Monetary Policy: With the economy seemingly headed for a big slowdown or even a double-dip recession, it’s tempting to demand that the Fed print more money. The only problem is, it won’t work.
Fed chief Ben Bernanke, speaking last week at the central bank’s annual Jackson Hole meeting, promised that the Fed would do “all that it can” to keep the economy from falling off the table and to stave off deflation.
But he fell short of promising concrete action. Indeed, he pointedly noted, “central bankers alone cannot solve the world’s economic problems.”
He’s right. Still, there are those who think the Fed should do more — a lot more. For sheer impact on the economy, none of the things the Fed could do would have the impact or sheer size of what’s being called “QE2″ — which stands for Quantitative Easing, Part II.
“QE1″ was what the Fed did from early 2009 to March of this year, during which it expanded its own balance sheet by about $1.4 trillion by buying government bonds and agency securities.
That added nearly $1 trillion to banks’ reserves, an unprecedented flooding of the banking system with cash. How did the Fed accomplish this financial feat? By simply creating money out of thin air, then buying financial securities with it.
Money printing, pure and simple.
Did it work? That depends on what your definition of “work” is.
