Quantitative Easing

I believe we are getting $600 billion of that now, announced yesterday.

Deconstructing the term "quantitative easing", all of a sudden it occurred to me that this is just another way of saying "printing money by the government". Looking it up at Wikipedia, some writer there does make this statement, sort of acknowledging that this is what it is but claiming it is not exactly that simple: "Quantitative easing is sometimes colloquially described as "printing money" although in reality the money is simply shifted from member bank dollar deposits to financial instruments."

Kind of funny to me that "they" don't seem to want the public to know what this is.

Quote: odiousgambit

I believe we are getting $600 billion of that now, announced yesterday.

Deconstructing the term "quantitative easing", all of a sudden it occurred to me that this is just another way of saying "printing money by the government". Looking it up at Wikipedia, some writer there does make this statement, sort of acknowledging that this is what it is but claiming it is not exactly that simple: "Quantitative easing is sometimes colloquially described as "printing money" although in reality the money is simply shifted from member bank dollar deposits to financial instruments."

Kind of funny to me that "they" don't seem to want the public to know what this is.

The question is, how do they get that money into the system? they must be literally giving it away, but to who?

If five people lived on a island, with $100 each, there can only ever be $500. If someone printed more money is that not fraud?

The government prints money to pay its dues: government employees, bank debts, internation debts, etc. Sometimes the government brings in enough money in taxes, sometimes it doesn't and needs to print.

Printing money does devalue existing money, but that's what makes the fiat system so fun.

Quote: WizardofEngland

The question is, how do they get that money into the system? they must be literally giving it away, but to who?

If five people lived on a island, with $100 each, there can only ever be $500. If someone printed more money is that not fraud?

I believe the Fed gets the money into the system by buying debt or other financial instruments from banks with the money they created, which then frees up money for the banks to do bank-y things with, such as loans.

The government creates money all the time; since the money itself is backed by the government they have the authority to do it. In your example, it's not just "somebody" printing money - it's the one who is backing the money in the first place.

In fact, as I understand it with the fractional reserve system most of the modern world uses, commercial banks create money
as well, in the form of things like loans.

Again, this is all from my understanding, so I could be way off.

The whole Federal Reserve system is very interesting to me; probably mostly because I didn't know much about how it works until I started reading about it recently. I was actually reading about just this topic yesterday, since Wall Street was obsessed with the whole thing.

Quote: ElectricDreams

I believe the Fed gets the money into the system by buying debt or other financial instruments from banks with the money they created, which then frees up money for the banks to do bank-y things with, such as loans.

You are correct. This is known as an open market operation. The Fed buys government securities, in this case long term debt, 30 yr bonds, to inject money into the financial system with the hope that:

1. The increased demand for the securites will drive the price of the securities up, which consequently means that the yield of the bonds is lowered, as an attempt to lower long term interest rates, i.e. mortgages .

2. To increase the money supply in order stimulate lending by banks since they will have more money to lend.

For the most part, the Fed conducts open market operation every day and usually in secret. What is different this time is they are announcing their intent.

This operation is also known as monetizing the debt.

The planet Money podcast from NPR has covered the idea of the fed making money and how it works. If your interested in Economics, it's worth listening to.

Quote: matilda

For the most part, the Fed conducts open market operation every day and usually in secret. What is different this time is they are announcing their intent.

I see. That begs two questions then: Why do they normally do it in secret? Why didn't they this time? Did The Fed figure announcing their decision would boost the economy, which it apparently temporarily has on the stock market?

Quote: thecesspit

The planet Money podcast from NPR has covered the idea of the fed making money and how it works. If your interested in Economics, it's worth listening to.

Thanks, I'll go listen to it today. I didn't take a single economics class in college, so the whole topic is something I know little about. It's all very interesting!

Quote: ElectricDreams

Why do they normally do it in secret?

Good Question: many believe they should not. In fact, there is usually a bill in Congress that would require the Fed to open up its books.

Quantitative Easing explained here at mid-page.

An even more thorough explanation of Quantitative Easing can be found here.