What Is Quantitative Easing?

A buzzword that flies around the media when warranted is “quantitative easing.” Although it sounds complex, the idea is relatively simple in economic terms. The central banking system, the Federal Reserve in America, buys bonds from private or commercial banks at a slightly higher price than anyone else in the market is willing to pay, injecting cash into the market and creating economic growth by increasing spending power through bank loans to businesses and individuals.

Here’s the rub. The Federal Reserve pays for the bonds by inventing new money electronically and paying for the securities with this new money. This influx of cash is supposed to stimulate the economy, but many argue that quantitative easing will only compound economic problems by triggering a dangerous inflationary spiral. Nonetheless, citing necessity during a past implementation of quantitative easing, the Financial Times stated,  “The Federal Reserve, the Bank of England and the European Central Bank each had to intervene in order to prevent a deeper economic depression,” and because the market already had such low interest rates, the only way they could intervene was by quantitative easing.

The video below, featuring Paddy Hirsch, a senior editor at www.marketplace.org, explains quantitative easing in further detail.