Keystone College
Quantitative Easing
of November 2010
Most Anticipated News of 2010’s fourth quarter
Samuel Dodda
12/2/2010
Quantitative Easing of November 2010
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November 3, 2010 CNNMoney Reported “The central bank will buy $600 billion in long-term
Treasuries, and The Fed also announced it will reinvest an additional $250 billion to $300 billion
in Treasuries”, “The bond purchases aimed at stimulating the economy -- a policy known as
quantitative easing -- will total up to $900 billion”. Fed’s decision to infuse little less than a
trillion dollars into our economy was received well by the Wall Streets with a 219.71 points gain
that day by the DJI closing at a two year high(Yahoo 1). Frontline’s nightly business news
reported that one of primary causes for the recent bullish stock market rally since august was due
the reports that Federal Reserve’s Chairman Ben Bernanke was creating a program to infuse
capital into our economy. As boring as Quantitative Easing sounds the effects in could have on
our economy is sobering, stock markets’ to rally in fourth quarter is a good example.
The Great Recession
Economic Outlook Issue 4 – October 2010
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There are three very important reasons why this Great Recession started and is recovering at a
snail pace:
Too much Toxic assets are still flouting around in our economy
Banks aren’t comfortable to start leading again
Government doesn’t want intervene due to moral hazard, personal, and political agendas
Toxic Assets
Over the last decade consumers over consumption in Credit Cards, Home loans, Home equity
loans, and Personal loans combined with high interest rates created debts that were next to
impossible to repay, thus creating Toxic debt. Without addressing the issue, banks that were
responsible for those toxic debts packaged them into CDO’s and sold them off to other Banks
and Investment companies (Frontline). This meant that most of the banks’ and investment
companies’ balance sheets were filled with Account Receivables that aren’t going to be repaid,
which created a credit bobble. As the C.E.O. of Bear Stearns Jeffrey Lane, chair and CEO of
Asset Management said to Frontline “It was a classic game of hot potato, instead of passing it
along everyone ended up with one”
Banks Stopped Lending
When The Great Recession started, most of the toxic assets came into light. This resulted in
banks hold on leading to each other and investment companies due to the lack of confidence in
others balance sheets. This hold on credit also extended to an average person and small business
owners in order to prevent formation of more toxic debt.
Government
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Treasury Secretary, Paulson (2006 – 2009) and Timothy F. Geithner (2009 – Present); the
legislative department; and the United States public felt “why should the government, and
thereby U.S. taxpayers, bail out lenders and borrowers who made bad decisions? And if they
know they're going to be bailed out, what does that do to the moral hazard argument that they
don't end up paying a price?.” This kind of thinking made it almost impossible for the
government to provide adequate help to Wall Street in timely manner. With the best of efforts by
the Treasury Secretary, Paulson and Fed Chairman Ben Bernanke, they were able to fund $ 3
trillion dollars over the last three years compared to the $ 9 trillion Federal Reserve was able
fund to help U.S. economy (CNNMoney).
Reasons for Quantitative Easing
USA Today, Economic Calendar
Looking at the big picture, with unemployment rate at 9%, Federal Funds Interest Rate at .20%,
and a Government debt over 13 trillion; it’s safe to conclude that our economy is still in turmoil
(Google Public Data, Bloomberg, and Bureau of the Public Debt). Since there is no concrete
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hope of a stable economy in site, Federal Reserve Chairman. Ben Bernanke had to come up with
a new strategy on top of everything Fed and the government could do and did in order to help
our crippling economy.
Had Fed and Government did everything they could’ve done?
Fed
One of the primary ways The Federal Reserve controls our economy is with the use of Fed Funds
Rate(FFR). By increasing and decreasing Fed Fund Rate, The Federal Reserve is able to control
the volume of loans created. The Federal Reserve did lower the FFR to nearly 0% since October
of 2008 with no success (CNNMoney).
With $ 11 trillion dollars in overnight loans, bailouts, Fed backed up mergers and acquisitions,
and direct injection; Federal Reserve used every tool it has in order to keep our sluggish
economy moving so it wouldn’t from stop. Effectively hiding records of overnight transactions
and stress test results, Federal Reserve crossed many regulatory reform acts that was passed in
July to keep consumer confidence from falling (CNNMoney).
Government
With relief programs such as TARP (356.2 billion), Federal Reserve Rescue Efforts($1.5
trillion), Federal Stimulus Programs($577.8 billion), American International Group($127.4
billion), FDIC Bank Takeovers($45.4 billion), Other Financial Initiatives($366.4 billion), and
Other Housing Initiatives($130.6 billion) with a total of $ 3 trillion; our Government did
everything it could to provide relief to a stressed out economy. Since the money used to for any
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given program would be the tax payers, one has to keep in mind that moral hazard, personal
agendas, and political barriers involved in passing such a bill.
What is and how does Quantitative Easing work?
Created by the Bank of Japan in 2000, Quantitative Easing was used to fight domestic deflation.
Even thou it was unsuccessful in Japan, the relative success it had in U.S. in 2008 seemed to be
enough to gain popular support on Wall Street.
Quantitative Easing is a credit injection into our economy through the purchaces of assets in
Banks and Securities. What makes the November, 2010 $ 600 billion Quantitative Easing so
unique is its implementation. Fed Plans to inject $ 56 billion every month into our via buying up
treasury bonds and toxic debt held by banks. The Fed also called to buy up 91% of 10 yr and 30
yr T-bonds over the next year in order to drive down the yield. Feds is hoping this new money
along with low yield in bond markets will discourage banks to invest in bond markets and
simultaneously encouraging them to invest in individuals and small business. Exporters
throughout the U.S. are welcoming this second round of Quantitative Easing because this credit
injection is also expected to depreciate the Dollar which should result in demand for export.
Criticism
Many critics suggested that this injection of credit might create inflation U.S. is not ready for. If
that was the case, adjusting to inflation with a depreciating dollar might cause further damage to
our economy which could result in a double dip recession. Quantitative Easing never worked in
Japan, and its effects were hardly noticed in 2008. But the optimism in the current market place
says different.
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Conclusion
Since these crises started, The Federal Reserve and The Government did everything in their
power to help us out. We also witnessed with Lehman Brothers and Iceland what could happen
to a company or a country when Fed or Government doesn’t intervene. U.S. being the largest
economy in the world, The Federal Reserve and The Government has the responsibility to not
just the American people but to the World to do everything in its power to stop this train headed
toward a broken bridge.
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APA formatting by BibMe.org.