QE happens when central banks buy (crap) bonds from financial companies, giving them liquidity to buy better assets. Consequently boosting the stock market as we have seen.
But what happens if these bonds bought by the central banks default?
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2QE usually buys government bonds ( investopedia.com/terms/q/quantitative-easing.asp ), are you suggesting that they are crap? I'm not aware of any country that has needed QE defaulting on their bonds in recent times and I think QE would be unnecessary in a country that is likely to default.– MD-TechCommented Jun 26, 2019 at 9:50
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I do need to do deeper research on this, I heard recently, maybe in a documentary someone say that QE is buying subprime bonds. Could be wrong. Does anyone know of a way of finding what QE is being used to buy?– coisoCommented Jun 26, 2019 at 10:00
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1the bad news: you'd have to look in the central bank's arcane and impenetrable accounts. the good news: I'm having a pint with one of the former accountants at the Bank of England so I can simply ask. I'll let you know after my conversation. BTW a lot of people misunderstand QE!– MD-TechCommented Jun 26, 2019 at 10:02
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Looking forward to that! Thanks! btw, I am also in London and would also have a pint with you :) I'm learning about the economy and would love to pick your brain.– coisoCommented Jun 26, 2019 at 10:28
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1I'm actually in Geneva right now but I'm sure it can be arranged. I have to warn you that we talk a lot about central banking accountancy which is AMAZINGLY dry!– MD-TechCommented Jun 26, 2019 at 11:20
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2 Answers
For the US:
Quantitative easing was the monetary policy where the central bank purchased government bonds in order to increase the money supply and encourage lending and investment. It lowered the cost of money and increased the money supply by purchasing assets with newly created bank reserves in order to provide banks with more liquidity.
The Troubled Asset Relief Program (TARP) was a law passed by Congress that enabled the US Treasury to buy troubled company assets and stock (toxic assets) in order to stabilize the financial system, restore economic growth, and mitigate foreclosures caused by the 2008 global financial crisis.
answered Jun 26, 2019 at 12:34
Quantitative easing is about essentially printing money out of thin air.
The whole (theoretical at least) point of this exercise was to boost the economy by injecting fresh funds and liquidity to the country's economy via commercial banks and intermediate institutions that were the beneficiaries of the QE policy.
Should the bonds or other financial instruments purchased with those money default or not, should make little difference to the central bank at the end. Also, keep in mind that the primary instruments purchased during such efforts are sovereign bonds (not exclusively though), so if those ever come to default, the implications would be far greater for everyone, the central bank of the said sovereign country included.
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1My initial assumption was that it would have little effect also. What I believe happens in practice is that as stocks and inflation go up, those with stocks enjoy the ride, and the rest suffer price increases that they now have to work extra hard for. I'm still very very curious about the long term effects of this.– coisoCommented Jun 26, 2019 at 11:50
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1@coiso that is true, this whole exercise in economics is about artificially lowering yields for bonds, increase inflation(from deflation that was a danger in the 08' Crisis) and incentivize the market to re-balance portfolios towards equity as well as commercial banks offering this newfound liquidity to more/higher-risk enterprises. This widespread use of QE is a thing of the last decade so we ve yet to witness the aftermath, especially if another crisis rears even through such (QE) efforts.– LeonCommented Jun 26, 2019 at 11:58
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1@coiso btw its true that QE money was used in the 08' crisis by the Feds to buy 'toxic' subprime mortgage backed securities off the balance sheets of banks/institutions deemed too big to fail (as systemic pillars).– LeonCommented Jun 26, 2019 at 12:08
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1"What I believe happens in practice is that as stocks and inflation go up". But inflation DID NOT go up any meaningful amount.– RonJohnCommented Jun 26, 2019 at 13:16
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@RonJohn Quantitative easing does not automatically result in higher inflation. although the Central Bank increases the monetary base, this is basically saved rather than spent. Therefore, there is little inflationary pressure. – At least whilst the economy remains in recession and within a liquidity trap.– LeonCommented Jun 26, 2019 at 13:29