Beyond Economics

The End of Growth and Time for a New Era

Category Archives: QE

QE: How does the Fed do it?

A student sent me a clever YouTube video cartoon trying to explain QE2. It scores some points on Bernanke, the Fed, and Goldman Sachs but either intentionally or unintentionally confuses demand-pull and cost-push inflation to push its point of view. It is nevertheless very entertaining.

QE Explained / A Response

I was left left with the question that is the title of this post and found this, which seemed to sum it up nicely: (From: Quora.com)

Why does the Fed buy treasury bonds through Goldman Sachs instead of from the treasury?  How did this happen?

Vince de Baca, AB Econ from Princeton, Wharton MBA
AB Econ from Princeton, Wharton MBA Economics

  • The Fed buys securities from banks to inject liquidity into those institutions to ensure a low cost credit supply and bank liquidity.
  • If the Fed bought from the Treasury, the funds could only be used to close fiscal deficits, not having the same benefits to the financial sector and economy at large (eg lower interest rates, bank solvency).
  • Also if the Treasury exclusively sold bonds to the Fed, it would diminish market confidence in the dollar and likely create inflationary expectations.