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Unconventional Monetary Policy: QE
The unconventional monetary policy of quantitative easing (QE) brought about by the Federal Reserve in 2008 was meant to address the Great Recession triggered by the bursting of the housing bubble and the subprime blow-up. Three rounds of QE were initiated, the first from December 2008 to March 2010 in which $600 billion in agency mortgage-backed securities and agency debt were purchased by the central bank in order to add liquidity to the market, ease fears of a collapse, and stimulate the overall economy. In November 2010, the Fed began its second round of QE, this time buying $600 billion in Treasuries. The third round of QE was announced in 2012 and halted in October 2014 after the Fed had accumulated $4.5 trillion in assets on its balance sheet. Prior to the recession, the Fed held only $800 billion of Treasuries on its books. In order to stimulate the economy, the Fed had pumped nearly $4 trillion into the markets. The problem of recession was what QE was meant to solvebut, as Milton Friedman (2013) points, rapidly increasing the monetary supply in a brief amount of time is inflationaryand across asset classes the effects can be seen: the price of gold up, the price of homes up, the price of medicine up, the price of equities up,...…bull run ten years agounheard of in any other bull market in history).
The incentive framework implied by the policy was that so long as the Fed was backstopping the market by purchasing the mortgage-backed securities full of subprime that no one else wanted and by purchasing U.S. Treasuries that no one else wanted, yields would collapse and prices would rise. Investors would have no choice but to get back in in order to obtain the returns they needed. Risk assets (equities) were run up and today they are more expensive than ever before in history, though the fundamentals of many of the underlying indicate that the market is overboughtthanks, of course, to…
References
Friedman, M. (2013). Stagflation was not caused by Cost-Push factors—MiltonFriedman. Retrieved from https://www.youtube.com/watch?v=qQjAbHR40nk
Paul, R. (2009). End the Fed. NY: Hachette Book Group.
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