Quantitative Easing Explored

The recent recession lasting from 2007 until 2009, and the effects of which are still highly visible in the U.S. economy, led the Federal Reserve to use new and largely untested methods for protecting the country from a total financial collapse. The new strategy, which blurs the lines between monetary and fiscal policy, had been attempted only once before, and is open to criticism from several difference angles. This report documents the history, purpose, and controversy surrounding quantitative easing as a strategy to mitigate the effects of the recent recession. After considering these factors, the conclusion is drawn that quantitative easing was a modestly successful policy, yet one which should not be employed again. Although quantitative easing is not vulnerable to several of its main criticisms, I conclude that it is a dangerous overreach and should not be instituted into regular fiscal or monetary policy.

Beginning in 2007, the world financial system experienced a nearly unprecedented economic downturn. As the boom in housing prices took an abruptly downward turn, a chain-reaction ensued that devastated worldwide credit markets and both consumer and investor confidence. As housing prices fell, subprime mortgage delinquencies skyrocketed, and major financial institutions suffered heavy losses (Bernanke 1). The housing market was only one aspect of a much larger credit boom which had broad effects across the global economy. Irresponsible lending practices, a decline in underwriting standards, and banks’ heavy use of complex and risky financial instruments such as derivatives and mortgage-backed securities all contributed to the damage that began with the housing bust (Bernanke 1). As jobs and wealth were lost around the w...

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