Evaluation of the Quantitative Easing

Abstract

Evaluation of the Quantitative Easing (QE) stimulus package was reviewed within the framework of this research. The financial crisis that resulted after the collapse of the auto industry along with the savings and loans scandals has given rise to QE. QE can be defined as an attempt to subdue interest rates which in turn encourages spending and stimulates the economy. The U.S. is currently on round three of the QE program. Research of QE seemed important as it has been extended three times. This research attempted to answer what the role of QE is in our economy and what the effects are on our business sector. Also, whether or not this stimulus is actually helping the U.S. was called into question. The preliminary data did not support that QE was actually helping as the results have been very slow or non-existent. Whether it is or is not helping may not be seen for years to come. The role of QE to stimulate the economy has been very slow as well and the results on the business sector have only increased the price of gasoline as well as other commodities. The increased costs have been passed on to the consumer which has not aided in stimulation of the economy. Overall, QE has not afforded many benefits and has done nothing more than subdue interest rates, slow the decline in Gross Domestic Profit (GDP), increase transportation costs, and devalue the U.S. dollar.

Table of Contents

Introduction.....................................................................................................4

Literature review...............................................................................................6

Analysis...........................................................................................................9

Results and Conclusion.......................................................................................11

References.....................................................................................................13

How will Quantitative Easing Effect the Business Sector?

The era after the collapse of the auto industry as well as the savings and loans scandals have left the economy in shambles. The Reserve (Fed) recently extended their QE bond buying program, known as QE3, with the hopes of improving economic conditions which they are hoping will eventually affect the global economy. According to an article in the Journal of Risk Management in Financial Institutions (2012), the credit crisis of 2008 resulted in the central banks playing an increasingly activist role (para. 1). The effects of QE can be seen in the bond market and also affects the value of currency. The effects of currency have an impact on the economy which eventually hits the business sector. All of these issues are intertwined and one small change affects the entire economic structure.

Alex Frangos of the Wall Street Journal (2012) stated that emerging market leaders are concerned that all the new money created will devalue their dollar and result in less competitive economies (para. 5). Brazilian finance minister Guido Mantega accused the Fed of starting a currency war after implementation of the United States bond buying program called QE2. The federal government looks at the QE program as stimulation for the economy and assists in having available capital for the business sector.

While QE does seem harmless and appears that it would help our current economic crisis, too much off a good thing can be bad. The question is, just how bad and what effects will it have on our business sector? According to Mortimer-Lee (2012), QE comes in many forms and is tailored to that specific region (para. 1). However, from other research, one can see that when one region is affected, the entire global economy ends up being affected.

The purpose of this research is to identify the present role of QE and how it will affect the business sector. Some adversaries of QE believe too much capital will flood the market and hurt our economy.

The primary research questions in which answers are being sought for consist of:

* What role does QE play in our economy?

* What are the effects of QE on the business sector?

* Is this stimulus helping or hurting the business sector?

Although the primary research does not focus on one particular business sector; the research regarding QE is still very important as it affects the economy as a whole and many areas of the business sector. According to Cobham & Kang (2012), when QE was introduced to the Bank of England, that fiscal expansion may have constituted major exogenous shocks to money (para. 1). QE affects both money and credit, and its effects can be felt on a global level.

Review of Literature

Financial Crisis

The financial crisis that began during 2007-2008, seems so long ago; however, the influences are still being felt today. The collapse of Lehman brothers and other financial institutions along with the auto industry crisis, left devastation and despair in its wake. This global crisis plagued the world economy and has proven that volatility is higher for financial markets and ordinary business than have been anticipated before (Dankó & Barakonyi, 2012, para. 1). During this disaster the mortgage market took a huge blow leaving many Americans homeless and jobless. The unemployment rate soared as the auto industry crumbled and banks began to close or be taken over. The sad and inevitable truth is that the global economy has yet to fully recover.

According to Buhagiar (2012), The U.S. entered the last recession in December, 2007 and it lasted approximately eighteen months, ending in June of 2009 (para. 1). It was notably the longest recession since World War II. Although the recession is over, measures are still being taken to help ease the effects and stimulate recovery. Notwithstanding the establishment of the QE program, the economy has been very indolent. Fred Hickey (2012) states that despite the efforts of QE programs put in place to suppress interest rates, the recovery we

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