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There is no doubt that the global economy is facing an economic Essay
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Nov 26th, 2019

There is no doubt that the global economy is facing an economic Essay

There is no doubt that the global economy is facing an economic instability the last several years. The crisis has started from US subprime mortages and has been contagious across countries all over the world and since the banks hold positions with very high risk in their portofolios they have been to big to control financial system. During the period of 2007-2010 the US economy was in danger of falling over a recession or a depression. In order to prevent this danger the government used the strategy known as Quantitative Easing.

Quanitative Easing is a monetary policy established by the central bank where the FED buys and sells stocks and bonds which are available for investment and spending and it works by injecting liquidity and pulling down the interest rate. It consists of cash, Treasure bills and notes that can be sold quickly. It is used to encourage the economy by making it easier for businesess to borrow which will promote economic growth.

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In 2008 the US banks had huge problems and they needed money in order to overcome the debt they were facing. There was the collapse of Lehman Brothers which influenced all the other banks “investment or not- to the start of the collapse. This happened because the banks were giving loans “otherwise lending money- to more and more less trustworthy customers and as a result this lead to the impossibility of the repayment or elsewise default. That lead to the economic crisis, started from US and influencing the whole world. With the emergence of the financial crisis in 2008, the Federal Reserve introduced a number of instruments that changed the size and composition of its balance sheet. The main purpose of these tools was to support the normal functioning of financial markets and to provide additional relief under the conditions when the base rate of monetary policy was close to zero.Federal Reserve through quantitative easing programs aimed to inject liquidity into the economy by accepting as much collateral as much wider range of products compared to the pre-crisis period. In November 2008 the first round of QE started after three months of the Lehman Brothers collapse. The FED spent $100 billion to purchase mortage backed securities (MBS) and in the same year the price of gold and gas has increased by 50%. The economy also was more strong due to the support of credit markets and the liquidity provided to the private sector. The first round managed to lower rates which played a major role as regards to stimulate growth. From November 2010 to 2011 started the QE2. The FED started to purchase US treasuries rather than buying MBS which showed that by expanding its balance sheet the money which were to stimulate the economy was again in their bank and they were adding a reserve to their reserves. The interest rate was lower and it encourages lending to the borrowers. In QE3 FED bought both MBS and treasuris. In QE3 the FED startet to work together with Operation Twist and their plan was to sell short term tresuries that they had and use funds to purchase long term securities. The goal of this exchange was to immerse the market by causing the increase of short term interest rate and buying more long term securities which would do the opposite, they would decrease the long term interest rate. At that time the gold was high and the dollar value was lower and there was a worry if this would have good results. However QE3 had good results because the US stock became cheaper for International investors by encouraging investment and the international trade took a boost. In QE4 the dollar value continued to be low in order to encurage investment all over the world and on the other hand mortages and interest rate will continue to be low in order to encouragge lending. After 2009, the Federal Reserve activity focused mainly on long-term bonds and mortgage-backed securities . These instruments aimed at reducing long-term interest rates and increasing the inflation rate to levels that were more consistent with the Federal Reserve’s mandate. Unlike the first round of quantitative easing, financial markets expected a renewal of these programs and consequently asset prices were adjusted to these expectations and did not change much when the Federal Reserve notice came.The purchase of long-term government bonds was aimed at lowering the rates of all maturity curves of the yield curve and affecting as much as the short-term and long-term expectations of investors. In this way, the Federal Reserve, through its clear press releases, tried to persuade agents that the rates would remain low over a prolonged period. Buying mortgage-backed assets beyond this channel was also important in maintaining the value of housing by a drastic downturn, a phenomenon that would cause further problems in the balance sheets of individuals and banks.Since 2008 to date, the Federal Reserve has undertaken four rounds of quantitative easing, which proved to be successful in several respects. The quantitative easing program managed to remove “toxic” mortgage loans from banks’ balances by returning confidence and normality to their operational activity. After the fourth round of quantitative easing (QE4), the US economy marked a slight recovery, marking an annual growth of 2-3%, unemployment fell sharply to 7% and interest rates remained low enough to revive the housing market. However, despite trillions of dollars injected into the economy as a result of four rounds of quantitative easing, the Federal Reserve failed to generate sufficiently high inflation pressures to reach its inflation target of around 2%. But the result of the quantitative easing was able to ignore the projections and estimates of many Federal Reserve critics, according to which the liquidity injection programs in the economy would generate hyperinflation. In December 2013, the Federal Reserve announced it would slow down the pace of quantitative easing programs and begin to pursue a tightening monetary policy in mid-2015 if economic conditions would continue to improve.The European Central Bank is in a more delicate position due to its status Compared to the Federal reserve, the European Central Bank has had fewer room to operate during the crisis due to its special legal status as a bank central to several states with independent budget policies. Its interventions have been largely limited by the purchase of bonds governmental organizations of so-called “peripheral” countries during the Euro-crisis period in 2011-12 to calm the financial markets and to prove that a lender of last resort existed in Eurozone. Unlike the United States of America, where credit depends on financial markets, in The lending area of ‹‹the euro area is supported by the traditional banking sector and not by the markets financial. As a result, buying various financial assets may not be the solution optimal for the ECB. In 2015 (7 years after the Federal Reserve launched the relief program for the first time quantitative), the European Central Bank adopted a genuinely facilitated quantitative easing program bought about 60 billion government bonds denominated in Euros. Many economists have voiced various views on the quantitative easing undertaken by the Central Bank European. Quantitative easing is expected to be less effective in Europe than in America for three reasons key. First, quantitative easing in America was launched at a time when yields of titles government officials were high and could sit down because of these programs. Second, relief quantitative in America was unexpected and consequently was a surprise to the economy. Third, Quantitative relief in America was realized through capital markets, while in Europe it was realized through banks where money is flowing not too loosely. The quantitative easing in the Eurozone was a highly controversial process among countries member. Despite Mario Dragh’s belief that quantitative easing would be crucial in extracting the Eurozone economy from the spiral of deflation, Germany was very much concerned that injecting excess liquidity into the economy would trigger asset bubbles and would facilitate vulnerable countries from the pressure of implementing the necessary reforms. To conclude, since the moment of undertaking quantitative easing programs in America had positive effects that have been observed mainly in growth economic and employment.If the central banks did not use Quantitative Easing monetary policies the consequences for the economy would be catastrophic.REFERENCES Betzinger, T. (2018). Designing QE in a fiscally sound monetary union. [online] European Central Bank. Available at: [Accessed 20 Jan. 2019].Heard, R. (2013). QE: a timeline of quantitative easing in the US. [online] openDemocracy. Available at: [Accessed 20 Jan. 2019].Kimberly, A. (2018). How Central Banks Create Massive Amounts of Money. [online] The Balance. Available at: [Accessed 20 Jan. 2019].Team, T. (2015). Quantitative Easing In Focus: The U.S. Experience. [online] Forbes.com. Available at: [Accessed 20 Jan. 2019].Winkler, M. (2018). Bloomberg – Are you a robot?. [online] Bloomberg.com. Available at: [Accessed 20 Jan. 2019].

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