Quantitative easing
Quantitative Easing is the controversial use of gimmicks by the Federal Reserve to try to encourage economic growth during a recession. It consists of buying up longer-term bonds in an indirect effort to lower medium and long-term interest rates. So, the Federal Reserve shift its portfolio of assests from overnight and short term loans to holding more long-term bonds.
It is an economic monetary policy in which the total money supply is increased by the Federal Reserve buying government Treasury bonds. The goal is to encourage private banks to lend more and help reduce the effects of an economic recession. Quantitative easing was first used by Japan in 2000 to fight a deflationary economy. The 2010 and 2011 actions of Federal Chairman Ben Bernanke is to buy U.S. government bonds, with borrowed money, to help ease America's declining financial statistics. By creating more dollars out of thin air, the dollar becomes devalued with the existing money supply versus other currencies. This policy of creating additional money to give to banks so that they lend more is highly questionable. The banks were largely responsible for the Great Recession and the increased money for banks have failed to produce the desired effect even after the Central Bank's $1.7 trillion purchase. The short term gains are minimal and in the long term, this will eventually lead to higher prices and inflation or even hyper-inflation. [1]
For example, in response to a weakening economy likely due to liberal policies by the Obama Administration, the Federal Reserved announced on September 13, 2012 that:[2]
| “ | The Fed initially disappointed some investors on Thursday when it said it would buy $40 billion of mortgage-backed securities each month. That is far less than the $75 billion a month it bought in its second round of bond-buying, or the more than $100 billion monthly tab for its first round.
But this time, the Fed has promised that "if the outlook for the labor market does not improve substantially," it won't stop buying and could ramp up its spending further. |
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In general, the Federal Reserve tries to stimulate the economy by lowering short-term interest rates. However, when short-term interest rates are lowered to zero, the Federal Reserve turns to other less frequently used actions to with a goal of stimulating the economy. The Federal Reserve calls these "quantitative easing." Basically, these involve the Federal Reserve purchasing longer-term bonds to lower the medium and long-term interest rates.
There is no free lunch, so "quantitative easing" is always at someone's expense. In general, although the economy may benefit from quantitative easing, the people who rely on bond interest income are harmed by their reduced income.
