Quantitative Easing 2, or QE2, is the second round of quantitative easing that the Fed executed during the Great Recession of 2008. You know the time: it was a dark, post-subprime-mortgage-crisis world. Stocks crashed, homeowners defaulted, lots of jobs were lost.
To try to turn that economic train around, the Fed lowered interest rates to zero and implemented quantitative easing (QE). QE is where the bank prints money and uses it to buy government securities (injects liquidity into the system) from banks. That gives more money to banks to lend out, which, like interest rates, should make borrowing easier and more attractive. Since there’s more money now (increasing the money supply), it should be cheaper to lend out. All that is supposed to stimulate borrowing, which stimulates businesses, employment, and spending...which should increase GDP.
But...QE can lead to inflation, hyperinflation, and stagflation. All not good.
QE2 was in 2010, a couple years after the economy hit the fan. While the market was halfway bouncing back by then, unemployment was still high, almost 10%. This isn’t uncommon; oftentimes, firms figure out how to do without the workers they had pre-recession, doing less with more...making job creation much slower to rebound than GDP and markets.
The Fed put $600 billion into the economy by buying back U.S. securities. The Fed also reinvested what money it had from mortgage-backed securities it unloaded from big banks during the toxic asset cleanup.
QE2 did, well...okay. Maybe. Correlation is not causation, but asset prices were still good. Unemployment didn’t drop below 9% until late 2011. QE3 came a few years later, and economists weren’t impressed. Time to move on to different tactics, they said.
See: Quantitative Easing.
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Finance: What is the Federal Open Market...15 Views
finance a la shmoop what is the Federal Open Market Committee... FOMC! come say it
with me FOMC yeah that's the noise of meatball makes when it hits the floor it [Meatball lands on the floor]
also happens to be the acronym for the Federal Open Market Committee and part
of its purpose in life is to manage financial outcomes through monetary
policy all right well the Federal Reserve pulls three levers of monetary [3 Levers appear]
policy discount rates open market operations and bank reserve requirements
those are the big three the big three monetary policies used to try and [Monetary policies appear]
control the economy well the font is responsible for the open market
operations part of that equation it tries to fight the twin evils of [Person pulls open market lever]
unemployment and inflation and among other things if unemployment is high
well in general the FOMC will seek to increase the supply of money by holding
back on sales of government paper like t-bills bonds notes and all that good
stuff leaving more cash sloshing around in the [Dollar bills appear]
marketplace and hopefully encouraging the cost of renting money or interest
rates to decline like encouraging people to borrow because rates are cheap well
when people can borrow more cheaply yes they're incentivized to spend more at [Person picks up stack of cash]
the mall on earrings and rings for other places well it works in the opposite
direction as well with the FOMC fearing inflation while they'll issue
lots of government paper sucking out the excess cash that was previously in the [Money supply meter declines]
marketplace and likely causing interest rates to rise right so cash will be less
available and people want more to rent their precious dollars as interest got
it okay well the key issue remains that the FOMC is making money more expensive
when it does that when an issues paper sucking cash out of the system it's hard
concept for most people including me to understand here
well the FOMC called eight secret very dan Brown like meetings a year to look [Months of year appear on calendar]
through reams of data and decide what policy should be note that they're
applying monetary policy here to do their bidding not fiscal policy the gist
is that the committee is the one sitting atop monetary policy in the US and it's
the committee who makes the decisions on the big three dials they can turn one [Committee standing by 3 dials]
two and three they can sift through data on the economy jobs inflation bang
fear surveys etc and then make decisions about what to do or you know what not to
do I remember that Soup Nazi from Seinfeld no bonds for you [Nazi holding a bond]
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