Question

What was the significance of quantitative easing during the 2007–2009 financial crisis in the United States? Maximum number of characters (including HTML tags added by text editor): 32,000

Answer 1

Quantitative Easing, a rather unconventional monetary policy, has found widespread use in recent times. In 2008, since the Great Depression, the world experienced its worst economic crisis. The crisis, which discovered its origins in the U.S. housing market, spread rapidly to the economic industry of the U.S., and then to the global financial industry. It brought down investment banks, insurance firms, commercial banks, mortgage lenders, and a number of credit-based firms.

The Federal Reserve used several rounds of QE in the aftermath of the global financial crisis to get the economy back on track. In this, the Fed began to grow its balance sheet by buying government bonds and hypothecary securities. The first round of QE, also later called QE1, was initiated in November 2008. The Fed proposed to buy ~$100 billion of agency debt and ~$500 billion of mortgage-backed securities. The first round was further extended in March 2009, where the Fed used another $850 billion to purchase mortgage-backed securities and debt.

The Fed launched a new maturity extension program in September 2011, also known as Operation Twist, to increase the average maturity of the treasury portfolio of the bank. Consequently, the Fed bought treasuries worth $400 billion with maturities between 72 and 360 months, and sold off an equal amount of treasuries that had maturities in the 3-36 month range.

The Fed announced QE3 in September 2012, with the central bank spending nearly $40 billion a month on mortgage-backed securities. This, together with Operation Twist, was expected to account for long-term bond acquisitions worth $85 billion. The Fed reported a taper in December 2013, where the $85 billion spent per month would be lowered in the future by $10 billion. The Fed announced an end to the QE3 program in October 2014.

Unconventional monetary policy, such as QE, is typically used when conventional monetary policy fails, i.e. when nominal short-term interest rates are already close to zero so they can not be further lowered to stimulate financial activity. Now, in QE, the Fed typically purchases commercial banks debt and MBS in return for electronically generated cash. This swells the balance sheet of the Fed by the quantity of assets