In general, when the Federal Reserve wants to provide economic stimulus they do so by decreasing the federal funds rate. This action which cheapens the cost of borrowing should promote bank borrowing, leading to more lending and an overall increase in economic activity. Because of the recent economic crisis, the Fed has implemented a zero interest rate policy, prompting it to use alternative means for stimulating the economy – that of large-scale debt purchases, otherwise known as quantitative easing. By purchasing bonds from banks, the Fed makes cash available for banks to lend out, which increases the amount of money circulating in the economy and promotes economic growth. The Federal Reserve, launched its first round of quantitative easing in response to the economic crisis, which, in conjunction with near zero interest rates, fiscal stimulus and numerous bank bailouts, has been credited with staving off what may have been a Great Depression.
The Fed has since wound down its lending programs, but, with painfully high unemployment and with concerns of entering a deflationary cycle, has found it necessary to implement a second round of asset purchases worth $600 billion – commonly known as QE2.
Why is it important?
There has been much criticism surrounding the Fed’s decision to implement QE2. Foreign leaders have accused the United States of currency weakening, affecting the exports of many developing countries, and sparking what some have called “currency wars” in mid-October 2010. Other critics of the Fed claim that QE2 is setting the stage for high inflation and future asset bubbles. However, with sharp spending cuts and increases in state and city taxes, as well as concerns over spillover from Europe’s strained financial markets, many economists still deem QE2 a necessary measure.
We don’t have an angle. We want to present the issues surrounding QE2 fairly, bringing in opinions from around the globe, and from all points of view. In this way, we hope to bring the debate to a new level.