Quantitative Easing - Research Paper Example

Running Header: Quantitative Easing Student’s Name: Instructor’s Name: Course Code: Date of Submission: Quantitative Easing Each and every government has devised very many mechanisms that are aimed at helping and improving their monetary policies. This is because the stability of economies and the high levels of employment are dependent on these polices. The governments in question rely heavily on systems and structures that are in place to ensure policy formulation, attainment and evaluation. This ensures that the government has secured its citizens from any possible negative effects of an economic overturn.1 Quantitative easing is one of the monetary policies that are formulated by such governments. It is the process whereby the central bank in any country takes time to increase the money supply of the country by injecting it back into the economy. Each and every country has interbank interest rates, discount rates and interest rates. The set rates have the sole duty of ensuring that it is possible for the banks to conduct their sole business. This includes offering and lending to actual and potential clients. What is clear is that while they are doing so, they aim to make a profit from these transactions.2 In many instances, the rates are very low. This is where quantitative easing comes into effect. The term “Quantitative Easing” is generally a representation of the process that is adhered to by banks to reverse their economic fortunes.3 This means that the activities conducted are specific in nature and they represent a specified agenda. The pressure that is felt by banks needs to be reduced to ensure that the bank can perform as is expected. This is what is referred to as “easing”. The pressure that is felt by the banks is eased off through the creation of other mediums and methods that allow it to carry out its businesses without strain.4 The bank then has the sole aim of reversing the effects of near zero or zero rates by participating in open market operations.5 These operations allow the bank to look into feasible legalized ventures that will reverse the trends. All the money that the bank has created over the specified period of time is credited out of nothing. The bank then takes it upon itself to purchase several assets and stocks that will complement its financial activities. The purchases could be from other banks, financial institutions, the government, and all existing and interested corporates. It should be noted that all the purchases that are conducted by the bank are cleared through account deposit system.6 Account deposit system is preferred because of its advantages to the bank. It creates avenues for them to have the capacity to create and develop new money which they did not have. This is some form of monetary expansion. The excess money is created when the deposits are multiplied and credited to a set aside reserve bank7. The set aside reserve acts as an additional source for the bank to continue with its lending processes. This then translates to increased rates on the banks part from the customers. This is because the general process of injecting money to the economy ensures that the economy is stimulated and it is effective for all needed economic activities.8 Influence on Economic Activities Many economic activities are hugely dependent on the ability to borrow from financial institutions. The act of being lent money by the banks ensures that the person who has received the loan can injected it back into the economy in one way or another.9 This influences the economy of that country by either increasing demand or supply. Once demand is increased, suppliers will have to go an extra mile in meeting the demands of the goods or services in question. They will have the choice of either raising the general cost of those goods or services to ward off demand, or increase their supply. The process of buying and selling at this stage translates to the loan being paid off quickly and the need of the goods and services requires urgent attention. This means that production will have to be increased and it should translate to beneficial economic activity. QE also makes it very easy for very many people to obtain and acquire loans. This is as a result of the bank’s ability to go back to the reserve accounts and issue people with loans. This aspect of loan provisions is related heavily to the one that dictates the aspect of supply, demand, inflation and unemployment.10 If many people have acquired loans, they make investments. Once they have decided on the channels to invest in, they encourage supply and demand. This means that if they have opted to supply, they will create a clear link to the demands of potential and actual consumers. The demand is what will keep them in the market or their business venture for a very long time. This is turn results in employment for very many people who would have otherwise remained jobless. The bank gets the loan repaid at their stipulated interest rate. All in all, the economic activities all result in a stable economy.11 This is because a country’s economic activities are heavily reliant on what is available, who can purchase it, what will be its overall benefits on individuals and a country’s economy? The process has been disregarded in very many circles. This is because many of the people debate on what QE is and how it should occur. This means that there are very many people who state the QE has psychological impacts on the people in any economy. This can be explained through the following analogy.12 Banks require the help of their governments in the event that things do not go their way economically. This paves the way for the adaptation of varied economic mechanisms by the help of the government. This occurs majorly because many banks have the governments in their region as shareholders. Once the help is developed many investors are at ease with the economic situation in the country. This means that they are either attracted to investing in the country or acquiring loans. This is a huge boast for the banks where the investors will result to for their activities.13 Economic activities in any country are determined by the amount of money that the economy has to offer. This money could either be spent or saved. If an economy does not have enough monetary supply, it will have choked economic prospects. People will grapple with the cost of living as the cost of inflation goes up generally. There will be very many products and services that are available that do not have consumers. This is because they are expensive and not many people in a country can afford them. In other cases, if a country has a lot of money the scramble for existing goods and services will be very high. This means that the economy will have individuals that have a lot of money but no goods or services to purchase.14 Level of Success I do not think that QE will succeed. As has been observed, QE has been applied in many countries. One thing that has comes out clearly is that many countries have tried to introduce QE in their economies and it has failed. This is because the benefits aimed at have failed at each and every level. QE has very many risks to the overall economy of a country. A case where the policy has been introduced and has been essentially effective has led to cases of hyperinflation. Hyperinflation is termed as the process where the inflation rates in a country or region are so high that they border on the brink of economic self destruction.15 A good case is of an African country called Zimbabwe. After the country took back many of the white highlands, farming and farm produce dropped. The goods and services available were so expensive that many of the citizens in the country could not afford. At this point, QE was introduced. The failure of QE in Zimbabwe was best observed when the people were seen spending millions of Zimbabwean dollars on an essential commodity for example, a loaf of bread. The banks in the country pumped a lot of money into the economy with no dew concern for the availability of goods and services.16 All in all, the money floating in the region was so much and there were no products and services to consume. Many farms were left bare as people could not afford to till land and plant crops for their own consumption. This led to nationwide famine that killed many people. This shows that QE has to be carried out in the most controlled manner. If not, the amount of money in the economy could supersede the good sand services that are supported by the same economy. This is a result of overspecialization of one area at the expense of another.17 Banks have very many varied options when it comes to dealing with low interest rates. It would be disastrous when banks decide to cash in on the extra cash that they have attracted when carrying out QE. This will ensure that the bank has increased its general capital revenue. It would not be a positive thing for the overall economy18. This is because the economy will experience a lot of money floating around that does not complement the fixed assets that are available. Banks could also decide that they are selling the assets that they have acquired over the period of time. The process of selling will create an avenue where the banks take more money out of the economy.19 This results in an economy that is grappling with choked supply. This is best termed as a potential risk. This is where the economic risks are very high based on the knowledge that banks are eagerly spending what they have created. In conclusion, economies from all over the world have been observed as making hasty decisions that have cost countries a lot more. It is wiser for economists and all the concerned stakeholders to identify what needs to be done at each and every point20. This is in relation to balancing the supply, demand, formation of monetary policies and reducing inflation. At the end of the day, stable economies are defined as those that have had the ability to identify what needs to be done at each and every step of the way. This is when the profits were high or when they are low. It is best for banks to identify what QE is and how it affects them.21 This is in relation to the current affairs and the situation and circumstance that they are in as financial powerhouses. Observers have been quoted stating that the introduction of QE has resulted in lack of confidence in the economy in any country. Many people who have over the years predicted the economy and how it produces results have lost faith in it as a result of QE. This is based on the fact that the practice of QE entails economic juggling that over turns the current state of things. This means that it is impossible for an economist to understand why any bank would want to offer loans at zero interest rates.22 The thing is that there is need to try and understand why every financial move is being carried out the way that it is. It is not a good sign when investors and consumers cannot rely on the economic trends of their country. They need to understand what is being done, why it is being done and the effects that it will have on them.23 This is because they are part of the economy in terms of actual or potential investments. References BAILLIE, R. & OBSTERBERG, W. “Central Bank Intervention and Risk in the Forward Market,” Journal of International Economics, Vol. 43, pp.483-497, 2006. BERNANKE, B., “Semiannual Monetary Policy Report to the Congress,” Testimony before the Committee on Financial Services (Washington, DC: US House of Representatives, 2009). BERNANKE, B.,“The Federal Reserve's Balance Sheet: An Update,” Speech at the Federal Reserve Board Conference on Key Developments in Monetary Policy (Washington, DC: US House of Representatives, 2009). BERNANKE, B., “Federal Reserve's Exit Strategy,” Testimony before the Committee on Financial Services (Washington, D.C: U.S. House of Representatives, 2010). BERNANKE, B., Statement before the Committee on Financial Services (Washington, D.C: U.S. House of Representatives, 2010). BLINDER, A., The Quiet Revolution: Central Banking Goes Modern (New Haven, CT: Yale University Press, 2010). CURDIA, V., & WOODFORD, M., “The Central-Bank Balance Sheet as an Instrument of Monetary Policy,” (USA, Colombia: Bantam Books, 2010). EGGERTSSON, GB., & WOODFORD, M. “The Zero Bound on Interest Rates and Optimal Monetary Policy,” Brookings Papers on Economic Activity, Vol.0, issue.1, pp. 139-211. HOENIG, TM. “The Federal Reserve’s Mandate: Long Run.” Presented at the National Association of Business Economists Annual Meeting, Denver, Colorado, October 12, 2010; Retrieved from, www.kansascityfed.org/speechbio/hoenigpdf/nabe-hoenig-10-12- 10.pdf. KEISTER, T., & MCANDREWS, J. “Why Are Banks Holding So Many Excess Reserves?,” Current Issues in Economics and Finance (New York, Federal Reserve Bank, 2009). METLZER, A., “The Fed’s Anti-Inflation Exit Strategy Will Fail (New York, The Wall Street Journal, 2010). MODIGLIANI, F., & SUTCH, R., “Innovations in Interest Rate Policy,” American Economic Review, 56 (March): 178-197. SHIRAKAWA, M. “One Year under ‘Quantitative Easing’,” IMES Discussion Paper Series, Bank of Japan, No. 2002-E-3. THORNTON, DL. “Would QE Have a Significant Effect on Economic Growth, Employment, or Inflation?” Federal Reserve Bank of St. Louis Economic Synopses, No. 29, October 13, 2010; http://research.stlouisfed.org/publications/es/10/ES1029.pdf. THORNTON, DL. “Negating the Inflation Potential of the Fed’s Lending Programs.” Federal Reserve Bank of St. Louis Economic Synopses, No. 30, July 1, 2009; http://research.stlouisfed.org/publications/es/09/ES0930.pdf. UGAI, H., “Effects of the Quantitative Easing Policy: A Survey of the Empirical Evidence,” Bank of Japan Working Paper No. 06-E-10, July 2006. WHEELOCK, DC. “The Monetary Base and Bank Lending: You Can Lead a Horse to Water…”Federal Reserve Bank of St. Louis Monetary Trends, September 2010; http://research.stlouisfed.org/publications/mt/20100901/cover.pdf Read More