The great recession was characterized by many financial disadvantages. It caused financial institutions and individuals to lose their savings. During this session, mortgages shot up dangerously, and many people lost their homes and livelihood. It was a frustrating time for the economy and resulted in the great depression. This period lasted between 2007 to 2008, and it saw to a decrease in GDP and an increase in unemployment levels ("Great Recession", 2020).
To assist the economy, the Federal Reserve introduced Qualitative Easing. Qualitative Easing (QE) refers to the financial issue where the central bank acquires long-term securities such as government bonds and financial assets intending to improve the economy by integrating finances into the economic pool, and it also gives credit to banks (Foster, 2020). This process is often used when there is low inflation, and it is equated to printing money because the argument arises of where the central bank acquires funds to execute these plans.
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The first Fed Qualitative Easing began in 2008 as a solution for the financial crisis. They started as an effort to salvage the situation as the other financial policies had reached the limit, and the Fed's funds had no deposit. They began taking an interest in the bank's reserves, thus coming up with the idea of Qualitative Easing. The first announcement was made in November 2008, where the Fed announced its intention to purchase 600billion dollars’ worth of bank debt, treasury notes, and mortgages from bank members. They accomplished this in early 2011, thus acquiring the ability to turn the deficit into cash. In November 2011, the Fed established its goal to reduce interests in property and make housing more affordable. It also intended to make treasuries invaluable and divert attention to investment in mortgages. Some investors were skeptical that these moves would cause inflation, and it actually caused a rise in the value of gold (Amadeo & Boyle, 2020).
In 2012, the Fed declared their operation twist. The terms were favorable, keeping the fund rates at zero and improving the economy without contraction. In 2013 the Fed's QE allowed loans, reduced housing prices, and devalued the dollar. 2014 was the year that the Fed's Qualitative Easing ended. In June 2014, the Fed announced that it would be reducing its QE. However, most of their goals were met as the unemployment rate was at seven percent, the GDP was between two to three percent, and the rate of inflation had exceeded two percent (Amadeo& Boyle, 2020).
The most recent encounter of Qualitative Easing is in 2020 as a response to Covid-19. In the midst of the pandemic, the Fed declared that it would be purchasing US treasury worth five hundred billion dollars, and it would proceed in purchasing mortgage security worth two hundred dollars in the preceding months. In May 2020, the Fed's balance sheet read more than seven trillion dollars. The total amount of money used by the Fed during the great recession was 1.25 trillion dollars in purchasing mortgage securities, 200 billion dollars in agency debt, and 300 billion dollars in long term treasury security.
Federal Reserve Qualitative Easing Programs are beneficial, but they have some disadvantages. The benefits include that the Fed's QE provided a credit channel. It promoted liquidity in the banking sector, and this facilitated the acquisition of lucrative loans to companies and households, thus promoting easier credit acquisition. Fed's QE is also responsible for portfolio rebalancing, whereby the central bank has removed the most valuable assets from the market, causing other financial institutions to look for other investments. By purchasing the riskiest assets, the value of interest is reduced. Fed's QE also affects the country's exchange rate; this is true because through increasing the circulation of money, the dollar's value is decreased. Qualitative Easing causes the fiscal effect through decreasing yields and sovereign bonds, making it more affordable for the government and individuals to acquire loans from financial institutions. Fed's QE has also enhanced the prices of assets; by buying the economy's risky assets, it regulates the cost of other assets. Another benefit is that the Fed's QE established lower interest rates, and this has made housing more affordable. The program also stimulated economic growth, easing the country out of the great depression, and helped to stabilize the United States’ economy. Finally, it helped to promote confidence in banks by removing toxic sublime mortgages from their balance sheets.
One disadvantage of the Fed's QE is that it benefited the debtors since they had less debt to pay, considering that the interest rates had been reduced. By tampering with the exchange rate, the program caused the dollar's devaluation, which affected importers and consumers as it became very expensive to conduct importing businesses. The program created unpredictability since it was not clear whether it would cause better circulation of cash in the economy or result in further inflation.
The republicans opposed the move by Fed's QE and they wrote a letter to Fed chairman Ben Bernanke expressing their fear of hyperinflation caused by the program. They opposed its mission to balance low inflation with reducing unemployment and proposed a single mission to fight low inflation at whatever cost (Chait, 2010). The fears arising from the end of the Fed's QE program were the aftermath of the persistent low inflation, which undermined consumer expenditure as they waited for the economy to normalize ("US Federal Reserve ends QE stimulus programme", 2014). A common fear was if the situation would continue to improve or will it move from better to worse as the program was the backbone of the economy during the recession.
References
Amadeo, K., & Boyle, M. (2020). How QE Allows Central Banks to Create Massive Amounts of Money . The Balance. Retrieved 2 December 2020, from
https://www.thebalance.com/what-is-quantitative-easing-definition-and-explanation-3305881#:~:text=QE%20in%20the%20United%20States,December%202008%20to%20October%202014.
Chait, J. (2010). Ease the Day . The New Republic. Retrieved 2 December 2020, from
https://newrepublic.com/article/79739/washington-gop-opposition-quantitative-easing.
Great Recession . HISTORY. (2020). Retrieved 2 December 2020, from
https://www.history.com/topics/21st century/recession#:~:text=The%20Great%20Recession%E2%80%94sometimes%20referred,are%20considered%20high%2Drisk%20loans.
Foster, S. (2020). Quantitative Easing: Here's How It Works | Bankrate . Bankrate. Retrieved from https://www.bankrate.com/banking/federal-reserve/what-is-quantitative-easing/.
US Federal Reserve ends QE stimulus programme . BBC News. (2014). Retrieved 2 December 2020, from https://www.bbc.com/news/business-29823798.
