Quantitative Easing

RECENT NEWS
Yahoo  Sep 18  Comment 
Ahead of this month’s Fed meeting, Harvard Business School (HBS) Dean Nitin Nohria says that policy changes from the government are urgent.
MarketWatch  Sep 17  Comment 
Not all eyes are on the Fed. The Bank of Japan could steal the show by altering its quantitative easing program and potentially upsetting the bond market.
MarketWatch  Sep 15  Comment 
Bank of England holds key rate and quantitative easing program unchanged
newratings.com  Sep 9  Comment 
CANBERA (dpa-AFX) - Asian stock markets are in negative territory on Friday with investor sentiment dampened by the European Central Bank's decision to not extend its quantitative easing program and following news that North Korea may have...
newratings.com  Sep 8  Comment 
CANBERA (dpa-AFX) - Asian stock markets are mostly lower on Thursday following the mixed lead overnight from Wall Street and as investors stayed cautious ahead of the the release of Chinese trade data as well as the European Central Bank's...
newratings.com  Sep 7  Comment 
STOCKHOLM (dpa-AFX) - Sweden's central bank decided to keep its negative interest rate and quantitative easing unchanged on Wednesday. The Executive Board of the Riksbank maintained the repo rate at -0.50 percent as economists had...
Forbes  Sep 6  Comment 
With apologies to Meatloaf, it is fascinating to me that we have leaders at each major central bank and each major political ruling class who has said they will do "whatever it takes" to spur growth - from negative interest rates, to massive...
MarketWatch  Sep 6  Comment 
Investors are becoming increasingly convinced the European Central Bank will extend its quantitative easing program, but the big question plaguing them this week is if it’ll happen as soon as Thursday.
Forbes  Aug 25  Comment 
Tomorrow is the big annual Fed conference in Wyoming. It typically draws the world's most powerful central bankers. This is where, in 2012, Ben Bernanke telegraphed a round three of its quantitative easing program.




 
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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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