In an article by Jean-Michel Naulot about the 2007–2008 financial crisis, I read (my translation):

Although central banks had an exemplary reaction at the time of the [2007–2008] crisis, they subsequently carried out an unprecedented policy by massively and durably injecting currency into the financial system, as never before. A major part of these liquid assets was invested into risky assets and speculation. Private debt rose considerably again.

In the past 20 years, a fiendish debt feedback system has risen: as crises break, public spending is massively revived and tax revenue is reduced, hence public debt soars. Central banks keep interest rates low for extended periods of time and private debt rises considerably, especially in countries with high levels of inequality. Excessive private debt leads to a new crises, which drives public debt up, ...

The second paragraph suggests that public debt rises because of public spending programs and because lower tax revenue during hard times is not compensated by higher tax revenue during boom times. However the first paragraph suggests that there's more to public debt than public works (which benefits the public) and low taxes (which benefits whoever gets low tax rates). Where does the money that's “massively and durably injected” go?

Does this refer to stimulus packages? To governments compensating for defaulting financial institutions? Who's getting the money? Are these loans (that don't seem to be repaid) or gifts?

  • $\begingroup$ This must be a duplicate but I can't find an appropriate one. Those with more experience in the site can know better. $\endgroup$
    – luchonacho
    Aug 10, 2017 at 6:37
  • $\begingroup$ @luchonacho I didn't find one, but I'm very unfamiliar with the topic so I may well have used the wrong search terms. $\endgroup$ Aug 10, 2017 at 8:37

2 Answers 2


Central banks "...inject currency into the financial system" by carrying out asset purchases---sovereign bonds/MBSs/ETFs/etc.

In practice, this is a transaction between the central bank and large financial institutions with deposit accounts at the central bank. For example, the Federal Reserve "buys" X billion dollars worth of US 30-year T-Bills from JPMorgan by simply taking possession of the T-Bills and credits JPMorgan's deposit account X billion dollars. Money is created out of thin air and given to JPMorgan in exchange for T-Bills. This unconventional monetary policy is known as "quantitative easing" (QE).

Conventional monetary policy sets the interest rate on deposit accounts at the central bank---e.g. the federal fund rate in the case of US. Conventional monetary policy controls the price of money, while QE controls the quantity of money.

All major central banks currently have large QE portfolios. The Fed's balance sheet consists mainly of US government debt. During the 2007-2008 crisis, the Fed also acquired a large portfolio of MBS's. Similarly, the ECB has a $2.4 trillion portfolio of Eurozone sovereign bonds. Bank of Japan has a stock buying program---BoJ owns 80% of domestic Japanese ETF's. (This is all public information.)

The second paragraph you quote suggests that sustained QE by the central banks has led to increased public and private debt and more risk-taking in the economy. That is the case.

On the supply side, private debt increases simply because there is more liquidity. Public debt increases because large purchase of sovereign bonds by the central bank pushes down the yield on bonds. For example, the yield on long-term German government debt dips consistently into negative territory, because German government debt is scarce. Most of it is held by the ECB. This means you have to pay the German government to lend it money. If someone pays you to lend you money, you'd probably choose to borrow. (Besides QE, conventional policy already sets interest rates extremely low, in some cases negative.)

On the demand side, low yield on high-quality bonds pushes investors toward more risky securities---both public and private---in search for higher returns. Case in point are Italian, or Greek, public debt, and currently very high and rising levels of corporate debt in the US.

This is the debt feedback Naulot speaks of.

(Decrease in tax revenue would exacerbate the situation but that is a fiscal decision, not a monetary one.)


The question touches several points, but I can try to explain the "where did the money go in the crisis" with an example from Portugal:

  1. Through automatic stabilizers, and
  2. due to acquisition of bankrupt banks and companies, absorbing the losses in the public budget.

With the crisis several companies and financial institutions went bankrupt, meaning that the government increased spending with the automatic stabilizers such as unemployment subsidies => more public spending due to more subsidy and loss of tax collected from company and salaries

Allegedly due to international toxic assets, as well as some media speculation, some banks couldn't face their responsibilities anymore, declaring bankruptcy - see BES bank for example. People were in panic because the money they had in the bank could disappear suddenly, so the government nationalized the bank, guaranteeing everyone's deposits, assuming the losses of the bank. This means that the government increased its costs in millions of euros to save this and other bank, in the interest of national financial stability.

If you are more looking at how central banks inject money in the economy, take a look at money supply tag.


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