Policymic – In September, Ben Bernanke announced that the Federal Reserve would be extending its bond buying program in the form of a third round of quantitative easing (QE3). QE is an unconventional form of monetary policy enacted by central banks if conventional monetary policy is not effective. It amounts to, basically, the creation of a pre-determined amount of new money, which is injected into the economy by the Federal Reserve’s bond purchases.
QE has the effect of increasing bank reserves, as well as driving up prices on bonds and lowering their interest yield. So far, it has been an effective method for the Federal Reserve to boost financial markets. Each time it has been enacted, we have see stock prices increase.
Some say that QE is a necessity to stave off deflation, which would manifest in plummeting prices. As long as stock prices and home values are kept high, QE’s proponents reason, people will be encouraged to spend money and stimulate economic growth. This does not mean that QE is the cure-all to America’s economic woes. In fact, it is anything but a panacea; rather, it is prolonging the fundamental problems that underlie the United States’ economy.