“Hey did you hear about QE3?”
“What’s that? Sounds like some new drug slang or Korean Pop band.”
For those students who aren’t Economics or Business majors, or even for those who sleep through their business classes, financial lingo can be really obnoxious. Simple ideas, theories, or actions always seem like they have to be bogged down with an army of alphabet soup bent on keeping outsiders out of the financial community. Let’s change that, shall we?
Today the Federal Reserve, led by Ben Bernanke, announced the implementation of QE3. That stands for ‘quantitative easing’ and this is the third round of it. When the Fed implements a QE, it means that they hope to stimulate the economy by buying financial assets from big banks using straight cash. What do they hope this achieves? For one, they hope that with this money, banks will lend more to businesses and everyday consumers. The stock market usually also improves at an announcement of QE. With this, the Fed hopes that as people’s portfolios become more wealthy, people will feel more free to spend and stimulate the economy.
So while QE is good for stocks and consumers in the short term, it can have some negative effects in the longer term. By increasing the money supply, the dollar can become subject to inflation and devaluation against international currencies.
Did we need help from the Fed? Should we be letting our economy work as a true “free market” instead of relying on government intervention? If this isn’t the answer, how should we help the economy?