We've moved! Come join us at Watchdog Arena, where you'll continue to find the same quality articles that expose waste, fraud and abuse as well as examine policy issues at all levels of government.

Please visit our new home and follow us on social media: Facebook & Twitter

We've moved!

Come join us at Watchdog Arena!

Sign Up for Watchdog Updates!

Quantitative Easing: Is it working?

Since the financial crisis struck the United States five years ago, the Federal Reserve has taken major steps in trying to revive the nation’s struggling economy. The central bank’s plan of attack is centered around a form of “stimulus” that has never been tried on such a grand scale anywhere in the world.

The Fed’s program is known as Quantitative Easing, or QE, which began in November of 2008. But what do the Fed’s actions mean for regular American citizens? Has the program solved any of the issues facing the U.S. economy? The answer to the latter question may depend on who you ask.

So, what is QE? Let’s start from the beginning.

infograph

The country’s unemployment rate was steadily rising as Fed Chairman Ben Bernake announced the beginning of the largest program in the central bank’s history. QE was designed to provide liquidity at a time when financial institutions were facing cash shortages.

Here’s how QE works: First, the Fed cuts interest rates in order to promote spending within the economy. Then the Fed decides to take a bigger step by pumping money into the system by buying government assets. These assets consist primarily of government bonds.

In 2008, the Fed bought $500 billion worth of mortgage-backed securities, and purchased $100 billion in debt obligations from Fannie Mae and Freddie Mac – two government controlled mortgage giants at the center of the crisis.

In 2009, the Fed expanded its buying program by announcing the purchase of another $750 billion in mortgage-backed securities and more debt from Fannie and Freddie. It also decided to buy $300 billion in long-term Treasury securities.

The Fed is able to do this by printing money, then buying bonds from private financial institutions on a secondary market, which in turn expands the monetary supply.

In November of 2010, a second QE program was announced. The Fed bought $600 billion in long-term Treasuries with a total bond purchase of $900 billion.

A third round of QE began in September of last year with the Fed buying $40 billion in mortgage-backed securities per month indefinitely. That number was then upped to $85 billion a few months later in December of 2012.

OK, but what did it do for the economy?

When the original round of stimulus was announced in 2008, the unemployment rate stood at 6.8%, the national debt at $10.66 trillion and the Dow Jones Industrial Average at 8,829.04.

When QE2 was launched in 2010, the unemployment rate increased to 9.8%, the national debt went up to $13.86 trillion and the Dow also saw a large jump to 11,006.02.

In September of 2012 when QE3 began, the unemployment rate dropped to 7.8%, the debt continued to rise to $16.06 trillion and the Dow continued on its way up, hitting 13,540.

Bernake announced a possible “tapering” of the QE program in June of this year. When that announcement was made, unemployment stood at 7.6%, the debt was up to $16.74 trillion and the Dow was coming off a period that saw record highs well over 15,000.

The U.S. GDP also grew from just over $14.2 trillion in 2008 to over $15.6 trillion in 2012.

Many critics have voiced opposition to the Fed’s actions. One such critic is Mark Thornton, a senior fellow at the Ludwig von Mises Institute at Auburn University.

Thornton says that the central bank’s actions have largely benefitted those on Wall Street, and not the American people. Since QE began, the Dow has surged to record highs, despite high levels of unemployment.

Critics also point to the more than $6 trillion in debt the U.S. has racked up since 2008 due in large to the “easy money” policies of the Fed. “Long-term debt has never worked for any government,” said Thornton. “Debt has effectively brought down empires.”

Setting interest rates to effectively zero may have other unintended consequences. When rates are low, fewer people save, instead shifting their money to more risky investments.

But one point of contention is that of inflation. With the Fed creating, and then pumping in trillions of dollars into the system, why hasn’t inflation also risen?

The government measures inflation based off the Consumer Price Index. When looking at this measure, inflation has largely remained below the Fed’s set goal of 2% since 2008. But critics contend that CPI doesn’t take into account many items that effect consumers such as oil or gas prices, land values and food prices, all of which have gone up since 2008. Even commodities like gold have seen large increases since the beginning of QE.

“There are a lot of signs out there that show the Fed’s monetary policies are affecting other products,” said Thornton.

Another potential reason for a lack of current inflation may be coming from the financial institutions that are dealing with the Fed.

Statistics from the Federal Reserve show that banks are holding onto large portions of money in reserves. This means that the Fed is printing money, giving it to banks through bond transactions, then banks hold onto that money instead of passing it along into the economy, thus reducing the “stimulus” effect the Fed was looking to create.

According to the Federal Reserve, the monetary supply has more than tripled since August of 2008, going from $800 billion to $2.7 trillion.

The Fed’s actions are seen as a way of “monetizing the debt” – an accusation in which the bank is refuting. However, that denial is falling on deaf ears.

“If they say they aren’t monetizing the debt, they are liars,” said Thornton. “Creating money and buying bonds is monetizing the debt.”

With a potential “tapering” of the QE program occurring in the foreseeable future, President Obama’s choice to head the Federal Reserve will be important.

As of now, two candidates, Larry Summers and Janet Yellen, are seen as the front runners for the top position. It is rumored that Bernake will be stepping down before his term officially ends on January 31, 2014.

Categories: Budget and Finance, Government Transparency, Must Read, Policy, Politics
Tags: , , , , ,

RELATED ARTICLES

  1. WichitaLiberty.TV: The need for reform at Wichita City Hall
  2. GA: Augusta approves $2.8 million for broke Hyde Park project
  3. Balancing the Kansas budget
  4. Kansas ‘Green Book’ released
  5. Wichita Metro Chamber of Commerce: What is the attitude towards taxes?

COMMENTS

comments powered by Disqus
Login