You're right, I wasn't making a point about the author, just how the comment I was replying to didn't make sense given the context. I might have replied to the wrong comment. There was one which was saying something to the effect of "you would know what it means if you can understand the article".
My core point is you can know what Quantitative Easing is while still not immediately recognizing QE as its abbreviation. For example, I thought this was going to be about some sort of Qsomething Equity, since I've seen PE to mean Private Equity.
>So it’s not really correct to say it isn’t like QE at all since in both types of stimulus new USD is issued by the federal reserve in exchange for assets.
Uhhh, OK, by that definition the Fed discount window is "a bit like QE" too.
>The difference is in the terms, counterparties, and types of assets.
This is ... not a subtle difference? QE is outright purchase, vs a relative short-term swap structure; domestic commercial banks, vs. foreign central banks; bonds and MBS vs. currency.
> i don't really agree with this - the money used to purchase financial products don't disappear, because for every product bought, there was a seller. This seller now has cash, which would be invested elsewhere.
Make no confusion, please. Quantitative easing was intended to give credit institutions greater ability to lend money to entrepreneurs, so as to boost real economy. When capitals are invested in financial products the entities closing their positions (e.g., selling stocks) and, in turn, getting the cash are not necessarily credit institutions (i.e., they are typically fund managers and private investors) – which is to say they pocket the money.
> It’s not really QE, the banks loaned the government money when they bought the bonds, the government would still repay them exactly the same amount as before.
It's literally QE. Like, it's the textbook definition of quantitative easing. Where the government buys back bonds it gave out without taking into account the current interest rate. The government is giving banks more money than the bonds are worth, raising their prices. That's QE.
> QE requires low interest rates as I understand it.
It’s the other way around. QE lowers interest rates; that’s the main purpose. The idea is that low interest rates force investment in risky ventures (since safe ones are offering low yields) and those risky investments on net will generate excess economic growth.
> QE and the banks buying stocks is the same thing:
No they most certainly are not. QE puts money into the economy. People can then use that money to buy stocks or short stocks, they can also use that money to do things like travel, purchase a new house or put a kid through school, etc. It can be viewed as a market neutral strategy in terms of buy vs sell pressure on the stock markets.
Now this can cause the stock market to rise through "organic" growth from increased consumption leading to increased corporate profits.
On the other hand the government buying stocks only puts pressure on the buying side of the equations, causing the market to move up.
They both may cause the markets in general to rise, but in terms of market dynamics they are not the same thing:)
> I wish instead of QE the government would let people buy much higher amounts of I bonds instead. Seems like a great way to hand out money to people directly instead of via banks.
I think you mean QT?
The intent of QE is to stimulate the economy by injecting liquidity into the markets; increasing the limit on annual I bonds purchasable by individuals does the exact opposite of what QE objectively intends by locking that liquidity back up at the Treasury.
At face value, the nominal return on I bonds may be net positive (and perhaps even attractive to some investors in this bear market), but the real return is effectively net zero by design; it's a naive mistake to conflate growth with increase in purchasing power. Besides, when the Fed cut stimulus checks during COVID, their intent was for you to spend, not save by giving it right back to them to hold.
>In most cases they are a way to purchase bonds and alike for people who don't want (or don't know how) to deal with that, and the bank pocketing the difference for their services.
Yeah and banks basically gave up on buying corporate bonds and only want treasuries or reserves. QE is basically a way to let banks use your savings account to buy treasuries. The commercial bank is making the decision on what to invest in, not the Fed. The Fed is actually just giving commercial banks as many reserves as they request.
I just quoted the article. You're right, I should have quoted it fully but I didn't think it would get to this level of pedantry for a point that is not even necessarily related to the profit or loss of a bailout.
>QE is just repricing risk. It doesn't really have any real economic impact.
That's where things get interesting.
Let's imagine, for a simplicity sake, that there are 3 types of assets -- government debt, apple stocks and tesla debt.
If I'm sitting on my 1 trillion of government debt and I want actually switch to apple stocks (or maybe just get dollars and eat pizza and drink margaritas), I need to sell it to someone who will put his trillion into government debt. So, for me to "untie" my 1 trillion in government bonds and free it for consumption, someone has to "tie" his trillion dollars into it.
Now, fed enters the market and buys that 1 trillion from me as a part of QE. It does not need to sell his apple stocks or delay consumption and save that 1 trillion.
I now have dollars in my account, and can use it to buy, say, trillion of tesla debt, because I love Elon Musk.
Musk, in turn, can look at the market and observe that it has a huge appetite for tesla debt, and it was not the case one year ago. So maybe it make sense to issue one trillion dollars worth of bonds and build Gigafactory-2 and another car factory, and he does exactly that.
Are we still sure that when Gigafactory-2 is being erected and people are hired for a second car factory, "QE have no real economic impact"? It's not obvious to me.
> It want to capital infusions for major banks and QE-related asset swaps
The $3 trillion figure is from the 2016 budget. I don't believe any capital was infused into banks à la TARP [1] last year. Also, QE refers to the Federal Reserve, instead of just buying Treasury bonds from banks, buying a broader portfolio of assets. This is done off the Fed's balance sheet and does not come out of tax proceeds.
> QE is proving to be a very inefficient way to inflate the economy. The idea was that the banks would take the capital and lend it to corporations for productive investment, but I see no sign of this - the money is being laundered through dividends and financial engineering to the 0.1%
Even if we accept your premise that that is what is happening, what is it that you think the 0.1% are doing with that money? They're doing one of two things:
1. Reinvesting it in other companies, who are then using that capital to invest in their business.
2. Buying goods and services from companies who use that revenue to invest in their business.
> If I were the next president I would establish a national investment bank and use it to undertake infrastructure improvement / development by US companies in both the US and abroad (because stimulating the economy else where would be pretty useful to the US as well).
Why do we need to establish a national investment bank to undertake infrastructure projects? The federal government undertakes infrastructure projects all the time.
> I would mandate that the fed would have to invest in the national bank first and the national bank would be allowed to bail out other banks (with "liquidity") only if it received substantial near term reward from the investment (therefore definitely only liquidity).
Are you aware that the US government made a very healthy profit by bailing out the banks in 2008[1]?
> The problem with this operation by the fed is that every banks finance department has priced it in for this quarter, so they're all going with the begging bowl now - moral hazard write large!
That's...actually exactly the point of it. There is no 'moral hazard' here. The fed wants the market to anticipate its actions, and react to them pre-emptively. This allows the fed to actually do less than they otherwise might have to. If the Fed's goal is to drive rates down to a certain point, and the market knows they'll spend the money to do it, the market will do it for them. That's how arbitrage works. This is the system working exactly as intended.
Sure it does. Easy money is easy money. That goes for you and your mortgage at historically low rates, or VCs raising capital. When stimulus is occurring, it's interesting to see where it ends up.
I'm not implying anything nefarious. In fact, I'd say it's working as intended (or at least expected).
> The "reason" for QE was not for the banks to lend out all of their new funds.
No, just the 97% of them that banks (at least those in the "upper reserve tranche" at the Fed, which is basically any bank you've ever heard of) are allowed to lend out. But in fact banks lent out virtually none of it.
> They did lend a fraction.
A tiny fraction (a few percent).
> That it was not a bigger fraction should tell you something about the perceived risks and risk appetite at the time
Which was exactly the point the Fed did not get at the time. (In the Fed's obfuscatory language, the "money multiplier" decreased drastically, which they had not expected.)
My core point is you can know what Quantitative Easing is while still not immediately recognizing QE as its abbreviation. For example, I thought this was going to be about some sort of Qsomething Equity, since I've seen PE to mean Private Equity.
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