Quantitative Easing Paper
Nov.06.2012
Ruixuan Ding
Corporate Finance
Quantitative Easing Paper
Introduction
United States confronted serious disorder in financial markets and steep declines in overall economic (Williams 2011) after 2007 financial crisis. The financial crisis in 2007 and its subsequent negative effects greatly challenge the conventional understanding of recession and available monetary policies to handle it. The US and global monetary authorities have been criticized for the excessively expansionary monetary strategies in last decade. (Giraud 2012). In this prospective, the monetary policy after the 2001 recession remained “too lax for too long and this triggered asset-price inflation” (Giraud 2012), not only in US housing but also in associated subprime mortgage. (Bernanke 2009) Especially, the huge amounts of housing mortgage defaults are unusual in formal recessions and deeply hurt investors’ confidence in credit market. The following nervousness about banking sector causes the economic slowdown and a credit crunch, which make more difficulties for business and household to go through the crisis. (Giraud 2012)
In order to fix the situation, several central banks, including the Federal Reserve (Fed), have decreased the market interest rate close to zero bound. (Williams 2011) Taking the lesson from Japanese experience from 2001 to 2006, (Giraud 2012) the Fed argued that under almost zero interest rate monetary policy still can be effective if implementing the unconventional ones, typically Quantitative Easing. Quantitative Easing (Q.E.) is also used in Eurozone and Japan as kind of panacea under this globally recession and Fed already announced the third round of Q.E (as Q.E.3). However, the actual effect and future forecast show that US economy is under uncertainty even after the third round of the Quantitative Easing. The cost and psychology of Q.E.3 tend to be permissive. The implement of Q.E.3, is largely overshadowed in current uncertainty.
Ruixuan Ding
Corporate Finance
Quantitative Easing Paper
Introduction
United States confronted serious disorder in financial markets and steep declines in overall economic (Williams 2011) after 2007 financial crisis. The financial crisis in 2007 and its subsequent negative effects greatly challenge the conventional understanding of recession and available monetary policies to handle it. The US and global monetary authorities have been criticized for the excessively expansionary monetary strategies in last decade. (Giraud 2012). In this prospective, the monetary policy after the 2001 recession remained “too lax for too long and this triggered asset-price inflation” (Giraud 2012), not only in US housing but also in associated subprime mortgage. (Bernanke 2009) Especially, the huge amounts of housing mortgage defaults are unusual in formal recessions and deeply hurt investors’ confidence in credit market. The following nervousness about banking sector causes the economic slowdown and a credit crunch, which make more difficulties for business and household to go through the crisis. (Giraud 2012)
In order to fix the situation, several central banks, including the Federal Reserve (Fed), have decreased the market interest rate close to zero bound. (Williams 2011) Taking the lesson from Japanese experience from 2001 to 2006, (Giraud 2012) the Fed argued that under almost zero interest rate monetary policy still can be effective if implementing the unconventional ones, typically Quantitative Easing. Quantitative Easing (Q.E.) is also used in Eurozone and Japan as kind of panacea under this globally recession and Fed already announced the third round of Q.E (as Q.E.3). However, the actual effect and future forecast show that US economy is under uncertainty even after the third round of the Quantitative Easing. The cost and psychology of Q.E.3 tend to be permissive. The implement of Q.E.3, is largely overshadowed in current uncertainty.
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