What Is Qe2 and How Does it Affect You?

There has been a lot of talk about Qe2 lately, which might sound to you like an obscure molecular formula. In actuality, this term is related to the financial sector and how the government works to fix certain issues with the economy. If you, like many, are unfamiliar with this idea, find out how Qe2 works and what it means for you.

What Are Qe and Qe2?

Have you ever wondered to yourself, if the economy is suffering why doesn’t the government just print more money and fix it? Theoretically, this is what’s done with quantitative easing, only the money isn’t printed, it is created electronically.

Qe stands for quantitative easing–”quantitative” means that a specific quantity of money is created and “easing” means pressure on banks is lessened or reduced. In layman’s terms, it means to create money out of thin air in order to give the economy a boost.

So how is quantitative easing accomplished?

The Federal Reserve writes an electronic government check in exchange for financial assets in the market, including government and corporate bonds. Once the assets are purchased, they are usually bought by banks at a low interest rate.

The money is then supposed to be redistributed into the economy in the form of consumer and business loans. The expectation of Qe is that the economy will expand because the money supply has expanded.

So far, Fed quantitative easing has occurred twice. The first time was between Dec. 2008 and March 2010 when the Fed bought $1.7 trillion in Treasury bonds and mortgage-backed securities to fuel the economy. The second quantitative easing attempt, also known as Qe2, started in late 2010 as a $600 billion bond buyback program, again, meant to stimulate the economy.

How Does Quantitative Easing Affect Americans?

Quantitative easing is meant to have a direct effect on consumers and the economy. Since the idea is to expand financial opportunities for consumers by offering more loans and credit, it is supposed to make it possible for Americans to have access to much of what was lost during the recession, including credit cards and personal, auto and home loans.

However, the practice of quantitative easing has been controversial for a few reasons. One is that this action usually lowers bond yields and increase prices for the public when rates are dropped so dramatically for banks, and ultimately decreases bond returns.

Another reason Qe is controversial is that banks haven’t loaned money as intended. Federal Reserve Chairman Ben Bernanke has been vocal about the fact that the assets banks purchased to issue loans have not been used for their intended purpose. But banks have argued that they can’t lend as leniently as in the past because it is their risky practices that pushed the economy into crisis.

A third reason Qe is considered controversial is because, in general, it is deemed a risky practice. It increases money supply so substantially that the value of the U.S. dollar can potentially decline and inflation (even hyperinflation) can occur.

Ultimately, experts argue that borrowing the large amount of money has not had a majorly positive effect on the economy. It has not increased business or consumer borrowing, added jobs or fueled the economy in any other significant way.

It’s for this reason that people are criticizing the possibility of yet another quantitative easing, known as Qe3.

Is Qe3 a Possibility?

Now that the Fed has made two attempts at quantitative easing, some are speculating the government may make a third attempt, especially since the Qe2 program was completed at the end of June.

However, Ben Bernanke has reportedly played down the possibility of a Qe3, noting that because the dollar is stronger now, there is no need for it.

Government officials also say that during the time Qe2 was initiated, there were major concerns over low inflation. Last summer, prices were rising at an annual rate of about 1 percent, which is below the Fed’s 2 percent target.

Officials say inflation is now at–or maybe even a bit above–where the Fed wants to be.

Qe3 doesn’t seem likely, at least for the time being, which is probably a good thing seeing that the government has its hands full trying to manage the national debt ceiling issue, which is said to be set for default on Aug. 2.

President Barack Obama has given lawmakers until July 22 to avoid default. If they can’t get the job done, experts say it will take much more than quantitative easing to fix the financial devastation the economy will suffer as a result.