What is credit easing? Definition and meaning

Credit easing is a strategy used by central banks to ease credit conditions (increase liquidity) within the economy by buying private sector assets. The aim is to boost liquidity in a troubled market so that the flow of credit and lending in the economy increases.

The US Federal reserve started purchasing MBS (mortgage-backed securities) and commercial paper in 2009 after the global financial crisis and Great Recession that followed, while the European Central Bank and Bank of England bought corporate bonds.

An economy’s monetary base might be affected by credit easing. This depends on how the central bank’s buying is financed. It may sell government debt to finance the purchase of corporate debt.

Credit easingMany central banks across the world implemented a credit easing approach following the global financial crisis.

When the purchases are financed through the creation of money, the monetary base effectively grows.

Monetary easing used in times of crisis

Ben Bernanke, who was Federal Reserve Chairman in 2009, said regarding the central bank’s strategy during the Stamp Lecture, London School of Economics, England:

“These three sets of policy tools – lending to financial institutions, providing liquidity directly to key credit markets, and buying longer-term securities – have the common feature that each represents a use of the asset side of the Fed’s balance sheet, that is, they all involve lending or the purchase of securities.”

“The virtue of these policies in the current context is that they allow the Federal Reserve to continue to push down interest rates and ease credit conditions in a range of markets, despite the fact that the federal funds rate is close to its zero lower bound.”

The Federal Reserve wanted to push interest rates down and make credit more available to businesses and members of the public, even though the federal funds rate was already very close to zero.

Difference between credit easing and quantitative easing

Credit easing (CE) does not target the level of reserves, as the Bank of Japan had done at the end of the last century.
CE focuses on expanding the asset side of the balance sheet by extending different kinds of credit. Its only aim is to kick start the credit markets.

With quantitative easing (QE), the focus is on the liabilities side by raising the reserve base (mainly currency and other liquid items) to a target.

The two strategies are similar in that they both involve the expansion of the central bank’s balance sheet.

However, in a purely QE approach, the focus is on the quantity of bank reserves, which for the central bank are liabilities.

The Fed’s CE approach focused on a combination of securities and loans that it held, and how this mix of assets affected credit conditions for private individuals and businesses.

Video – Credit Easing and Quantitative Easing

In this Khan Academy video, the speaker explains the difference between’s the US’ and Japan’s quantitative easing, where the American one is (according to Mr. Bernanke) credit easing.