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Where is QE2 Going?

Nov 6, 2010 • Demand, Supply, and Markets, Financial Markets, Money and Monetary Policy • 124 Views    No Comments

Did you ever wonder how things really happen? We read about quantitative easing and hear some gigantic number but then…what? Who does it and how?

In a Planet Money podcast, journalists visit the Fed and observe how one person implements Fed policy. It all began during 2008 with frozen financial markets, mortgage related securities that no one want to buy or sell, and a $1.25 trillion assignment. One way to rescue wounded financial institutions was to buy securities from them. They get the money. The Fed gets the securities. And then, with more to lend and spend, the banks can lower interest rates and start money moving.

For QE1, at the Fed, several people, daily, sat in front of a computer, selecting securities and then buying them. Keeping track of totals, when they were done, they had spent $1,249,999,999,999.39, 61 cents less than their goal. In this interactive graphic, the Washington Post explains the pros and cons.

Now, QE2 is about to begin.

The Economic Lesson

Discussing the Great Depression, during 2002, Ben Bernanke told economist Milton Friedman, “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” (from In Fed We Trust) Dr. Bernanke was referring to the inadequacy of the Federal Reserve’s response during the 1930s. Now, as the Chair of the Fed, through QE1 and QE2, the Federal Reserve has been flooding the economy with money through its purchases of securities so that, as he said, “…we won’t do it again.”

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