Although QE2 ended yesterday, eulogies for the Fed’s $600 billion bond buying program did not focus on the qualities of the deceased and why we will miss her. Yes, some did believe that things would have been much worse without QE2. But others were saying it was unnecessary and will fuel inflation.
Described in this Marketplace Whiteboard video, quantitative easing was about flooding banks with money by exchanging the securities they owned with deposits and reserves from the Fed. More money should mean lower interest rates which can encourage businesses to borrow.
Logical. But it did not work out that way. Between November, 2010 and June, 2011, when QE2 was “alive,” we had the low interest rates. Still though, lending lagged, unemployment remained high, and growth, sluggish.
The Economic Lesson
Can government make a difference? Adam Smith (1723-1790) said leave the economy alone. John Maynard Keynes (1883-1946) said prime the pump. Sadly, the economy can never provide a controlled experiment for deciding who is right.
Even now, economists dispute the causes of the Great Depression. Was the problem insufficient government spending or inadequate monetary policy? Did the depression end because of WWII or would pent up demand have blossomed with or without a war?
An Economic Question: Even when banks are flooded with money through quantitative easing, why might they be unwilling to lend and businesses uninterested in borrowing?