Quantitative Easing
Evan Schrager 11/14/2011
Quantitative Easing Research Paper
The term quantitative easing (QE) describes a process in which the Federal Reserve expands its balance sheet through purchasing back government bonds from financial institutions with electronically created funds. The government purchases, by way of account deposits, give banks the excess reserves required for them to create new money by the process of deposit multiplication from increased lending in the fractional reserve banking system. As the supply of medium and long-term government bonds decreases, their prices increase. This leads to a decrease in their yield; yields are often a determinant of long-term interest rates, mortgages and most business lending. Since it is easier for individuals to borrow money, consumer wealth increases, which leads to investment and consumption increases as well. Risks include the policy being more effective than intended, spurring hyperinflation, or the risk of not being effective enough, if banks opt simply to pocket the additional cash in order to increase their capital reserves in a climate of increasing defaults in their present loan portfolio.
In the quantitative easing process, the Fed goes to a network of dealers, in search of Treasury bonds. The Fed buys the bonds in a competitive bidding process between the approved bond dealers. The Fed takes a bond certificate and gives the dealers freshly printed US dollars. The transactions are done electronically, but it is still referred to as printed money.
The US Federal Reserve held between $700 billion and $800 billion of Treasury notes on its balance sheet before the current recession. In late November 2008, the Fed started buying $600 billion in Mortgage-backed securities. By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010.
The primary dealers can offer to sell the Fed bonds held by their clients. The newly printed money
Quantitative Easing Research Paper
The term quantitative easing (QE) describes a process in which the Federal Reserve expands its balance sheet through purchasing back government bonds from financial institutions with electronically created funds. The government purchases, by way of account deposits, give banks the excess reserves required for them to create new money by the process of deposit multiplication from increased lending in the fractional reserve banking system. As the supply of medium and long-term government bonds decreases, their prices increase. This leads to a decrease in their yield; yields are often a determinant of long-term interest rates, mortgages and most business lending. Since it is easier for individuals to borrow money, consumer wealth increases, which leads to investment and consumption increases as well. Risks include the policy being more effective than intended, spurring hyperinflation, or the risk of not being effective enough, if banks opt simply to pocket the additional cash in order to increase their capital reserves in a climate of increasing defaults in their present loan portfolio.
In the quantitative easing process, the Fed goes to a network of dealers, in search of Treasury bonds. The Fed buys the bonds in a competitive bidding process between the approved bond dealers. The Fed takes a bond certificate and gives the dealers freshly printed US dollars. The transactions are done electronically, but it is still referred to as printed money.
The US Federal Reserve held between $700 billion and $800 billion of Treasury notes on its balance sheet before the current recession. In late November 2008, the Fed started buying $600 billion in Mortgage-backed securities. By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010.
The primary dealers can offer to sell the Fed bonds held by their clients. The newly printed money
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