Quantitative Easing 101
Here’s a nice primer from the Financial Times on quantitative easing. When trying to understand this, it’s worth keeping in mind that the name “quantitative easing” is very non-descriptive and I have no idea how it got this label. So don’t try to think about what those words might mean, just pay attention to the description of what it is.
Meanwhile, Larry Kudlow finds the inflationary potential of this move so terrifying that he’s setting money on fire which, as Ryan Powers observes, is actually illegal:
Spurring Kudlow’s inflationary expectations is, however, actually part of the idea. One problem the US economy is having right now is that even though I’d kind of like to buy a new MacBook and have the money in my bank account to pay for a new MacBook, I’m not buying a new MacBook. Why? Well, because I don’t really need one, and I keep having this feeling that they’re going to start being discounted soon once Apple realized that nobody wants to buy their super-expensive laptops amidst a cataclysmic recession. I have, in other words, deflationary expectations. These kind of expectations, when widespread, become self-fulfilling as all kinds of spending on non-necessities collapses. Change those to inflationary expectations and I think, hey, I’d better buy that today because it’ll cost more next week. And that helps the economy grow.
Obviously, this is the kind of thing that can be taken too far. And it is true that if aggressive Fed policy succeeds in returning us to growth, we will soon enough need to deal with the prospect of problematic inflation—either in the sense that the level might get too high, or that we might see increases of an accelerating character. Which is certainly a good reason to wish we hadn’t gotten into this situation. But it’s not a good reason to eschew the methods that are most likely to get us out of it.
40 Responses to “Quantitative Easing 101”
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March 21st, 2009 at 9:06 am
Just buy the damn Macbook. It’s terrific. You won’t regret it.
March 21st, 2009 at 9:24 am
The ft article is behind a firewall.
The wikipedia article:
http://en.wikipedia.org/wiki/Quantitative_easing
Is free. Is it as good?
March 21st, 2009 at 9:27 am
Raivo Pommer
raimo1@hot.ee
AIG-krise
Die US-Bevölkerung ist ob der teuren Renovierung ähnlich empört wie bei den AIG-Bonizahlungen für Versager-Banker, hatte doch der Staat in drei Tranchen rund 45 Milliarden Dollar in die Citigroup gepumpt, um einen Kollaps der Krisenbank zu vermeiden. “Es ist das falsche Signal“, sagte Charles Elson vom Weinberg Center for Corporate Governance der University of Delaware zu Bloomberg. Der Staat will seine Anteile an der Bank auf bis zu 40 Prozent aufstocken.
Das Institut selbst kann die ganze Aufregung um die Millionen-Renovierung nicht nachvollziehen und rechtfertigt die Ausgaben mit dem Argument, dass langfristig gespart werde. “Unsere Topmanager ziehen von zwei Fluren in kleinere, einfachere Büros auf einen Flur um”, teilte die Bank mit. Weltweit will die Citigroup in den kommenden Jahren 15 Milliarden Dollar durch die Verknappung von Büroraum sparen.
Für die Citigroup ist die millionenschwere Renovierung nicht der erste Fauxpas. Erst vor wenigen Wochen war bekanntgeworden, dass die US-Großbank für 50 Millionen Dollar einen neuen Firmenjet Typ Dassault Falcon 7X kaufen wollte und trotz der Finanzkrise an der Bestellung aus dem Jahr 2005 festhalten wollte. Erst die Kritik von US-Präsident Barack Obama veranlasste die Bank zur Stornierung des Auftrags. Die Bank habe “keine Absicht, sich irgendein neues Flugzeug liefern zu lassen”, hieß es in einer Mitteilung.
March 21st, 2009 at 9:32 am
This recession is not caused by a mistaken expectation of lower prices, something more fundamental is going on.
March 21st, 2009 at 9:33 am
If investors thought the fed could or had the will to maintain a stable albeit higher level of inflation gold wouldn’t have risen from the mid-800s to the mid-900s last week.
Why not address inflation concerns now before they become a problem and are too hard to fix?
March 21st, 2009 at 9:34 am
Most people who aren’t buying the Mac Book aren’t holding off because they’re thinking about it being discounted.
Rather, they’re shoveling money into their savings accounts and leaving it there because they might get laid off.
I’m not sure what quantitative easing is going to do about that.
March 21st, 2009 at 9:43 am
If Bernanke’s printing press were as obvious a solution as Matt thinks it is, Bernanke would have fired it up long ago. Bernanke knows the risk he’s taking and wouldn’t be taking it if he weren’t desperate. More than one central banker has found out that fucking with the bond vigilantes is fraught with all kinds of dangers.
The Fed is doing the same thing it did when it opened up the credit spigot in 2001, hoping that the resulting credit tsunami would be easier to deal with than the recession is was facing at the time. Well, they were wrong.
March 21st, 2009 at 9:48 am
Here’s what I completely fail to understand. This policy is supposed to lower mortgage rates to get those of us who aren’t underwater to refinance and have more spending money each month. And doing this involves printing lots of money, which will increase inflationary expectations. But if there’s an expectation of more inflation out there, doesn’t that *raise* long-term interest rates? Who would lend at 6% when expecting flat prices but lend at 4% when expecting inflation? How the heck is this supposed to work?
March 21st, 2009 at 9:50 am
Rather, they’re shoveling money into their savings accounts and leaving it there because they might get laid off.
I’m not sure what quantitative easing is going to do about that.
Seriously? The proposed quantitative easing plan will lower interest rates and raise inflation. The savers will receive a lower nominal and real return on their savings. Overall people will save less and buy more than without quantitative easing.
March 21st, 2009 at 10:24 am
Krugman has some pertinent thoughts on fiscal aspects of QuE (let’s abbreviate, and then we can also write “In coming months, monetary policy is going to be QuE-sy”)
http://krugman.blogs.nytimes.com/2009/03/20/fiscal-aspects-of-quantitative-easing-wonkish/
Short version: I will gladly pay you today for some fiscal stimulus on Tuesday.
He also is unhappy about the financial system proposal; I share his unhappiness, it sticks with the “save the toxic assets at most any cost” approach that was much discussed in recent months.
http://krugman.blogs.nytimes.com/2009/03/21/despair-over-financial-policy/
March 21st, 2009 at 10:28 am
And on Kudlow, that was an old dollar bill he found in his house, and he was afraid there might be some blow on it from back in the day, so he may have been destroying evidence as well.
March 21st, 2009 at 10:31 am
OK folks, at rock bottom economics is easy. Expectations of the future determine what sort of economy we have. If expectations are good so is the economy. If expectations are bad…. So quantitative easing (expanding the money supply) is all about manipulating expectations.
The hard part is timing. As noted above Greenspan did the right thing in lowering rates, he just did it too long.
Our problem currently is conflicting policy agendas and a doomsday possibility nobody wants to acknowledge. Obama wants a crisis to take advantage of, while simultaneously trying to ameliorate said crisis via bailouts, and avoiding the real reason for AIG. That being another looming lockup of the financial system.
Nobody wants to acknowledge the possibility of financial systemic collapse. Understandably. If you start a stampede of fear that checks won’t be honored, credit cards denied, and accounts inaccessible, it’s literally guns, gold, and anarchy. This is not a drill. This is the unspoken/unspeakable reality.
Every thing else is fluff. Don’t worry about inflation, it’s a long way away, and compared to the worst case scenario, meaningless.
March 21st, 2009 at 10:35 am
Yves Smith (and the comments there) are also worth a read on the financial plan http://www.nakedcapitalism.com/2009/03/private-public-partnership-details.html
March 21st, 2009 at 10:37 am
shooter, your link is bad
http://www.portfolio.com/views/blogs/market-movers/2009/03/17/why-aig-wasnt-allowed-to-fail?tid=true
should work
March 21st, 2009 at 10:37 am
Seriously? The proposed quantitative easing plan will lower interest rates and raise inflation. The savers will receive a lower nominal and real return on their savings. Overall people will save less and buy more than without quantitative easing.
You don’t get it, Gordon. People saving up their nuts because they’re afraid of losing their jobs aren’t shopping around investment vehicles and calculating interest. They’re putting money aside so they will have something to pay the bills for a couple of months in case they don’t have a paycheck.
March 21st, 2009 at 10:43 am
Yeah, the MacBook is excellent…Especially the new unibody models (although you might want to wait for Snow Leopard).
I agree, there are bigger fish to fry, but I think that far too many people are underplaying just how serious this inflation is going to be…and the effects that it will have on the middle class. Part of that is because some of you hate Larry Kudlow so much that you can’t accept that the guy is partially right on this issue.
My friend did an excellent post on why the Fed may have gone down this route and the consequences. Considering that he’s been through similar situations with Latin America, I’d suggest that you all read it:
http://ashtonadvisory.blogspot.com/2009/03/this-dear-dear-land-is-now-leased-out.html
March 21st, 2009 at 10:46 am
And here I thought people weren’t worried about inflation because we’re trying to avoid a deflationary spiral
Apparently, it’s actually because of liberals mumble mumble mumble Larry Kudlow rulez.
March 21st, 2009 at 11:38 am
Re: This recession is not caused by a mistaken expectation of lower prices, something more fundamental is going on.
I don’t think Matt was saying deflationary expectations were the cause of this mess, only that such expecatations were making a bad situation even worse.
Re: Why not address inflation concerns now before they become a problem and are too hard to fix?
By that logic we should all be taking antibiotics 365 days a year just in case we pick up a bacterial infection someday.
March 21st, 2009 at 11:38 am
I know everyone means well. Hopes that monetizing will return us to growth. It won’t.
The last bubble is now forming. Treasury debt. Spurred on by purchases of it by the Fed who will print money to buy it. As all the trillions in old debt flounder everyone wants a part of what Uncle Sam is buying. No matter that the supply is going through the roof, the demand seem limitless. Treasuries are the most crowded trade in the world.
Printed or not the money is coming from borrowing. It takes a least $2 trillion in new credit just to keep the economy from falling at double digit rates. What will be needed for growth? Who will supply it?
———————————————-
“The problem with discretionary central banking is that it virtually ensures that policy mistakes will be followed by only greater mistakes.” Here, I’m paraphrasing insight garnered from my study of central banking history. Naturally, debating the proper role of central bank interventions – in both the financial sector and real economy – becomes a much more passionate exercise following boom and bust cycles. The “Rules vs. Discretion” debate became especially heated during the Great Depression. It was understood at the time that our fledgling central bank had played an activist role in fueling and prolonging the twenties boom – that presaged The Great Unwind. Along the way, this critical analysis was killed and buried without a headstone.
I believe the Bernanke Fed committed a historic mistake this week – compounding ongoing errors made by the Activist Greenspan/Bernanke Federal Reserve for more than 20 years now. I find it rather incredible that Discretionary Activist Central Banking is not held accountable – and that it is, instead, viewed as critical for a solution. Apparently, the inflation of Federal Reserve Credit to $2.0 TN was judged to have had too short of a half-life. So the Fed is now to balloon its liabilities to $3.0 TN, as it implements unprecedented market purchases of Treasuries, mortgage-backed securities, and agency and corporate debt securities. And what if $3.0 TN doesn’t go the trick? Well, why not the $5 or $6 TN Bill Gross is advocating? What’s the holdup?
Washington fiscal and monetary policies are completely out of control. Apparently, the overarching objective has evolved to one of rejuvenating the securities and asset markets and inciting quick economic recovery. I believe the principal objective should be to avoid bankrupting the country. It is also my view that our policymakers and pundits are operating from flawed analytical frameworks and are, thus, completely oblivious to the risks associated with the current course of policymaking.
http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10204
March 21st, 2009 at 11:51 am
Joe,
It’s pretty clear that you and others on this page have no concept of what significant inflation looks or feels like. Frankly, you have lived a privileged existence by global standards and are too young to remember (or maybe you weren’t even born by then) the 1970s.
The issue is whether or not the Fed has gone too far under the circumstances…and whether or not they (and the administration) needed to go down this route to help right the ship. Your looking at inflation and pronouncing it a “meh” issue demonstrates your ignorance (and your bias).
You can certainly argue that inflation is the least of our worries, but don’t think for a second that this isn’t going to be enormously painful down the road…and significantly damage our national security (as countries like China get a bigger and bigger say over our economy).
March 21st, 2009 at 11:55 am
Until our debt starts getting into 1940s/1950s territory, don’t bore me with concerns about our debt.
March 21st, 2009 at 11:59 am
if investors thought
An inoperative catch-phrase. Maybe you didn’t notice but investors thought it would be a good idea to bet the planet on the idea that real estate prices wouldn’t go down.
Your entire Economics went kaput and you haven’t noticed.
March 21st, 2009 at 12:00 pm
Ed you said
Hmmm..well, in the light of your fear of China having us by the nads economically, riddle me this. Do you ultimately feel that it was the wisest economic strategy to pay for our war of choice with Iraq SOLELY with money borrowed from China? Inevitably, we’re going to end up with a Republican President in a generation or so. Will YOU hold their feet to the fire and demand that their planned war with Iran be paid for by American taxpayers instead of Chinese IOU’s?
March 21st, 2009 at 12:09 pm
By that logic we should all be taking antibiotics 365 days a year just in case we pick up a bacterial infection someday.
It’s actually worse than that, because taking antibiotics when you don’t need them doesn’t actually do much harm, whereas adopting anti-inflationary policies now would put us into a depression.
March 21st, 2009 at 12:14 pm
Yes, Ed, I’m just so naive that it’s never occurred to me that severe inflation is harmful. That’s exactly why it’s’ not my top priority right now, while we’re facing a deflationary spiral and a possible depression.
What a nice, warm feeling it must give you strike such a superior pose. As an added bonus, it saves you all of the hard work of actually having to consider anything I wrote – any of the reasons I actually provided for why inflation isn’t the biggest fish we have to fry right now.
Here, let me try. Oh, Ed, you young-un. You’ve lived such a privileged existence if the worse thing you can think of is inflation. Obviously, you never lived through the 1930s, and saw people STARVING TO DEATH IN THE UNITED STATES OF AMERICA because of a deflationary depression brought on by a meltdown in the financial sector.
Gee, that was illuminating. Oh wait – yoor biased!
March 21st, 2009 at 12:30 pm
isn’t going to be enormously painful down the road
As if there isn’t enormous pain currently.
Why would anyone think that Humpty Dumpty is going to back together again?
March 21st, 2009 at 12:30 pm
Pete,
I spent the last eight years going after the Bush administration on Iraq and their profligate spending, the answer is yes in my case. I would say however that after this round of spending and monetizing our debt, China is going to have us by the balls far more than ever before.
Joe,
We’re not facing the great depression…No one with a brain believes that. Not even your demigod Krugman.
March 21st, 2009 at 12:47 pm
What’s so maddening about so much of this is that moderate levels of inflation are one of the easier economic problems to fix: just raise interest rates. Getting out of our current economic mess, especially figuring out how to get the financial sector and lending running again, is a much harder problem to solve. By and large, right-wing conservative economic demagogues have abdicated all responsibility of coming up with anything relevant to say.
March 21st, 2009 at 12:48 pm
Yeah, because nobody in charge is dumb enough to listen to you. If you don’t understand what people are saying, don’t respond and show yourself to lack basic reading comprehension.
March 21st, 2009 at 12:53 pm
We’re not facing the great depression No, but we are facing a depression. They were common enough before the Big One of the 1930s, and they were plenty painful. The most shallow depression of the 1800s hurt a lot more people a lot worse than the inflation of the 1970s.
But the important point isn’t the relative pain of depressions vs. inflation. The important point is that, in the face of a deflationary depression, inflationary pressure is a good thing, which would not produce pain, but would alleviate pain.
In five or ten years, we might find ourselves in a position where deflation has been whupped, the economy is growing, and we need to reign in inflation. When and if that day comes, I’ll be right there beside you, demanding fiscal and monetary policies to head it off, but now, in 2009, insisting that we’d better let the country slide into a depression because it would be bad to add a couple points to the currently flat or even negative CPI would hurt a decade down the road is ridiculous.
You are going to be there, fretting about inflation and public debt, the next time the economy is gong strong, right? You’re not going to be all “Reagan proved the deficits don’t matter” and “We need to cut taxes because there’s a small surplus,” right?
March 21st, 2009 at 12:55 pm
Oh, and btw, in terms of Greek mythology, being the Nobel Laureate in Economics would make on a Hero, not a Demi-God.
March 21st, 2009 at 12:58 pm
Or, at a minimum, that they won’t do what Ed is recommending, and what Hoover did, and what the Republicans demanded in the 1930s, and what FDR briefly acceded to in 1937 – adopt inflation-fighting, budget-balancing, clamp-down fiscal and monetary policies in the midst of a deflationary spiral and financial-sector meltdown.
March 21st, 2009 at 1:03 pm
More from the great Doug Noland. He began publicly denouncing the credit and financial system including the Fed in 1999. He is not a Austrian School idealog or a Libertarian or a Conservative. He assumed if not quite outright predicted that the flawed credit system would falter and unwind every step along the way for 10 years. As it didn’t and excess followed only more excess the scale of the problem only multiplied. The final unwinding promising to be worse each step along the way.
The United States is now being bankrupted. The Treasury destroyed. It will have been done by our banks and central banks.
I know nobody believes this sky is falling stuff. Do this. Allow 1% of yourself to believe it. Prepare a little corner of yourself for a world that is completely different. Like the disaster movies where the asteroid strikes. Which come to think about it is how we have subconsciously been preparing all along. The apocalyptic scenario movies reflect a very general fear that something is going to break. Some great thing is going to happen. Well this is possibly it.
The new administration is adopting every last possible mistake offered by those who brought on the fiasco. Thus faith and confidence is the political system is set to crash and burn. Something that has to be coincident with an economic collapse. There was a hope with new leadership things would change. They haven’t. It is the worst possible world.
——————————————————–
Market confidence in the vast majority of private-sector Credit has been lost. This Bubble has burst, and the mania in “Wall Street finance” has run its course. The private sector’s capacity to issue trusted (“money-like”) liabilities has been greatly diminished. The hope is that Treasury stimulus and Federal Reserve monetization will resuscitate private Credit creation; that confidence in these types of instruments will return. I would counter that once government interventions come to severely distort a marketplace it is a very arduous process to get the government out and private Credit back in (just look at the markets for mortgage and student loan finance!). This is a major, major issue.The marketplace today wants to buy what the government has issued or guaranteed (explicitly and implicitly). Market operators also want to buy what our government is going to buy. In particular, the market absolutely adores Treasuries, agency MBS, and GSE debt. There is no chance that such a system will effectively allocate resources. There is today no prospect that such a financial structure will spur the necessary economic overhaul. None.There is indeed great hope policymakers will succeed in preserving the current economic structure. On the back of massive stimulus and monetization, the expectation is that the financial system and asset prices will stabilize. The economy will be, it is anticipated, not far behind. And the seductive part of this view is that unprecedented policy measures may actually be able to somewhat rekindle an artificial boom – perhaps enough even to appear to stabilize the system. But seeming “stabilization” will be in response to massive Washington stimulus and market intervention – and will be dependent upon ongoing massive government stimulus and intervention. It’s called a debt trap. The Great Hyman Minsky would view it as the ultimate “Ponzi Finance.”As I’ve argued on these pages, our highly inflated and distorted system requires $2.0 TN or so of Credit creation to hold implosion at bay. It is my belief that this will ONLY be possible with Trillion-plus annual growth in both Treasury debt and Federal Reserves liabilities. Private sector Credit creation simply will not bounce back sufficiently to play much of a role. Mortgage, consumer, and business Credit – in this post-Bubble environment – will not re-emerge as much of a force for getting total system Credit near this $2 TN bogey. In this post-Bubble backdrop, only government finance has a sufficient inflationary bias to get Trillion-plus issuance. But the day that policymakers try to extract themselves from massive stimulus and monetization will be the day they risk an immediate erosion of confidence and a run on both government and private Credit instruments. Also as I’ve written, once the government “printing press” gets revved up it’s very difficult to slow it down. This week currency markets finally took this threat seriously.
http://www.prudentbear.com/index.php/commentary/creditbubblebulletin?art_id=10204
March 21st, 2009 at 1:20 pm
I’ve been taking antibiotics since the anthrax thing — I can stop now?
March 21st, 2009 at 1:54 pm
Is it me, or is Matt getting more patronizing and cossetted these days? You’re not an economist, Yglesias, so you don’t need to write as though we’re thirteen and you’re our older and wiser friend. Moreover, as someone pointed out above, most Americans, including the majority of your readers, I would posit, are not musing about whether or not to buy a new and unneeded Macbook; they are worrying about how to pay the rent. This is getting into proto-Friedman territory.
March 21st, 2009 at 1:57 pm
“But the logical question to ask is why do most people expect us to avoid another Great Depression? ”
DTM,
There are a host of reasons, one important reason being that technology is 80 years advanced. No one expects major infrastructure changes coming, unlike 1872 and 1929.
Matt Young
March 21st, 2009 at 2:28 pm
I don’t think he means to be patronizing. I think he is learning economics on the fly and explaining things makes it easier to learn. I do wish he’d do it a bit more systematically though. For example instead of reading econ blogs, articles, and whatnot, I really think Matt should sit down and read, say, Mankiw’s Macroeconomics and Krugman’s International Economics textbooks. With that as a base the other stuff he is reading would make more sense.