What you need to know about QE2
TEXT OF INTERVIEW
STEVE CHOITAKIS: The Federal Reserve meets in a couple of weeks to talk about what it can do to stimulate the economy. Chairman Ben Bernanke on Friday said the Fed will likely get into another round of quantitative easing. But a lot of folks still don’t really know what that means. Fortune Magazine’s Allan Sloan is here to help this morning. Good morning, Allan.
ALLAN SLOAN: Good morning, Steve.
CHIOTAKIS: All right. Quantitative easing, sounds like something Mr. Spock would be warning the Enterprise about. What specifically does it involve?
SLOAN: Well to those of us in the financial circle, we call it QE2, and I think it’s a passage ship. But what involves is the Fed going into the markets and buying all sorts of long-term securities, primarily Treasury securities, which runs down the interest rate on them. Now that’s the technical explanation. The simple explanation, which I would give if this were a bar and we were drinking beer, is printing money.
CHIOTAKIS: That sounds great, Allan, printing money. I mean, free money. But something tells me printing money can be harmful. Is it too good to be true?
SLOAN: Well, it is. Just like free beer is too good to be true.
CHIOTAKIS: Yeah, really.
SLOAN: Printing money means that you’re possibly increasing inflation and you’re certainly weakening the dollar, and the dollar has been now dropping for weeks relatively to other currencies because people in the markets have anticipated that quantitative easing is coming.
CHIOTAKIS: You mentioned lowering interest rates, though, what about jobs? Can quantitative easing do anything to get more jobs created?
SLOAN: Well the theory is if you lower long-term interest rates, it makes companies and small businesses more eager to expand, more likely to borrow money and it stimulates the economy. And who knows? That might actually work.
CHIOTAKIS: All right, so you mentioned this is QE2. So this is the second time that they’ve done quantitative easing. Did it work the first time, Allan?
SLOAN: They did it last year and part of this year, and it forced down long-term rates and it assured the mortgage market that there were people to buy securities. I mean, obviously things are not great now. But the argument these guys make is that if they hadn’t done QE1, things would be even worse than they are now. And the short answer is: Who knows?
CHIOTAKIS: Fortune Magazine’s Allan Sloan with us. Allan, thank you.
SLOAN: You’re welcome, Steve.
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