This video from Oppenheimer Funds explains the basics of quantitative easing (“QE”), an official policy of central banks designed to stimulate a national or regional economy. QE typically involves a government or regional central bank buying government and agency bonds from commercial banks, thereby increasing the bank’s reserves, expanding the money supply, and pushing down interest rates.
According to Oppenheimer, the three effects of QE are:
Stocks become more attractive, potentially increasing household wealth;
Banks are able to lend more; and
Borrowing becomes more affordable for consumers and businesses.
QE attempts to make a weak economy stronger – but Oppenheimer’s 1:48 video doesn’t even hint at a single potential disadvantage to the policy, which may include higher-than-desirable price inflation, exacerbation of the business cycle, and creating unsustainable financial bubbles.
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