Quantitative Easing

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MarketWatch  Jun 22  Comment 
Albert Edwards, Société Générale’s bearish strategist, hasn’t exactly hidden his disdain for central bankers during this go-go era of quantitative easing. His latest take is no different.
247WallSt  Jun 14  Comment 
Janet Yellen and the Federal Open Market Committee have confirmed what the market was bracing for (or hoping for) — a Fed Funds rate hike. What is also now on the table is that the Federal...
SeekingAlpha  Jun 11  Comment 
The Economic Times  Apr 23  Comment 
A Bloomberg survey says the ECB president will revise forward guidance as early as June.
Mondo Visione  Apr 19  Comment 
The European Central Bank’s (ECB) decision to stick to its bond buying program despite strong EU-wide economic growth has damped hopes in the market that interest rates will rise any time soon. This loose monetary policy can be felt in the real...
Reuters  Apr 11  Comment 
Bank of Japan Governor Haruhiko Kuroda said on Tuesday one option the central bank could take when it decides to unwind its current quantitative easing policy would be to raise interest rates on excess reserves.
Wall Street Journal  Mar 9  Comment 
The European Central Bank only recently expanded its quantitative easing program by a half-trillion euros, and economists say it’s probably too soon to change course.
guardian.co.uk  Dec 22  Comment 
Ultra-low interest rates and quantitative easing were needed in 2008, but keeping them for too long may precipitate the next crisis A long, hard look at the way the Bank of England has conducted monetary policy since 2008 is long overdue so the...
newratings.com  Dec 21  Comment 
STOCKHOLM (dpa-AFX) - Sweden's central bank retained its negative interest rate and extended the quantitative easing programme on Wednesday. The Executive Board of the Riksbank maintained the repo rate at -0.50 percent as economists had...




 
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Quantitative easing is a monetary policy tool in which a central bank—like the Federal Reserve—floods the market with cash in an attempt to stimulate an economy in recession and to stave off deflation. The idea is that if the central bank floods enough cash into the market, it will set off the following chain of events:

  1. Banks and other financial institutions will build up larger and larger cash reserves
  2. Banks will finally decide to loosen their lending standards to utilize their excess cash
  3. Individuals and companies will start getting the loans they are seeking
  4. The economy will begin to recover as people and companies begin to spend again.Understanding Quantitative Easing

Quantitative easing involves flooding the market with cash. The question is...how does a central bank—like the Federal Reserve—flood the market with cash?

Quantitative easing requires the central bank to take the following three steps:

  1. Cut the short-term interest rate to zero percent
  2. Announce how long it will leave the short-term interest rate at zero percent
  3. Begin buying long-term securities—like Treasuries, corporate bonds and asset-backed securities


Why Would the Federal Reserve Resort to Quantitative Easing?

It seems that during good economic times, all we hear about is how concerned the Federal Reserve is with inflation. We can't let the economy grow too fast....We can't let the monetary base get too big....We can't just print money—the Fed says.

But during bad economic times, all of that seems to change. And during really bad economic times, we even start to hear about quantitative easing. But what does quantitative easing do for the economy?Benefits of Quantitative Easing

Quantitative easing can help consumers, exporters and financial institutions find their way out of a recession and offers some of the following benefits.

  1. Quantitative easing can lower longer-term interest rates by pushing down yields at the far end of the yield curve.
  2. Quantitative easing can lower deflationary expectations by promising to keep interest rates low for an extended period of time.
  3. Quantitative easing can stimulate exports by increasing the monetary base.


Connecting Quantitative Easing to Government Spending (fiscal budgetary security tools)

Although monetary and fiscal models are normally viewed separately, QE as a monetary tool is so similar to deficit spending that the two lend themselves to a common view based on their immediate purpose: each is concerned with national and global security--to prevent chaos in trade and tragedy among nationals working in their own country.

QE and DS create necessary demand to protect people and nations from economic crises that may bring casualties in very large number and very short order. Both can create demand without limit -- except for the purchasing power of money after they become effective.

Each can be partially controlled by ending them. When either has done more harm than good their common remedy is taxation to prevent hoarding and policing to prevent tax evasion.

Accordingly, QE and DS require intense monitoring while in progress -- preferably by extremely sophisticated data analysts with tools akin to those of a national security agency with the highest priority on effectiveness not their cost.

References

Video: Understanding Quantitative Easing. Learning Markets. Retrieved on 2009-01-24.

Speech: Chairman Ben S. Bernanke. The Federal Reserve Board (1/13/2009). Retrieved on 2009-01-24.

Quantitative Monetary Easing and Risk in Financial Asset Markets. The Federal Reserve Board (9/282004). Retrieved on 2009-01-24. Bold text

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