Quantitative Easing Paper

Our economy is a machine that is ran by humans. A machine can only be as good as the person who makes it. This makes our economy susceptible to human error. A couple years ago the United States faced one of the greatest financial crisis since the Great Depression, which was the Great Recession. The Great Recession was a severe economic downturn that occurred in 2008 following the burst of the housing market. The government tried passing bills to see if anything would help it from becoming another Great Depression. Trying to aid the government was the Federal Reserve. The Federal Reserve went through a couple strategies in order to help the economy recover. The Federal Reserve provided three major strategies to start moving the economy in a better direction. The first strategy was primarily focused on the central bank’s role of the lender of last resort. The second strategy was meant to provide provision of liquidity directly to borrowers and investors in key credit markets. The last strategy was for the Federal Reserve to expand its open market operations to support the credit markets still working, as well as trying to push long term interest rates down. Since time has passed on since the Great Recession it has been a long road. In this essay we will take a time to reflect on these strategies to see how they helped.

In the late 2007, early 2008 the United States and the world was hit with the most serious economic downturn since The Great Depression in 1929. During this time the Federal Reserve played a huge role in assuring that it would not turn into the second Great Depression. In this paper, we will be discussing what the Federal Reserve did during this time, including a discussion of our nation’s three main economic goals which are GDP, employment, and inflation. My goal is to describe the historic monetary and fiscal policy efforts undertaken by the U.S. Government and Federal Reserve, including both the traditional and non-traditional measures to ease credit markets and stimulate the economy.

As the onslaught of the sub-prime mortgage crisis began in late 2007, the housing market plummeted sending the economy into what is now known as the Great Recession. The Federal Reserve, as well as the private and government sectors, quickly took notice. In November of 2008 the Federal Reserve undertook its first trimester of quantitative easing; which means the Fed began purchasing treasury securities to increase the money supply in the system, with the hopes that the increase in assets would encourage lending and investment, leading to a resurgence of the economy in terms of unemployment rates and GDP. As time progressed the Fed continued to implement quantitative easing into its third trimester due to a lack of sufficient results.

In the late 2007, early 2008 the United States and the world was hit with the most serious economic downturn since The Great Depression in 1929. During this time the Federal Reserve played a huge role in assuring that it would not turn into the second Great Depression. In this paper, we will be discussing what the Federal Reserve did during this time including a discussion of our nation’s three main economic goals which are GDP, employment, and inflation. My goal is to describe the historic monetary and fiscal policy efforts undertaken by the U.S. Government and Federal Reserve including both the traditional and non-traditional measures to ease credit markers and stimulate the economy.

The Federal Reserve System is the most powerful institution in the United States economy. Functioning as the central bank of the United States, acting as a regulator, the lender of last resort, and setting the nation’s monetary policy via the Federal Open Market Committee, there is no segment of the American economy unaffected by the Federal Reserve [endnoteRef:1]. This power becomes even more substantial in times of “unusual and exigent circumstances,” as Section 13(3) of the Federal Reserve Act gives authority to the Board of Governors to act unilaterally in lending and market making operations during financial crisis[endnoteRef:2]. As illustrated by their decision making in the aftermath of the 2007-2008 Great Recession,

To combat the liquidity issues in the market, the Federal Reserve stepped in and lowered the discount window interest rate with the intent of putting liquidity back into financial markets. These lowered rates had a positive short term affect with some improvements in market liquidity. However, credit markets were still not providing the level of market liquidity that was required by businesses. The first stage of the Federal Reserve’s response was only a short term fix and did not adequately address the market liquidity needs, so the Federal Reserve continued with additional action to supplement market liquidity through the use of non-monetary tools (Sarker, 2009).

The article covers a number of key concepts in macroeconomics. The first is the idea of the recession, something that Coy discusses at length in the article. We notes that the recession cam e as the result of a real estate bubble that stoked consumer spending. The author notes that the recession ended in 2009 when the economy stopped contracting, but that growth since then has been slow and as a result the economy is below the trendline, so it is underperforming the level where it should be. The author does not note if that trendline was adjusted for the bubble or if it accepts the bubble as being a reasonable contributor to the trendline while the recession is not.

The economic meaning of a recession is that the gross Domestic Product (GDP) has declined for two or more consecutive quarters. Unemployment rises, housing falls, stocks fall and the economy is in trouble. Whenever the government sees that the economy is entering a recession it is important for it to act. The U.S acted in two ways during the Great recession of 2008 through fiscal and monetary policies. Renaud Fillieule identifies that “ Monetary and credit expansions have been the main tools used by the U.S. government and central bank to try and recover economically from the Great Recession of 2008” (Fillieule r, Pg. 99 2016). These Keynesian policies are debatable among economist, none the less they were implemented and put the U.S on the road to recovery.

The Federal Reserve went into action in response to the 2008 recession by rapidly reducing interest rates with the hopes of encouraging economic growth. The federal funds target rate was decreased to between zero and .25 percent. The results of the rate changes caused what is called “zero bound”, this reduced the effectiveness of monetary policy with the near non-existence of interest rates.

This has the effect of bringing down interest rates, injecting money into the economy, and thus encouraging borrowing and spending. However, when interest rates are at or near zero and the economy still requires stimulus (a dangerous situation now referred to as a “liquidity trap”) (Blinder 466), central banks must use more extreme methods to resuscitate the economy.

Theory- During the recession flow of the money in the market is very less, hence central bank lend the money to the borrowers at low interest rates, but there is limitation they cannot go beyond zero percentage, hence central bank do “Quantitative Easing” that is printing of money and boost the money into market by purchasing the assets and buying the gilts or government debts.

Therefore, the quantitative easing adopted from 2009 was trying to gradually resume sustainable economic growth. Quantitative easing has helped to avert what could have been a second great depression (Wall Street, 2011). The US economy has been clawing its way out of the recession in 2009 and recovery has been slow compared to previous economic cycles. Regular review of the pace of securities purchase by the Federal reserve and the overall size of asset-purchase program in light of incoming information and adjusting the program as need be will help foster maximum employment and price stability.

“Quantitative easing” refers to an unorthodox monetary policy where a central bank would buy bonds and premiums to stimulate the economy when the nominal interest rates are near or at zero. Since nominal interest rates cannot technically go below zero, this is done by pumping liquidity into the economy so that asset prices would inflate. This technique had originated in the Bank of Japan (BOJ) during the early 2000s as an attempt to revive Japan’s stagnant economy. The United States Federal Reserve had implemented several plans similar to that of the BOJ after the 2008 financial crises, and continued until late 2014. Quantitative easing should not be put into effect again because it has not significantly affected the economy positively in the first place, it also risks hyperinflation, and if anything, it should be used only as a measure of last resort.

Globally financial crisis which lasted from 2008 until now has pushed the U.S. economy falling into prolonged inactivity, caused the U.S. Federal Reserve (FED) to consecutive lower interest rate to lowest record 0 - 0.25 % and continuous launching QE packs huge "rescue” the economy . In November 2008, the U.S. government has launched QE1 (Quantitative Easing) package when the financial crisis was in the most traumatic period. The Fed has cut interest rates for the USD to 0 - 0.25 % and paid out approximately 1,700 billion to buy debt securities collateral guarantees and Treasury bonds to increase the economy. In the impact of QE1, the U.S. economy has recovered in a short time but then there were some signs of decline. Therefore, from November 30, 2010 through December 6, 2011, the Federal Reserve decided to start QE2 program with adding $600 billion to purchase government bonds. To "save " and should continue to motivate the U.S. economy , the Fed has applied the program " Operation Twist " , also known as QE 2.5 , which contained two packages worth $400 billion and $267 billion . Thus, unlike conservative QE, the Fed programs do not increase the money supply and expand the balance sheet of its assets, but only change the composition of the balance sheet using the available funds. However, after QE1 and QE2 package, the U.S. economy still did not have many positive signs. The U.S. government chose to launch QE3 in 9/ 2012 and initiated to keep short -term interest rates

In 2007 the world witnessed an economic downturn so devastating to the global economy that it has been claimed to rival the Great Depression. The US stock market plummeted, the Dow Jones Industrial Average (DJIA) dipping below over 50% after its peak in October 2007, and reached a low of 6600 points by March 2009 . In England, Northern Rock, one of their largest banks, suffered a bank run. This was the first time in over 100 years a bank in England had suffered from a run, and because Lloyd’s bank denied them a buyout they had to be nationalized. If the world’s economy was shaken this much, a large number of significant mistakes must have occurred. The most significant of these mistakes was the loose monetary policy used by central banks. An imbalance of international money distribution and a housing bubble of the brink of bursting were the other heavy problems that eventually dragged the economy down.