'Quantitative Easing' By The Fed, Explained : Planet Money Quantitative easing, a step the Federal Reserve may take, is more dramatic than it sounds. It means creating massive amounts of money out of thin air with the hope of getting the economy back on track.
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Quantitative Easing, Explained

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Quantitative Easing, Explained

Quantitative Easing, Explained

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And every once in a while, we spend a few minutes on a dull bit of financial jargon.


Dull and, if possible, really, really obscure.

MONTAGNE: That's because this financial jargon can conceal huge, dramatic stories that affect all of us.

Consider now a phrase brought to us by Alex Blumberg and Adam Davidson of NPR's Planet Money.

ADAM DAVIDSON: Lately, everywhere you turn in the financial media, you keep hearing people talking about this new thing: quantitative easing. Like here are some clips from CNBC.

Unidentified Man #1: The discussion now at this stage is whether there'll be further quantitative easing, and so...

Unidentified Man #2: I think the quantitative easing story is one that you're seeing across different countries.

Unidentified Man #3: You fundamentally believe that both in the United States and in Europe, we will go back to quantitative easing.

ALEX BLUMBERG: Quantitative easing is really one of the more impressive financial phrases out there, impressive for the distance between how boring it sounds and how dramatic it actually is.

DAVIDSON: Because what quantitative easing actually means, at least in part, is creating massive amounts of money out of thin air. Economists -at least some economists - believe that when you want to improve the economy, you need to get more money out there, circulating around.

BLUMBERG: Now, the problem is there are only a few ways to do this. One way: have the government spend money, pay people to build roads or bridges or install solar panels. That would get money into people's pockets, and then out into the economy.

DAVIDSON: Only problem: We already did that one with the big stimulus last year, and it is not particularly popular. Congress will certainly not be voting in another stimulus anytime soon.

BLUMBERG: Option two: The Federal Reserve can cut interest rates, make it cheaper to borrow. People borrow more, buy more, build more new things, the economy starts working again.

DAVIDSON: The problem is we already did that, too.

BLUMBERG: Now, for almost all of modern U.S. economic history, policymakers have used only these two tools: government spending or Fed interest rate cuts. That's it. But with this financial crisis, for the first time in U.S. history, those two tools won't work.

DAVIDSON: So, enter quantitative easing. It's an idea the Fed is borrowing from Japan. Japan used it a decade ago when they had a similar problem.

BLUMBERG: And quantitative easing works like this: A big bank - let's say the Bank of America - has $50 billion in, I don't know, government bonds. They would sell those bonds if anyone would pay enough for them, but nobody is willing to pay that much. So, Bank of America just holds onto them. With quantitative easing, the Fed comes along and says, hey, Bank of America. We'll buy those bonds for a little more than anyone else is willing to pay. Bank of America says, okay, great. Send us the money.

DAVIDSON: And this is where the Fed gets to use some central bank magic. They pay that $50 billion in new money. They just invent it. They don't have to borrow it or tax us for it. The Fed is the one institution in America that gets to just create new dollars.

BLUMBERG: And the idea is that now, Bank of America has $50 billion extra dollars, 50 billion of these new dollars that they've created, and they have to do something with it. The Fed is hoping that Bank of America will decide to lend that 50 billion to companies and people to invest or spend, and that this will stimulate the whole economy.

DAVIDSON: Sounds great: Create new money, get it out there - everyone wins. But, of course, there's a but.

BLUMBERG: Of course there is.

DAVIDSON: Nobody really knows if quantitative easing works. It's still really controversial among economists, and that's because it's only been tried a few times, and like in Japan, it hasn't always had the greatest results.

BLUMBERG: The Fed first used quantitative easing in 2008. It's now considering a second round.

DAVIDSON: While the economy is still bad, the Fed really might only have two options: Take this desperation step, use quantitative easing, or just do nothing. Adam Davidson.

BLUMBERG: Alex Blumberg, NPR News.

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