Taxpayer bailouts of central banks and after the Global Financial Crisis

Introduction
Governments made major interventions to shore up the financial system during the Global Financial Crisis, which lasted from 2007 until the end of the Eurozone crisis in 2012. These resulted in big rises in national debt and a promise that taxpayers would never again have to bail out the financial system. Now, though, the very programmes put in place to continue official support are handing large losses to taxpayers. This begs important questions: is this the second part of the same loss? If so, would it have been better to take the loss all at once, given the size of this second bill and the scale and nature of detriments caused by these programmes since 2012?

Official interventions during and after the Global Financial Crisis
Governments initially intervened by buying direct shareholdings in banks and by underwriting various ‘lifeboat’ arrangements to keep banks afloat until they could stand on their own feet again. Central banks then supplied huge amounts of liquidity into the financial system, a phenomenon known as Quantitative Easing or QE.
QE meant the central bank buying existing fixed-interest rate bonds for cash, which reduced long-term interest rates, complementing the policy of central banks to cut short-term interest rates.
QE was increased at various times, in response to Covid-19, or the Russian invasion of Ukraine: any crisis appeared to be a reason to continue or increase support. QE was initially profitable: as central banks bought more bonds, interest rates fell further, and the bonds increased in value.

Quantitative Tightening
QE went hand-in-hand with very low or even negative short-term interest rates, as the orthodoxy in the central banking world was that this was the way to keep economies going. Central banks were deaf to the message that this might end in a painful bout of inflation and the need to raise interest rates.
Inflation duly manifested itself; interest rates were duly increased to dampen inflation down. Central banks began to consider and then carry out sales of their QE bonds, in order to halt or reverse the growth of the money supply which QE had created. This reversal is Quantitative Tightening, or QT.
The re-sale value of the bonds had by then fallen thanks to rising interest rates. QT reinforced the fall, magnifying both the losses realised upon sale and the unrealised losses if bonds continued to be held. Realised losses are passed to the respective finance ministry and on to the taxpayer. Unrealised losses stay on the central banks’ balance sheets, where the bonds are funded with private banks’ deposits of Minimum Reserves.

Amounts of bonds owned by central banks
The amounts are enormous, even if some portfolios have been reduced.
The US Federal Reserve’s portfolio is US$8.2 trillion.¹
The Eurozone has two sets of programmes, the Asset Purchase Programmes (APP), currently owning €2.9 trillion of bonds,2 and the Pandemic Emergency Purchase Programme (PEPP), currently owning €1.7 trillion of bonds.³
The Bank of England has £744 billion, down from a maximum of £875 billion.⁴

Losses so far
The Federal Reserve has US$1.05 trillion of unrealized losses.⁵
The Bundesbank lost €21 billion on its APP/PEPP operations in 2023, amidst warnings that it may need to be recapitalized.6 The Dutch central bank lost €3.5 billion.⁷
The Bank of England has already passed back at least £20 billion of losses to HM Treasury and the FT has reported that another £130 billion could be in the pipeline.⁸

What was the cost of government interventions during the Global Financial Crisis?
We can compare the Bank of England’s potential losses of £150 billion on QT with the interventions by the UK government over the period 2007-9. These totalled £137 billion:⁹

• Royal Bank of Scotland – £45.8 billion
• Lloyds/Halifax Bank of Scotland – £20.5 billion
• Bradford&Bingley and Northern Rock – £44.1 billion
• A loss within the deposit insurance facility – the Financial Services Compensation Scheme – of £20.9 billion
• £5.3 billion of other items

However, recoveries of £105 billion have been made, including £24.3 billion on Lloyds and £42.1 billion on Bradford&Bingley and Northern Rock.
The UK government’s net outlay has been £22 billion so far, and a further recovery is possible on the stake in Royal Bank of Scotland.

Further detriments of QE
QE has caused a number of detriments to Western economies:

• Asset price bubbles, notably in real estate;
• A rise in rentier capitalism – economic activity being dominated by charging for the usage of a fixed asset, instead by the making of productive investments;
• Enabling business models funded with almost no equity and loaded up with debt, vulnerable to rises in interest rates;
• Encouraging a borrowing boom amongst households, businesses and governments;
• Enabling the survival of weak economic competitors – zombie companies;
• Enabling the survival of weak financial intermediaries – zombie banks, with portfolios of loans to zombie companies.

The damage done by each of these side effects of QE would bear closer examination.

Summary and conclusions
QE was the medicine applied to a group of patients (Western economies) who were in convalescence after some of their organs (their banks) were struck by an acute illness (the Global Financial Crisis).
The organs recovered and began to function again, with a tolerable net loss to taxpayers.
QE, however, was continued and it has turned out to be a quack cure, widening and prolonging the patients’ distress, by inflicting severe side effects on entire economies over a period of 12 years.
Now, thanks to QT, the patients will have to ensure a further bout of acute illness as they digest the central banks’ losses running into hundreds of billions of dollars, pounds, euro etc. with no future prospect of those losses being mitigated.
The damage done by QE’s side effects and now by QT losses has dwarfed, in the UK, the direct impact of the Global Financial Crisis, which turned out to be less than 1% of UK GDP: the cure has turned out to be far worse than the original illness.