Thursday, November 4, 2010

QE2

As expected, the Federal Reserve Bank announced yesterday it would try to jump-start the economy with quantitative easing. This would be the second bout of quantitative easing the Fed has engaged in, with the first coming back at the end of 2008, in the midst of the banking meltdown. That has some financial pundits referring to the new measure as QE2.

Quantitative easing is a fancy term for a simple concept: buying up Treasury bills, as a means for the Fed to put more money into circulation. This time around the Fed is purchasing $600 billion worth of Treasury bills, at a pace of about $110 billion per month. The Fed buys these securities from banks around the country, paying for them with assets it basically creates out of nothing aside from accounting tricks, which is why some people refer to quantitative easing as “printing money.” There are two basic results of this:

  1. There is instantly a great deal more money in circulation, for banks to lend and for consumers to spend.
  1. Since there are now more people invested in Treasury notes, it becomes cheaper for the Treasury to borrow money.
Will it work? There are a lot of different motors running in the American economy, and it’s hard to attribute is success or failure to any one instrument. But after watching this sluggish recovery drag on for month after month, we are certainly all ready for some good news.

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