The Financial Page in this week’s New Yorker explains Quantitative Easing 2 far better than the cartoon video did. It’s not long and it’s well worth reading the whole thing, but here’s an excerpt:
The Fed’s job is to manage the country’s money supply, and it ordinarily does so by manipulating short-term interest rates, lowering rates when it wants to give the economy a push and raising rates when the economy seems to be overheating and needs to be cooled down. At the moment, though, short-term rates are already near zero and can’t be cut further. So instead the Fed is buying longer-term government bonds. The hope is that this will help keep long-term interest rates low, pump more money into the economy, and make investments other than government bonds (where investors have been parking their money) more appealing. The Fed used this tool during the worst of the financial crisis, and it helped arrest the economy’s precipitous decline. Now the Fed is using it once again because, though the economy has recovered, it’s still weak—unemployment is near ten per cent, and vast amounts of productive capacity are idling. In the circumstances, the Fed’s job is to use monetary policy to try to boost demand. And quantitative easing is how you do that when you can’t cut interest rates any more.
The article goes on to explain the backlash from the German and Chinese governments, Republican congressmen, the liberal economist Joseph Stiglitz, and Sarah Palin. Hint: It’s mostly political.
This was a good read, though I’m saddened there wasn’t enough emphasis on unemployment. People know the Fed works monetary policy, and they know inflation/deflation are areas of responsibility too! But a lot of folk forget that the Fed is supposed to maximize employment! QE should help with that last option, and I don’t understand why supports aren’t shouting from the rooftops that jobs are what we need right now.