QE Paper

Topics: Monetary policy, Inflation, Federal Reserve System Pages: 16 (6080 words) Published: February 2, 2014
The Bleak Outlook of Quantitative Easing
An economy develops and fluctuates with its governance. The government-controlled central banks, including the Federal Reserve Bank of the U.S., create and monitor national and international monetary policy with the overall goals of providing means toward economic growth, avoiding growing unemployment rates, allowing price stability by controlling inflationary measures, and providing stability within financial markets. With the economic collapse in 2008 pervading into the present day, economic officials in the U.S., mainly former Secretary of the Treasury Timothy Geithner and Chairman of the Federal Reserve Bob Bernanke, have engaged in monetary policy with an increasing diligence in order to attempt to stimulate the national economy once more, and bring the U.S. economy to a dominant world position. Geithner and Bernanke, along with President Obama, have switched to methods of quantitative easing in an attempt to revive the U.S. economy.

The U.S. is currently undergoing its third round of quantitative easing, or QE3, in an effort to again stimulate the national economy after failed bouts with QE1 and QE2. Bernanke has attempted to explain the overall efforts of the Federal Reserve in issuing this policy, outlining the differences QE3 hopes to achieve in a Wall Street Journal article, stating, “The difference is that, with short-term interest rates nearly at zero, we have shifted to tools aimed at reducing longer-term interest rates more directly.”1 The Fed remains confident that the key to improving national economic stimulation is through increased methods of quantitative easing. While this may end up being a successful monetary policy for future growth, the success of quantitative easing has so far been marginal at best. The methods of quantitative easing and its use by central banks, backed by historical examples of failure in Germany and Japan, has proved thus far to be unsuccessful in the U.S. through QE2 and QE3, and provides a future of implications in the U.S.-backed world reserve currency, U.S. risk within cash flows, and an overall negative effect on the U.S. as a premier world economy.

Central banks, such as the U.S. Fed, are responsible for overseeing monetary policy and changing policy to promote economic growth. These policies encompass a number of different sectors. For instance, central banks promote employment through government spending, and control interest rates as to promote borrowing and lending among its entities. These standard policies can only last for so long however. When federal spending is limited, interest rates are already low, and standard monetary policy is no longer stimulating the economy, central banks may undergo quantitative easing as an unorthodox policy. As Adam Davidson from NPR simply puts it, “It means creating massive amounts of money out of thin air with the hope of getting the economy back on track.”2 These “massive amounts of money out of thin air” do come from an actual source, typically from central banks buying off financial assets and government Treasury bonds from large commercial banks and other private businesses. As the government buys these assets from banks, they create new money to pay for their new purchases, remove a degree of debt from the commercial banks, and expect the newly created money to be redistributed into the economy as a stimulant as commercial banks lend out their excess reserves. This is the credit easing effect of QE, a method of eliminating commercial bank credit through central bank purchasing of commercial debt. Davidson provides an amount of skepticism towards the implementation though, stating, “Nobody really knows if this works. It's still really controversial among economists. It's only been tried a few times and, as in the case of Japan, hasn't had the greatest results.”3

Quantitative easing also implements a “zero interest-rate policy,” commonly known as “ZIRP.” Central...
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