What is Quantitative Easing?

by Michael Lam | Nov 26, 2015

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What Is Quantitative Easing?

Quantitative easing is a nontraditional method of introducing additional money into the market. Normally, central banks purchase government securities and bonds in order to increase the money supply and keep interest rates at a targeted level, but quantified easing is accomplished by purchasing securities and other assets from commercial banks and lenders in order to raise prices and lower yields. This method can be used to keep inflation from falling below a certain level, as well as mitigating damage in crises, such as the 2008 economic collapse.

Pros and Cons of Quantitative Easing

When short-term interest rates are close to zero, conventional methods of controlling interest rates become much less effective. When used effectively and at the proper times, quantitative easing can boost market confidence and mitigate damages in an uncertain financial climate, increasing consumption and working to support an economic upturn, as well as increasing investment and stock market valuation, reducing interest rates, and promoting job creation.

deepadesigns | shutterstock.com

deepadesigns | shutterstock.com

Despite its benefits, quantitative easing also comes with numerous risks. When too much money is created, it can lead to higher inflation and can prove to be ultimately ineffective if banks are unwilling to increase lending. The process can also cause potential long-term complications like underfunding conditions for pension funds, housing market oversupply, and increased income and wealth inequality.

Quantitative Easing and the Real Estate Market

Quantitative easing can be both detrimental and beneficial for the real estate market, depending on when and how it is implemented. As one of its goal is to lower interest rates, quantitative easing can lead to reduction in mortgage rates, making a loan more affordable, especially for those with questionable credit histories. However, quantitative easing may not be entirely effective if an ongoing credit crunch causes a reduction in lending to consumers. In addition, improved market conditions can lead to an increase in housing prices, which may restrict the ability of consumers to afford a property. This is exactly what is happening in areas around the country. Look at San Francisco Bay Area regions, prices keeps moving higher and in some areas higher in prices before the 2008 economic collapse.

mega pixel | shutterstock.com

mega pixel | shutterstock.com

While a perfect solution for market downturns would be nice, a global economy has no magic eraser to remove the effects of negative events. Quantitative easing can be effective when conventional monetary theory can no longer be implemented, but is by no means a perfect system to repairing a wounded economy. While this strategy can be a long-term fix and has the potential to offer many benefits, it also carries with it risk, making even a beneficial option one that carries no guarantee, especially in periods of unpredictability.


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