Everything you need to know about U.S. quantitative easing

Since the financial crisis of 2007-2010 , it is not a week goes by without one speaks of quantitative easing ( QE QE or just ) . This is a topic of utmost importance in the current economic reality. Yet still very few people are familiar with the concept , even in the business . Here is a portrait of this policy and its impact on the economy and your wallet.Quantitative easing monetary policy is applicable by central banks to increase liquidity in the local economy. The program was put forward by the Bank of Japan in 2001 , to combat deflation that prevailed in the country.A central bank is a public institution , wholly or partially independent of political power. She is responsible for the implementation of monetary policy of the country. Its mission is to control the amount of money circulating in the local economy as well as prevailing interest rates in order to prevent or limit the inflation and deflation rates.In appearance, the principle of quantitative easing is very simple and seems to have a positive impact on the economy. The central bank purchases private financial institutions ( DTIs / commercial banks) bonds and non performing other financial assets generally .To do this , the central bank must first create money electronically , so literally from nothing. This has the effect of increasing the money available. Thus , commercial banks willing to greater liquidity . It is assumed that the new capital will be used to increase and facilitate loans to individuals and businesses , which will ultimately stimulate the economy. GoldHowever, to achieve this objective , a central bank will generally reduce the interest rate at which financial institutions can borrow it rates. Being independent of interest rates , quantitative easing is a so-called unconventional policy . It is also a reason why it is often said that it is a policy of last resort.The American caseAt the height of the financial crisis in autumn 2008 , it was absolutely necessary to find a solution to revive the housing market, facilitating access to credit, maximize employment, short break the deadlock over economic quickly. Ben Bernanke, chairman of the U.S. central bank (the Federal Reserve System , or Fed ) has launched its quantitative easing ( asset purchase programs on a large scale ) program , also known as Large -Scale Asset Purchase Programs.In November 2008, the Fed commits to purchase for U.S. $ 600 billion (all amounts are in U.S. dollars) in securities backed by mortgages ( Mortage -backed securities or MBS) as well as bank debt. So, it saves the failure of institutions that lend and guarantee mortgages as Fannie Mae and Freddie Mac, which come under the supervision of the government. Four months later , the Fed announced the purchase of $ 300 billion of treasury bonds , an additional $ 750 billion in MBS and an additional $ 100 billion in bank debt . In addition, in December 2008, the Federal funds rate ( the rate at which deposits of U.S. institutions can borrow from the Fed) , goes to 0 % -0.25 %, the minimum rate still in effect today.Although the program is effective and provides a significant improvement in the stock market, the desired effect is not achieved quite as deposit-taking institutions still do not seem to pay enough . They retain indeed the biggest part of this new liquidity. That is why in November 2010, a second program of asset purchases on a large scale (QE2 ) is launched . Fed communicates its intention to buy $ 600 billion of treasury bonds in the long term , or for about $ 75 billion per month until June 2011.In September 2012, history repeats itself . The Fed began the third round of easing program , QE3 . The latter consists of the monthly purchase of $ 40 billion and $ 45 billion MBS of treasury bonds for an indefinite period , hence the nickname QE Infinity . A gradual decrease in the amount of QE3 was proposed in summer 2013 , in the event that data on employment reached a certain threshold.However, the Fed announced September 18, 2013 absolutely no reduction would be made. By cons , it communicated its intentions three months later to implement a first reduction of $ 10 billion per month in early 2014 . These monthly purchases will persist and it is likely that the new Fed President Janet Yellen, who takes office Jan. 31, 2014 , will continue this monetary policy.The problemsAlthough American Scholarships affect peaks , the economy of our neighbors did not improve as expected. In announcing the continuation of its third program of asset purchases on a large scale , the Fed sends a clear signal that the results are not satisfactory . Before the start of the 2007 crisis , it had less than a $ trillion in assets on its balance sheet, a relatively stable amount long . After five years of quantitative easing , this amount now exceeds $ 4 trillion .The U.S. central bank had bought securities backed by mortgages in nearly 100 years of existence . At last , it has nearly $ 1.5 trillion of these securities. Also note that these titles are the source of the economic crisis , which began as a housing crisis . They are part of the securities backed commercial paper to non- banking (ABCP) is called .Where all that money went newly introduced in the economy? Should we not see the inflation of the U.S. dollar with the sharp increase in the money supply ?Andrew Huszar , formerly employed at the Fed and formerly responsible for the execution of the first round of easing program ( QE1 ) , expressed recently in the Wall Street Journal in order to apologize to all Americans. He entertained doubts regarding the controversial monetary policy , even before the completion thereof , were confirmed after its establishment .Although Mr. Huszar has played a key role in the implementation of the monetary policy, he said that it did not help ordinary people to more easily obtain bank loans citizens. Rather it allowed private financial institutions to enrich substantially . Indeed, due to the high artificial demand created by the Fed, these institutions have seen the value of a significant portion of their assets increase significantly.And given the fact that the majority of transactions under the quantitative easing program are orchestrated by these same institutions , the program allowed them to pocket large commissions. Commercial banks still have a virtually zero cost to borrow ( the interest rate on the loan is the lowest level since 2008).The majority of trillions of dollars injected into financial institutions by the Fed over the past five years still sleeping in excess of these reserves. Excess reserves represent the amount of capital that exceeds what is required by law as a percentage of cash deposits and are not mandatory .Since the collapse of Lehman Brothers in September 2008 , a crucial point of the last financial crisis , the total excess reserves of depository institutions have increased from less than $ 2 billion to nearly $ 2.4 trillion . In other words , they are now more than 1200 times what they were before or equivalent to almost 5 times the total value of Apple stock exchange, the first market capitalization in the world. Here is the biggest problem associated with quantitative easing , the velocity of money has not increased (the rate at which money circulates in the system). Depository institutions hold most of this liquidity rather than lend more to individuals and firms. We can translate this by "freezing of liquidity ." This liquidity is considered by many as the oxygen market and is very essential for the proper functioning .This article is the second essay written by the students of mutual fund Alpha Fund of the Faculty of Administration at Université Laval . My name is Charles -Antoine Montreuil , currently MSc student in Finance at the Faculty of Administration at Université Laval and also financial analyst in the Alpha Fund. The Alpha Fund is managed by students. We invest money students of our faculty who entrust us with their savings. Our investment strategy is based on capital preservation and long-term investment . We try to find companies that seem undervalued to enjoy a bounce in their prices to their fair value.