“Quantitative Easing” Explained with Cute Bears

Did you understand the controversy over “quantitative easing” at the G-20 Summit last week? Were you able to sift through the news to find and understand why the US should not print more money and buy $600 billion in US Treasury Bonds? Did you even know there was a controversy? Or, like me, did your eyes glaze over at the very thought of trying to understand global monetary policy and having to listen to and understand yet more bad news about the economy?

First, I’ll describe the controversy. According to press reports,

Both China and Germany have publicly slammed the U.S. Federal Reserve’s recent decision to buy $600 billion in Treasury bonds, a move Washington maintains will jump-start the U.S. economy and fuel employment. Both governments argued that the infusion of cash would devalue the dollar – essentially manipulating currency to give U.S. exporters a leg up.

But what does that mean for you as a consumer and taxpayer, especially if you are a U.S. citizen? Will this policy decision be good, bad, or indifferent for us taxpayers? NPR’s Planet Money explains it this way:

Enter quantitative easing, an idea the Fed is borrowing from Japan, which used it a decade ago when it had a similar problem.

It works like this.

A big bank — Bank of America, say — has $50 billion in government bonds. They’d sell those bonds if anyone would pay enough for them, but nobody is willing to pay that much. So the bank just holds on to them.

With quantitative easing, the Fed comes along and says, “Hey, Bank of America, we’ll buy those bonds for a little more than anyone else is willing to pay.” Bank of America says, “OK, great, send us the money.”

This is where the Fed gets to use central-bank magic. They pay for that $50 billion purchase in new money. They just invent it. That’s what the Fed — but nobody else — gets to do.

So now Bank of America has $50 billion they need to do something with. The Fed is hoping that Bank of America will decide to lend that $50 billion to companies and people to invest or spend. That stimulates the whole economy.

It sounds great. Create new money, get it out there, everyone wins. But — of course there’s a but.

Nobody really knows if this works. It’s still really controversial among economists. It’s only been tried a few times and, as in the case of Japan, hasn’t had the greatest results.

The Fed first used quantitative easing in 2008. It’s now considering a second round, even though a lot of folks are against it.

While the economy is still this bad, the Fed really might only have two options: Do this as a desperation move, or do nothing.

OK — this might work. But why the controversy? Really. I can barely manage my household finances, much less understand the politics behind global monetary policy.

Enter malekanoms, who created this fabulous animation of text-to-video, where he (she?) explains the reasoning behind Fed policy, and the criticisms of it. Using cartoon bears. Welcome to “Quantitative Easing Explained.”

What I enjoyed about this video is the author’s humorous use of cute, child-oriented cartoon characters to explain a very adult, very complex topic. In terms of taming data, this is a great way to go if you want to disseminate complex information to the broader public who are not experts in this domain area. I also think it helps the message — which is poking fun of Fed policy while explaining it.

What do you think of the video? Is this a clever way to disseminate complex information, or should the author have taken a more serious approach?

If you would like to watch a more academic explanation of quantitative easing, the Financial Times has posted an interactive graphic and 3-4 minute video that explains it via that link. (I would post it here, but there is no embed code for the video.) I would also suggest clicking on the links I’ve placed within the post above. You might also want to read the Fed’s response to the sharp criticism of their decision to print money and buy $600B in Treasury bonds.

[Via Victoria B.]

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