Talk:Quantitative easing

Only half explained

The main article does not appear to explain the whole process of QE. It does explain that the central bank may purchase bonds - but does not say what happens to those bonds. What happens to the principal and coupon payments made to the central bank? Does the money get destroyed? Does it get passed to the government? Many people are confused about what happens and this article is not helping them. Reissgo (talk) 09:13, 9 September 2013 (UTC)

Agree. Not only are many things left unstated, but the vast majority of the article uses economics jargon and/or macroeconomic political jargon, neither of which is conducive to the average reader being able to understand what the article is about. I understand this is a complex topic, but it is also a topic with relevance to the average adult, if they vote, pay taxes, or have a bank account. Shrouding the article in jargon does not help explain quantitative easing to the regular citizen, let alone to the regular ten-grade-student in a government class. I'm not sure anything here should be removed, but I'm very sure some in-layman's-terms sentences are needed, for just about every paragraph... and the intro is significantly painful and jargon-filled, where it ought to be the gentlest and most jargon-free section. 74.192.84.101 (talk) 23:01, 20 October 2013 (UTC)

Printing Money

1'DNTREMOVOPINIONS! I noticed there was some opinion floating around this section. Someone wrote something like, "printing money usually implies that the newly minted money is used to directly finance government deficits". I ended up removing that opinion and simply putting that the Fed uses newly created money to purchase financial assets. I started this section in the talk so that it can be further debated if needed. — Preceding unsigned comment added by Fatrandy13 (talk • contribs) 19:37, 18 December 2012 (UTC)

Well, while I agree with you that your phrasing is an improvement, I disagree it has become fully neutral. Printing money is *sometimes* used to purchase financial assets (such as a stock or a bond), and sometimes used to purchase physical materials (such as a tank or an oil well), and sometimes used to pay salaries of government employees (the post office nowadays... soldiers during the revolutionary war), and sometimes used for strange esoteric macroeconomic fiscal transactions. I think the only thing that can be said is that the newly-created money is almost always immediately *used* for some purpose... and maybe we should list some historical ones like paying the minutemen in the 1700s or buying mortgages from banks in the 2000s ... but the key here is that QE never is done for the purposes of boosting the gold in Fort Knox, or saving newly-created money for some future need in a rainy day fund. Money printed nowadays is, practically speaking, to satisfy existing obligations -- it was already spent, before it was printed, whether physically printed in the 1700s or electronically 'printed' in the 2000s. 74.192.84.101 (talk) 00:51, 21 October 2013 (UTC)

To me, this is a key point. A snippet from the main article is "...by purchasing assets ..." It is clear to me, I think, what the assets are. They are the things the Fed gets from the institutions. What is used as the money for making this purchase? Was this money just sitting around? Did the presses run overtime at the Fed to manufacture new Federal Reserve notes? Was there a checking account somewhere with several hundred billion dollars to be tapped? — Preceding unsigned comment added by PEBill (talk • contribs) 22:34, 21 September 2013 (UTC)

Hello PEBill, here is your answer -- note that IANAE ... I am not an economist -- but my understanding is that no paper-based dollar bills or zinc-based dollar coins are printed for quantitative easing, whatsoever. Your understanding of assets is correct, and in a way, so is your understanding of what was used to pay for the purchase (it is unclear to you what was used because 'nothing' was used). The way quantitative easing works is, the Fed, at their sole discretion, can boost the 'bank reserve balances' (at most of the major banks in the country ... and *maybe* any bank with FDIC printed on the door ... but methinks just the biggest banks that are tied into the Open Market purchase system). See graph over here, for the impact of QE1, QE2, QE3, plus predictions of what it might look like in the future.[1] Basically, somewhere between three and four trillion dollars of assets have been 'purchased' ... in exchange for changing a numeral in a computer database, rather than for any actual minted-printed fiat money, let alone for old-school money. The government therefore still owes the big banks for those assets which were purchased; in other words, quantitative easing is a kind of government borrowing. The feds might pay for said trillions someday, by raising taxes in 2015 and beyond, or by releasing the bank-reserve-balances as inflation (Taylor is afraid that will happen all at once, in a downpour), or by paying the banks back in some other fashion, perhaps by confiscating assets via eminent domain, by nationalizing the banking industry and then 'forgiving' their own debt, or by simply default on the national debt (Russia did this in the post-Communist era... and when the Russians refused to pay the big banks back, the big banks went to DC for a bailout, but were rightfully refused, back in the 1990s). How times have changed. HTH. 74.192.84.101 (talk) 23:22, 20 October 2013 (UTC)

First time poster on Wiki (so please help me with etiquette) I'm an MBA student at Columbia and have been digging into this in class, so hopefully this will help. HTH is partially correct, but the answer is a bit more nuanced. I'll explain in vernacular below and allow someone else to update the page with better wiki language. This is based on how the Fed explained it [2] as well as [3]. In short, QE is NOT printing money and does NOT increase the amount of money (whether in digital or paper form) in the system. This is the key takeaway that needs to be reflected in the article.

During quantitative easing, 2 things happen: 1. Banks purchase Treasury bills and corporate bonds from banks. This is the key stimulating element of quantitative easing, because it increases demand on bonds. An increased demand on bonds raises their prices, which lowers their yield, which stimulates borrowing because interest rates are lower.

2. The Fed needs to pay banks for these Treasury bills and corporate bonds, WITHOUT adding to the money supply. It does so by increasing the Federal Reserves of banks equivalent to the price of Treasury bills and bonds that it purchases. Typically, if banks have higher Federal reserves, they are able to loan more, and this would normally lead to an increase in the money supply (essentially printing money). However, since 2008, the Fed also pays interest on those Federal Reserves. This interest provides a dis-incentive for banks to lend money based on the injected reserves, and essentially, the money just sits in the Federal Reserve accounts and is never used in the economy.

Furthermore, Quantitative Easing does NOT increase the national debt in the long term. The reason is that the Fed has purchased Treasury Bills and bonds, and is currently keeping them. They do not disappear. At some point, when the economy bounces back, the Fed will be able to sell these same Treasury Bills and bonds back on the market, and pull their reserves out of the banks' accounts. Ultimately, all of the money comes back.GorillaManBear (talk) 22:17, 14 November 2013 (UTC)

References

Ref#7 on "Quantitative Easing Explained" is a dead link. There is a page with the smae title, possibly the same page, on http://www.bankofengland.co.uk/monetarypolicy/pages/qe/default.aspx 78.69.107.197 (talk) 20:55, 9 July 2013 (UTC)

QE as a way for inflation to stay above target?

The statement in the lead is somewhat counter-intuitive, since inflation can only be produced in the medium- to long-term because a short-term effect is the lowering of the interest rates through direct bond purchases. Since the only source given for the statement is a dead link, can someone either elaborate further here, or better still find an alternative source?cherkash (talk) 15:44, 3 September 2013 (UTC)

I think the title should be "QE as a way to inflation prevent inflation staying below?" As QE increases the money supply it causes monetary inflation. If the BoE or Fed didn't buy the government debt then someone else would have had to with other money so it is just additional money going into the economy.--Caparn (talk) 23:40, 8 September 2013 (UTC)

Reading this will help explain why, without QE, inflation would fall, or even become negative in our current post housing bubble environment: Reissgo (talk) 17:06, 23 September 2013 (UTC)

This tells the same story: http://www.bbc.co.uk/news/business-15446545 Reissgo (talk) 17:21, 23 September 2013 (UTC)

Wow. A wordpress blog? I'm convinced. bobrayner (talk) 19:09, 23 September 2013 (UTC)

I never claimed it was a RS for main page purposes. Its just a cheap and cheerful explanation for Cherkash. Mervyn King though, is authoritative. Reissgo (talk) 19:25, 23 September 2013 (UTC)

I'm trying to rewrite the intro-section (see below), to be easier to understand. I believe this is the sentence under discussion. "QE can be used to help ensure that inflation does not fall below some political target.[8]" Should this be rewritten a bit more verbosely, so it is easier to grok? Maybe: "Because QE increases the money supply in the long run, and thus usually leads to inflation, QE can be used to help avoid deflation (aka negative inflation), or to counteract the fall of inflation that usually follows when a financial bubble bursts, or in general to force the inflation-rate towards a political target.[8]" Is that *better* in terms of being able to easily understand, or worse because it is now too wordy? Would appreciate criticism, or even better, a rewrite of the sentence which gives crystal clarity.  :-) Thanks. 74.192.84.101 (talk) 01:08, 21 October 2013 (UTC)

selling short term government bonds

Second paragraph of the article.

Expansionary monetary policy typically involves the central bank selling short-term government bonds in order to lower short-term market interest rates

It sounds strange to me. Selling short-term bonds should lower their prices subsequently increasing short-term interest rates(lower bond prices = higher interset rate) . Am I wrong? — Preceding unsigned comment added by 83.31.6.227 (talk) 08:54, 28 September 2013 (UTC)

 Done "Buying" had been changed to "selling" recently by an anonymous editor. I've now corrected it back again, and will review some other recent edits to check that they are OK. --greenrd (talk) 10:27, 28 September 2013 (UTC)

Nonsense in lede

In the first paragraph are the words: "or not being effective enough if banks do not lend out the additional reserves". But banks can never "lend their reserves" anyway. Reissgo (talk) 13:49, 29 September 2013 (UTC)

Mhhmmm... I think the sentence is talking about lending (to regular businesses and consumers) as a way to counteract their bank-reserve-balances which document their QE transfers to the Fed. Or maybe it is talking about QE itself, where the bank-reserve-balances are increased, when a bank 'lends' part of that bank-reserve-balance to the Fed? Guess at the end of the day, I agree with you it is confusing, and needs a rewrite.  :-) — 74.192.84.101 (talk) 23:27, 20 October 2013 (UTC)

Attempted intro rewrite by 74-whatever.

I have taken out the refs, but left in the ref-numbers, so that the refs can be added back in when we are satisfied with the rewrite. Comments and criticism welcome. Please don't change this paragraph, which is my working draft. If you want to suggest changes, go for it (say something like "suggest replacing 'short-term' with 'one-year' in first paragraph" or maybe "swap the 2nd and 3rd sentences") and I'll incorporate them later. If you want to perform a massive rewrite of your own, however, please just make a new section on the talkpage (called attempted intro rewrite by myUsernameHere). Thanks. 74.192.84.101 (talk) 00:37, 21 October 2013 (UTC)

((para#1)) Quantitative easing (QE), sometimes labelled (not quite correctly) as "printing money" in the press, is a political tool related to monetary policy. Typically, it is used by the country's central bank, or in the United States by the quasi-governmental Federal Reserve, as a means to achieving specific economic goals. ((sentence#3)) Usage of QE is unconventional, and usually only happens in economic emergencies, when standard monetary policy has become ineffective.[1][2][3] For instance, QE can be used to prevent the money supply from falling (this may be why it is sometimes dubbed 'printing money' which also increases the money supply). QE can be used to help ensure that inflation does not fall below some political target.[8] ((sentence#6)) A recent example, where QE is being used for a quite different purpose, is in controlling interest rates: if the government is trying to force short-term interest rates to be lower in the wider market, they institute an expansionary monetary policy, typically[9][10][11][12] involving the purchase of short-term government bonds by the central bank (or the Fed). Maintaining an expansionist monetary policy when interest rates are already forced close to zero requires[13] additional measures, beyond normal monetary policy: one such measure is QE, which involves the central bank or the Fed purchasing long-maturity assets (home mortgages or long-term municipal bonds for instance), which unlike short-term government bonds, can lower long-term interest rates (further out on the yield curve.[14][15]

((para#2)) Normally, in order to keep market interest rates at a specified target value, central banks will buy and sell government bonds.[5][6][7][8] This is distinguished from QE, which is the unusual policy of the central bank (or the Fed) buying non-government-bond financial assets from commercial banks (or similar financial institutions such as a credit union or a brokerage firm).[4] ((sentence#3)) For example, the government -- via their central bank or via the Fed -- might purchase a particular home-loan asset from a particular bank, or a stock that was purchased by the bank on the stock market. Assets which are purchased from commercial banks in this fashion (by the central bank or Fed as part of the QE process) will always increase in price, which lowers their yield.[16] The mechanics of QE vary from country to country, but in the United States it is performed via the Fed, when other policy tools fail to achieve their goals. ((sentence#6)) To implement QE, the Fed will first perform an electronic database operation that increases the bank-reserve-balance in the Fed's account at of one of the major commercial banks. In return, the bank in question will then transfer assets (a home loan or commercial paper certificate or similar -- also usually stored electronically) to one of the Fed banks, such as the Federal Reserve Bank of Minneapolis. As of 2013, the outstanding total bank-reserve-balances from QE1 through QE3 are predicted to hit three trillion dollars[22] sometime during 2014; this bank-reserve-balance outlay will eventually be dealt with, by becoming inflation, or by being paid from future taxation, or in some other fashion.

((para#3)) Risks of QE include higher inflation in the longer term (due to an increased money supply -- in cases where QE was specifically being utilized to prevent deflation, this can ironically be seen as monetary policy being more effective than intended).[17] Another risk is that QE may fail to achieve the intended goal (not being effective enough), should banks not lend out the additional reserves.[18] ((sentence#3)) According to the some economists at the IMF and elsewhere, QE undertaken since the global 2008 financial crisis has mitigated some of the adverse effects of the crisis.[19][20][21] Economists such as Taylor of Stanford largely disagree with this assessment,[22] stating that the "very existence of quantitative easing as a policy tool creates unpredictability... the Fed can intervene without limit into any credit market".[23]

Deleted this from the Risks: Savings and pensions section

In November 2010, a group of conservative Republican economists and political activists released an open letter to Federal Reserve Chairman Ben Bernanke questioning the efficacy of the Fed's QE program. The Fed responded that its actions reflected the economic environment of high unemployment and low inflation.

There are no mention of risks, and it's insignificant and political.

173.25.54.191 (talk) 06:12, 21 October 2013 (UTC)

Dates back to 1907?

George Cortelyou used Treasury funds to buy up government bonds, during Teddy Roosevelt's administration. The concept is far from new!