Um, Just What The Heck Is Quantitative Easing And Why Are We Doing It?

There’s been a lot of talk over the last few days about “quantitative easing,” but if you’re wondering what it is and why it matters — you’re not alone. Long story short — it’s a way for the Fed to create money out of thin air.

There are several ways to increase the amount of money circulating in the economy. You can spend it (stimulus package), you can cut interest rates (interest rates are now basically zero), or, after you’ve done all that, you can bust out the quantitative easing.

We’ve done it before — back in 2008, and now the Fed is expected to try it again. It’s a strategy they borrowed from Japan… where it didn’t seem to fix anything. But, never mind that, here’s how it works:

1) A bank has something they don’t want to sell because nobody is paying enough.

2) The Fed is like, hey, how about we buy that off you for a little bit more than market price.

3) The bank is like, yeah cool.

4) The Fed credits the bank’s account with money that it creates.

The idea is that the bank will then put that money out into the economy where people can benefit from it.

Like most of economics, nobody actually knows if this works and talking about it makes people angry. So why are they thinking about doing it again? Well, the consensus seems to be that they’ve tried everything else.

Fed may try quantitative easing to boost economy [Marketplace]
Quantitative Easing Explained [NPR]
Dollar Gains on Speculation Fed Will Limit Quantitative Easing [Bloomberg]
What Is Quantitative Easing? [Consumerist]
US Stocks Fall As Investors Lower Expectations Of Fed Easing [Wall Street Journal]