QE3: The Fed’s New Stimulus Is a Monster, but How Will It Help the Economy?
HOW QE WORKS
Quantitative easing is a horrible term in service of a necessary goal. It is economic stimulus. It’s not like the famous stimulus passed in Obama’s first month, which cut taxes and raised spending by more than $800 billion. Instead, the Federal Reserve lowers interest rates and buy debt from investors to encourage them to lend more money.
My favorite way to understand the purpose of quantitative easing comes from an extended metaphor from Chris Hayes. Imagine the economy as an irrigated farm with the Fed as the farmer in charge of the spigot and the water and the pipes. When things are growing, the Fed must be careful to not drown us with too much money. But when the things are dry, as they are now, it’s the Fed’s responsibility to return the farm to growth.