There are two ways of looking at quantitative easing. One way is to see it is as an unorthodox tool for loosening monetary policy by intervening in the bond market to hold down long-term interest rates. But that doesn't really do the process justice. A more useful way is to see it as the opening of a golden casket in which are housed billions of tiny money pixies who fly over financial markets sprinkling sparkly confidence dust. Invisible trader elves gather the dust and distribute it to institutional investors. They then take the dust in magic flying sleighs and stuff it down the chimneys of all the good citizens who go out and spend money and stimulate the economy. But it only works if people truly believe. If you don't believe, you won't get any confidence dust this Christmas and your economy will stay in the doldrums.The only thing I haven't yet figured out is how many pixies Ben Bernanke can fit into a helicopter.
Saturday, November 06, 2010
Qualitative Easing Explained
Paul Krugman's definition is pretty good, but I didn't really understand how qualitative easing worked until I read this: