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Fed unveils QE3, now for some good analogies

Daryl Paranada Sep 13, 2012

The Federal Reserve is launching a third round of economic stimulus, known as quantitative easing or QE3, it announced Thursday.

The big news from the Fed is that it will spend $40 billion a month to buy mortgage-backed securities in an effort to prop up the economy and create new jobs.

Here’s how the Fed explained it in a press statement: “The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.”

Confused about what quantitative easing is supposed to do for the economy? There are certainly a number of places you could find explainers. Marketplace’s own Paddy Hirsch uses a kiddie pool analogy to help explain its economic effects.

That got us thinking, what other analogies have been used to explain quantitative easing? You’ve heard the boring standards from economists and politicians: It’s like “pumping money,” “printing money,” (particularly “printing out of thin air”) and “pushing the panic button.” But we wanted more, how shall we say, creative examples, so we scanned the web for some better analogies.

Quantitative easing is….

  • Like the Fed basically shaking a giant bottle of monetary ketchup over the dinner plate of the American economy. – “The Black Swan” author Nassim Taleb
  • Like you are trying to keep a drug addict high. And every time the drug wears off, if you want him to stay high, you have to give him more. But he’s not going to get healthy if you keep him on drugs. – economist and CEO of Euro Pacific Capital Peter Schiff.  
  • Like a wrong medicine. “Our economy has a disease that all the quantitative easing in the world can’t cure. And while the wrong medicine may make us appear healthier in the short term, we will continue to deteriorate beneath the surface.” – economist and CEO of Euro Pacific Capital Peter Schiff
  • Like a grand ship… foundering on the shoals. For Bernanke’s [QE], currently the single reed supporting the equity market’s continued ascent, is doomed for intrinsic, structural reasons. – novelist and economics commentator Charles Hugh Smith, Business Insider.
  • Like type 2 diabetes, in which the body has become desensitized to insulin — that is, the body’s cells do not respond appropriately when insulin is present. In a process like type 2 diabetes, the U.S. economy has become desensitized to the Federal Reserve’s flood of liquidity and cheap credit. – novelist and economics commentator Charles Hugh Smith, Business Insider.
  • Like giving crack to a cocaine addict – Brian Belski, chief investment officer at BMO Capital.

A younger Paddy Hirsch first explained what this unconventional monetary policy known as “quantitative easing” was in another Whiteboard — back when it was just QE1. Check it out here.

Here’s an animated video explaining quantitative easing that went viral. And if you’d like to read the Federal Reserve’s full statement, you can do that as well.

Got one to add? Post a comment.

Paige Osburn contributed to this report.

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