Why most economists are not hopeful about 'quantitative easing', the Fed's latest idea to help the economy.
Added under Analysis
The U.S. economy's biggest problem, businesses and policymakers agree, is widespread lack of demand. If only people and companies would buy more stuff, the theory goes"a car, an office park, a forklift"then the stores and companies that make and sell that stuff would hire more workers, who would then spend more money, and just like that (or almost)"economic growth.
One way the Federal Reserve has spurred economic growth traditionally has been to lower interest rates, which has a known and a tested impact. If the Fed lowers rates, money becomes cheap and the economy heats up. But the federal funds rate, the Fed's main lever, is now near zero.
So the Fed is turning to a policy known as "quantitative easing." Essentially, the Fed is using its license to print money. (Technically, it doesn't have a license, but it knows someone who does.) On Nov. 3, the markets expect the Fed to announce that it has decided to create somewhere between $500 billion and $1.2 trillion that it will then spend to help goose economic growth. Rather than buying space in office parks or forklifts, though, the Fed"which purchases only government-backed assets, like bonds"will probably pick up long-term Treasury debt. The strategy has been termed "QE2" because it is the second time the Fed has used this arcane monetary policy tool. The Fed makes money ex nihilo, pulling it out of thin air rather than taking it from its coffers. Then, it pushes the money into the economy by buying up assets from banks.
Read the full story here.