Question

What role was played by quantitative easing (QE) in the U.S. after the “Great Recession”? Was this QE necessary or not? (Explain in great detail with reference to economic policies)

Answer 1

The dark days of 2008 following the collapse of Lehman Brothers as if the global economy was facing an economic collapse on a scale not seen in living memory before.

In November of that year, the Federal Reserve undertook its first round of unorthodox policies in the form of large-scale purchases of assets, commonly known as Quantitative Easing (QE), to prevent this disaster.

The Federal Reserve has used several rounds of QE in the wake of the global financial crisis to get the economy back on track. In this, the Fed started by buying government bonds and mortgage-backed securities to grow its balance sheet. In November 2008, the first round of QE, also later called QE1, began. The Fed has proposed buying ~$100bn of agency debt and ~$500bn of mortgage-backed securities. The first round was extended further in March 2009, when the Fed used an additional $850 billion to buy mortgage-backed securities and debt. In addition, the Fed also channeled $300 billion more into longer-dated treasuries.

Unconventional monetary policy, such as QE, is typically applied when conventional monetary policy fails, i.e. when nominal short-term interest rates are already close to zero, so that they can not be further reduced to stimulate economic activity. Now the Fed typically buys debt and MBS from commercial banks in QE, in exchange for electronically created money. In turn, this swells the Fed's balance sheet by the amount of assets acquired