.
This is where we come to the crux of the issue. Free money has been pouring into world stock and property markets like there was no tomorrow. Better by far that this happened than nothing was done and system was allowed to collapse. That wouldn't have ushered in a communist paradise it would have left most of us destitute. Worse by far that the money wasn't spent on helping to transform our economies onto a more stable circular basis. Worse by far that the need for a serious change in ideology was sidestepped.
Nothing was done to fix the fundamentals of the system. The 2008 crash was caused by an out of control financial boom followed by a dangerous and almost uncontrollable panic. The cure has been to provide enough free money to create - wait for it - another financial bubble. Whilst that money has been effectively given away national governments have built up scary levels of debts because the downturn has dragged on and their revenues have dropped like a stone.
The QE programmes have now largely come to an end - interestingly close to the end of the General Election in the UK's case! A mere pause in pumping in free money in the US and UK has been followed by a significant stock market decline across the world. It looks very much as if the fundamental weaknesses in financial markets are still alive and kicking.
No one knows when, where or how the financial bubble created by QE will fully unload. No one knows if it will do so with a moderate manageable decline in financial assets or another panic. It is entirely possible that the panic triggered by Chinese growth slowing down might set it off in the next few weeks and months, particularly if the Chinese feel the need to start selling US dollars to pay their bills. The potential scale of panic if there was any kind of run on the US dollar is beyond imagination. It is also entirely possible that the problems will grind their way out of the system slowly and steadily and we'll all be saved from another financial Armageddon.
Either way one thing is clear. If the state had used the QE money directly to invest in the structural changes that the economy needed we'd be a lot better off by now and well on the way to a much more secure future. The average pay now in the UK is £2,270 less than it was in 2008. That is the price so far of insisting the free market has the solution to every problem and refusing to use state planning and direct investment effectively. I hate to think what the cost will ultimately be if economists and politicians continue to believe that they can't manage and guide the global economy and they have to force their citizens to lower their standards of living whilst they supply free money to those who caused the problem in the first place.