QE - Quantitative Easing
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Thread: QE - Quantitative Easing

  1. #1
    Super Moderator Gulfstream's Avatar
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    QE - Quantitative Easing

    QE - Quantitative Easing or how banks made money off losses.
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    From the "Great Depression" in 1929 to the "Mortgage Crisis" in 2008.

    Preface

    During the Great Depression of 29-33 in the 20th Century, the Government and the US Congress decided that financial markets should be tightly regulated by the state - without government supervision of banks and financial companies, the stock market will regularly experience financial turmoil and economic crises, causing bank failures, financial companies bankruptcy and as a result, million people will lose their jobs and their savings.

    Therefore, in the beginning of 1930th, the US Congress was taking a number of legislative measures to regulate financial markets.
    The Law on Securities was adopted in that year and the Securities and Exchange Commission was established .
    Also in 1933, the President signed the Glass-Steagall Law, which ensured the stability of the US banking sector until the beginning of the 21st Century.
    The sense of this law were to forbid to сommercial banks to invest depositors' funds in risky securities.
    By this reason, USA banks are divided into two classes: commercial, which take funds from the public and issue loans (classical banking services) and investment banks - which provide services in the securities market and speculate in this market.

    After new legislation come into effect, it was almost quietly, peacefully and calmly in the financial markets, until the early 70's, when the "gold standard" was abolished, the FOREX market was set free and as the result, in the USA started overproduction crisis.
    Then there was a 30% drop in the stock market in 1987 - the Asian crisis of 1997.

    CDO(Collateralized Debt Obligation), CDS(Credit default swap), SubPrime Mortgage (non-standard mortgage) - "science geeks" come to the financial market.

    You can insure your car. Is it possible to insure a neighbor's car? Is it possible to insure a neighbor's car if he does not have a car?
    In the late 1980s - early 1990s when the "cold war" was over, mathematicians, physicists and chemists have found a new circuit of application for their knowledge - the financial market. Namely during these years the market of so-called “derivatives” - derivative financial instruments - developed rapidly.
    Initially, it was assumed that the derivatives market increases market liquidity and gives financial markets stability. Market risks, according to scientists, are hedged (insured).
    At this time new derivative financial instruments for additional hedging of financial risk are created.
    Instruments, created for financial risk insurance, become instruments of high-risk speculation.
    Due to the "diligence" of the Chairman of the Board of Governors of the Federal Reserve, Alan Greenspan, the Glass-Steagall Act (limiting banking operations in the securities market) is a thing of the past, and bankers are plunged into risky operations in the financial derivatives market.

    In the beginning of the century, life quality level was rapidly growing in the "citadel of democracy" - in the United States of America. Together with the standard of living, with an enviable stability, were rising property prices. Banks are happy to lend on the security of real estate - it would seem: the most reliable collateral for the loan.
    The investment bankers are devising new schemes of enrichment tools - CDO (Collaterised Debt Obligations) - bonds secured by a pool of debt obligations. A small savings bank of some county town of Kansas City has issued 1,000 mortgages.

    Further, this small savings bank forms a single security - a "pool of promissory notes", which is sold to a large investment bank. A large investment bank gladly acquires this CDO: this valuable paper is considered very valuable: the rating agency assigned this rating to the highest reliability rating - AAA. And anyone can not even imagine that real estate prices may fall at some point, borrowers will stop paying for loans, and this whole "house of cards" will collapse with the "domino effect".

    That's what had happened in 2008.


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    Global financial crisis - 2008




    Already at the end of 2007, borrowers have problems with paying off mortgage loans. And 2008 begins with the fall of the stock market. During the crisis, the "blue chip" index of Dow Jones "pooled" in 2 times - from 14,000 to 7,000 USD.

    "Falling down" the largest banks and insurance companies. The crisis peaked in September 2008, when one of the largest investment banks Lehman Brothers went bankrupt, which owed more than $ 600 billion by that time.

    Almost all the "whales": Merrill Lynch investment banks, Morgan Stanley, Bear Stearns, Goldman Sachs, the insurer AIG were on the verge of ruin and the state was forced to intervene and take measures to save the country's financial system.

    It was decided to launch QE (Quantitative Easing) program - a non-standard instrument of monetary policy for solving financial problems. Standard instruments, such as changing the discount rate, would hardly solve the problem in the current situation.
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    QE – quantitative easing program: trillions out of thin air

    "Only God knows where leads this policy"

    Ben Shalom Bernanke
    The 14th President
    of the Governing Council
    of the Federal Reserve System
    (2006-2014)

    Until the 70s of the last century everything was clear in the world financial system: there is gold - the yardstick of value, there are dollars - the world currency, provided with precious metal.
    But after the abolition of the "gold standard," the world changed dramatically: central banks were able to print money in unlimited quantities.
    Frankly speaking, at first it was considered a great sin: the imbalance of the financial system, the violation of macroeconomic equilibrium, the acceleration of inflation.
    Therefore, in those days, financial regulators did not abuse the printing press.

    Traditionally the money issue was managed by the state (the Ministry of Finance or the Treasury).
    But this is not about the USA. In America since 1913, the "printing press" is run by the closed joint-stock company "Federal Reserve System of the USA", which is represented by the largest private bankers.




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    The term "quantitative easing" was not known in the entire world until the financial crisis of 2008.
    In the midst of the crisis, in November 2008, it was decided to include the "printing press" at full capacity - to fill the crumbling economy with dollars.
    In order to cover up with some clever words unlimited emissions of unsecured bucks, the new term was created - quantitative easing.

    At the first stage of QE (November 2008-March 2010) "fire was extinguished" with the help of the state budget. 1.2 trillion. dollars was spent, but this was not enough - Fed (Federal Reserve System) must interrupt in order to rescue the situation. The Fed has been buying out bad debts from banks ("toxic assets") in exchange for legitimate, newly printed money from the Fed's press.
    At the first stage of the QE program, the Fed in total allowed 1.7 trillion USD (brand new dollars) in order to save banks.
    According to the expression of the Head of the Fed of that time Ben Bernanke - "Money was thrown from the helicopter."
    By the spring of 2010, the crisis began to fade and the QE-1 program was stopped.
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    The effect from QE-1 was short-term: by autumn 2010, the Fed again launches the "printing machine" - QE-2.
    During the QE-2 (until mid-2011), the Federal Reserve bought from banks debt obligations of the Ministry of Finance. Totally it was released 600 billion dollars for this period of the program QE-2 .

    But such an uncontrolled release of unsecured money is not popular among all Americans: some members of the Congress urge to limit the powers of the Federal Reserve, to conduct an audit, to nationalize the Fed, transferring the control of money release from private bankers to the state.
    It should be noted that the congressmen did not get anything out of this: they were not even allowed to audit the Federal Reserve.

    Presidential elections of 2012 were already approaching, that`s why it was decided to hold the "program of throwing away money from the helicopter" . The third stage of QE-3 began in the fall of 2012 (the official start of the program is September 13, 2013). The terms of this stage were not stipulated, but its purpose was clear - the maintenance
    of employment in the American economy. Since unemployment was at the 8% level at the height of the crisis, the goal of the program was to reduce unemployment to an acceptable level of 6%. And again, freshly printed dollars were issued to the economy at a velocity of 40 billion/per month.

    The main idea was - using this money, the Fed buys from banks "toxic assets" - these securities that are not "valuable" but "trash".
    It was supposed, that using this money banks will lend to the economy, giving cheap loans to private companies.
    However, banks have sent received funds in lending to the economy, but not on the "inflating the bubble" in the stock market.

    The QE program was completed in October 2014.

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    The impact of QE on the monetary, stock and commodity markets

    "It will be beneficial for people like me"
    American billionaire Donald Trump about the QE program

    The infusion of trillions of unsecured dollars into banks immediately resulted in financial markets: the dollar began to depreciate rapidly, investors and speculators began to sweep away any assets.

    First of all, investors invested in precious metals, hoping to find there a "quiet haven" for their rapidly depreciating dollars.
    The price of gold rose from $ 750 per ounce at the beginning of the crisis (September 2008) to $ 1,900 per ounce at the height of quantitative easing (August 2011).

    Banks did not credit the economy in big quantities - it was much easier for them to invest money in stocks on the stock exchange: the American stock index S&P-500 doubled from 2008 to 2012. This growth can be called a "bubble" in the stock market, since for this growth there were no economic prerequisites, only one financial precondition - too much extra money.

    And, finally, about the foreign exchange market:
    At the very beginning of the program for high-speed printing of dollars, we saw a collapse of the dollar against all major world currencies:
    the Euro flew almost 1.5, the British pound went to reach 1.70, and the Australian "kangaroo" strengthened above the level of 1.10 - although it was not there for too long.

    Such an abundance of dollars, for sure, led to an imbalance in the world economy: American producers, because of the weakness of the dollar, gained an advantage over all other producers, America began to get out of the crisis at the expense of the economies of other countries. And in 2012, Europe, Japan and England were forced to launch their quantitative easing programs. The period of "currency wars" has began.

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  7. #7
    Trader layigold's Avatar
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    This is a complete x-ray of the subject "quantitative easing " and to be honest with myself I have seen the very background of this subject matter. Though I know that quantitative easing is an unconventional form of monetary policy where the apex bank creates new money electronically to buy financial assets such as government bonds but this thread has really made so may areas very clear that what it used to be to me . The purpose is to directly increase private sector spending in the economy and bring back inflation to the predefined target.Currency in question becomes weak as a result of the quantitative easing.

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  8. #8
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    QE is just a forced way to create a supply of money that ends up devalueing a currency. And then the money supply will be injected to the financial market by buying their bonds. So it is like the government buys a company's bond with zero interest. So they have been providing liquidity to the market and what the market did to that will be like using the funds to improve their own business.

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