By David Greene |
Federal Reserve Chairman Ben Bernanke spoke to Congress on Tuesday about the still troubled U.S. economy, and what lawmakers can do to ease the pain. Giving his semiannual address to the House Banking Committee, he failed to provide any concrete information about actions the Fed will take to do its part in aiding recovery. One possible option the Fed has is another round of quantitative easing, a process in which the government purchases assets from banks and private companies in order to add a set amount of money into the economy.
Often confused with printing money, quantitative easing uses the new electronically-created cash to purchase government bonds and other assets, rather than using newly minted money to pay off government debt. The U.S. government began its first round of easing in November of 2008, followed by a second round in November of 2010. For the past several years the Federal Reserve has also maintained interest rates near zero, in attempt to boost economic recovery after the 2008 recession and housing market collapse.
A third round of quantitative easing could be a possibility, although Bernanke was vague on the Fed's plans. He told Congress Tuesday he considers the first two rounds to be successful, and the Fed is "prepared to take further action as appropriate." It is possible the Fed would see diminishing returns on a third round, or QE3.
Easing can boost the economy by increasing the amount of available liquid assets and ability of banks to lend, but can fail if banks still remain hesitant to lend. Banks can also use their new purchasing power to increase investment, but don't necessarily lend to the local businesses that are in need of loans. It can also cause too much inflation if not monitored carefully.
Should there be more quantitative easing? Here is the Debate Club's take:
Steven Horwitz Mercatus Center Senior Affiliated Scholar
Adam Hersh Economist at the Center for American Progress
Daniel Hanson Economics Researcher at the American Enterprise Institute