Christian Nelson

FIN650 Critique #1
Quantitative Easing
Quantitative Easing was introduced in December 2008, in one of its
many incarnations to come, to assist in creating recovery-via-stimulus to the
economy at that time. Due to the recession brought about by the Subprime
Mortgage Crisis, QE was developed to increase the money supply by lowering
interest rates so banks could lend more money. This was done through the
Fed purchasing mortgage backed securities and Treasuries from banks and
releasing funds into the banks reserves. In turn, banks have more
opportunity to lend to businesses for growth and expansion as well as
consumers more credit for purchasing goods. The Fed ended QE in mid-2010
but reintroduced it later that year as QE2 to attempt to create inflation
thereby increasing demand which would spur economic growth. The third
manifestation, called Operation Twist, began in late 2011. For the next nine
months, the Fed would continue to prompt the housing market by purchasing
long-term notes with short-term T-bills as they expired. They also ramped up
their purchases of MBS to achieve that goal. The last two versions, QE3 and
QE4, created goals that QE would meet before the Fed would finish the
program.
To some, QE was exactly what the economy needed. Research shows
that unemployment decreased 1.5% during QE1 and QE2 and that
employment could have suffered an additional 3 million lost jobs without QE.
The fact that interest rates on Treasury bills continues to hover around 2.75%

allows banks to continue to offer loans at reasonable rates for consumer

purchases thus creating economic growth. Through the purchase of the
infamous subprime mortgages, the Fed helped banks clean up their balance
sheets and help restore trust within the banking system. This helped provide
funds to spur the economy of recession.
To others, it was just a bailout with a different name. The problem with
infusing more cash into the economy is inflation and the lowering of the
value of the dollar. As the buying power of the dollar goes down, it costs
more to buy the same product. Basic supply and demand has also caused
individuals living on fixed incomes to realize less because their earnings do
not have the purchase power it once had. To encourage inflation has a dual
effect though. The rising costs of consumer goods like gas, food and other
items is compounded by the rising cost of health care. More income is being
expended than before which is creating less disposable income for families to
spend in the market. The solution of freeing up reserves has also caused
banks to hold on to these funds to fuel their own preservation thus defeating
the purpose of QE to encourage spending and lending.
In the end, the stimulus the Fed has implemented through QE has had
its good and bad points, however, I think they have only dealt with a
symptom of the real problem which is creation of jobs. To help curb
offshoring there must be some benefit to entice companies to stay within
U.S. borders and recruit tax paying citizens. With government mandated
healthcare, companies are less likely to expand its workforce or open new

facilities. Using Keynesian philosophy, and depending on the current state of

the economy, government needs to increase the tax rate and decrease
spending and entitlements in order to curb the ever-growing deficit and
increase the value and buying power of the American dollar. This will give
rise to both a stronger economy and lower unemployment. But, this train of
thought will never win anyone an election.
References
Amadeo, Kimberly. "What Is Quantitative Easing?." About.com. N.p., 27 Feb. 2014.
Web. 26 May 2014.

"QE, or not QE." The Economist. N.p., 14 July 2012. Web. 26 May 2014.
<http://www.economist.com/node/21558596#>.
Amadeo, Kimberly. "QE3 Pros and Cons." About.com. N.p., 4 Sept. 2012. Web. 26
May 2014. <http://useconomy.about.com/b/2012/09/14/qe3-pros-and-cons.htm>.

"Criticism of Quantitative Easing." Macroeconomic Analysis. N.p., n.d. Web. 26 May 2014.
<http://macroeconomicanalysis.com/macroeconomics-wikipedia/criticism-quantitative-easing/>.
Vorpahl, Mark. "Quantitative Easin: A Bank Bailout by a Different Name." Occupy.com. N.p., 4
Oct. 2012. Web. 26 May 2014. <http://www.occupy.com/article/quantitative-easing-bankbailout-different-name>.