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In: Economics

Consider the Global Financial Crisis of 2008, Explain why quantitative easing to stabilize the US economy...

Consider the Global Financial Crisis of 2008, Explain why quantitative easing to stabilize the US economy was considered a moral hazard (i.e.,
why will QE paid in 2008 will cause future banks to behave badly)?

Solutions

Expert Solution

It drives much, much higher inflation. This is the major concern surrounding quantitative easing. While the money supply is rising, the goods supply remains the same. Consequently, competition for any good rises, leading to higher prices , which in turn leads to inflation. Excessive inflation leads to price and income distortions, and can lead to inefficient operation of an economy.

It is creating havoc on international trade. The Government and customers will use freshly printed money to import new products and services from other countries. The problem is that, sooner or later, other countries are tired of trading goods and services for what they consider is useless paper sheets. In other words, the value of the currency of the importer declines which can discourage exporters. For instance, because of its quantitative easing programme, China stopped exporting valuable minerals to the US.

The U.S. dollar is at risk. Many countries are dissatisfied with efforts to manipulate currencies, such as quantitative easing. They feel such practices reflect the country's inability to generate real growth and honor debts. Other countries , for example, have become weary of lending more money to the US. The US dollar's status as the world reserve currency is also in jeopardy, probably due to quantitative easing.

Benefits do not outstrip QE programmes. When the central bank stops printing money, the recovery is often put on hold, or worse, it starts going backwards. Although the hope is that a real turnaround would spark new consumer trust, many fear these initiatives are just a short-term fix. This effect is demonstrated by the fact that stock markets often fall when the quantitative easing program is announced or speculated to be terminated.


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