Quantitative Easing 2 – QE2

Quantitative Easing 2, or QE2, is the second round of quantitative easing that the Fed executed during the Great Recession of 2008. You know the time: it was a dark, post-subprime-mortgage-crisis world. Stocks crashed, homeowners defaulted, lots of jobs were lost.

To try to turn that economic train around, the Fed lowered interest rates to zero and implemented quantitative easing (QE). QE is where the bank prints money and uses it to buy government securities (injects liquidity into the system) from banks. That gives more money to banks to lend out, which, like interest rates, should make borrowing easier and more attractive. Since there’s more money now (increasing the money supply), it should be cheaper to lend out. All that is supposed to stimulate borrowing, which stimulates businesses, employment, and spending...which should increase GDP.

But...QE can lead to inflation, hyperinflation, and stagflation. All not good.

QE2 was in 2010, a couple years after the economy hit the fan. While the market was halfway bouncing back by then, unemployment was still high, almost 10%. This isn’t uncommon; oftentimes, firms figure out how to do without the workers they had pre-recession, doing less with more...making job creation much slower to rebound than GDP and markets.

The Fed put $600 billion into the economy by buying back U.S. securities. The Fed also reinvested what money it had from mortgage-backed securities it unloaded from big banks during the toxic asset cleanup.

QE2 did, well...okay. Maybe. Correlation is not causation, but asset prices were still good. Unemployment didn’t drop below 9% until late 2011. QE3 came a few years later, and economists weren’t impressed. Time to move on to different tactics, they said.

See: Quantitative Easing.