Apparently there are rumors running around that the Fed is shifting to something called Quantitative Easing in an effort to help the still flat-lining economy.
What exactly is Quantitative Easing?
Well… according to former Fed economist Ken Kuttner it’s simply adding some zero’s to the end of the bank’s accounts.
True, the Fed will buy bonds but then it simply credits the banks with money.
It sounds slightly better when defined this way (summed from Wikipedia): When interest rates are at zero, or very close to it, but something is needed to stimulate the economy, a central bank might create money from nothing and use this credited money to multiply deposits of the banking system, thus increasing the money supply and the money that can be used on spending. Quantitative refers to the specific amount of money being created, while Easing refers to easing pressure on the banks by giving them that money.
Wait just a darn minute, isn’t that the same thing as printing money? And isn’t printing money something that everyone fears will lead to inflation?!
Technically no physical money is printed, it just electronically magically appears. However, for all other intents and purposes the result is the same. The Fed is in a bind: we are still struggling in a recession and they can’t lower interest rates further since they are already at 0% or very close to it which hasn’t helped to spur banks into lending again. Of course there is the risk of inflation, or of the banks simply pocketing the extra money. Ben Bernanke has already done a little bit of this type of easing in his initial response to the recession – but it is unclear just how much of an impact it had on lending.
What do you think? Is the risk worth the reward? Do we really need massive lending to have a great economy?
I am not convinced this is the right way to go about stimulating spending.
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