Quantitative Easy

Quantitative Easing

Hanson Chen

FE 445 C1

Professor Williams

The second round of quantitative easing better known as QE2 is the Fed’s repeated attempt to promote bank lending in order to reinvigorate the economy. Quantitative easing is a relatively new tool that the Federal Reserve has created to pump money into the economy. This approach has been adopted, because banks are still not lending to the private sector even though interest rates are at near zero levels. Instead they are investing their money in treasuries because they do not want to take a risk on the current economy. They would rather make two percent off a treasury, then attempt to lend at a higher rate to a company that might not pay them back. What quantitative easing aims to do is to buy all these treasuries, effectively lowering the rates on them to zero, and forcing banks to look elsewhere to make a return. What the Fed hopes is that the banks will turn to companies and lend money to them in order to repair the economy. I feel like this strategy is high risk, which can prove to either take us out of this recession or cripple our economy.

If things were to work out correctly the positives of quantitative easing are great. On paper the idea of quantitative easing makes some sort of sense. Banks will lend to people because they can no longer get significant returns on other investments. People will borrow this money because the interest rate is low, and they will spend it which will prop the economy back up. However, in order for it to work two things have to happen, the first is that banks must turn to the people to lend their reserves, and the second is that the people have to actually willingly take out these loans. It is uncertain that either of these will actually happen. Even though banks have large reserves of cash that does not mean that they have to lend their money out to the private sector. With a lack of faith in the economy a simple cost benefit outlook will deter banks from...