QE rose up in the international stage during the subprime debt crisis during 2008 in the United States.
QE been created by the Federal Reserve in multiple tranches over the years and the latest tranche is QE5 which was started in spring 2020 during the global Covid 19 crisis, although the Fed no longer calls it QE. But ultimately it’s a QE.
This system is one of the central bank’s weapons to incentivize banks to make loans, both among themselves and to their customers, companies or individuals like you.
QE was born because there was a block in the loan cycle so lets go into detail.
QE was a novelty in the management of the US central bank as it had never happened that the Fed had to intervene so massively in the market with so much liquidity.
The principle behind QE is simple, in fact it serves to incentivize or rather to push banks to lend money. This is to bring the money crammed into the banks into the real economy.
Banks can take money from the central bank at very low cost, but instead of lending to various companies that need liquidity, banks invest in 10-year government bonds
The lending activity is risky, the loan may not be repaid and therefore the money can be lost by the bank. Government bonds, on the other hand, are safe assets that have a return so the risk is zero and the gain is safe with the coverage of the Washington government.
This kind of activity, if done on a large scale by most banks, creates a slowdown or block in the flow of credit, which could slow the economy if it does not push it into a downward spiral.
The Fed therefore intervened to avoid this situation by creating quantitative easing, which is nothing more than a pumping of money into banks and the real economy.
First step, the Fed start to buy financial assets directly from banks, taking financial instruments and derivatives of any quality including many toxic assets, debts and derivatives
The Fed gave fresh money to Banks to buy their bad securities, eliminating some if not all of the heavy pressure on banks.
After that the Fed began buying American government bonds that the banks themselves bought. This is to help the US government finance itself and keep rates low, driving yields down. with low yield, banks are no longer inclined to buy government bonds which now yield near zero
So the banks to seek yield, in theory, must turn to the public loan market. This forces the banks to go back to banking, or to lend money to healthy and well-managed companies which will then return the money plus the interest rate.
The action of the FED has lowered interest rates making it less expensive to borrow money for the company or private individual in need of cash.
The problem of subprime mortgages should also be mentioned, like mortgages granted in the real estate world to people who are unable to repay the funds taken.
But now we may have a problem, if that doesn’t work, it means billions of dollars have been pumped into the economy. This amount of money depreciated the dollar.
Deprecating the dollar means that US products are cheaper to buy on the market but excessive depreciation causes the dollar to lose any value and become waste paper.
This means that no one would want dollars and there would be a possible crash of the currency, which is bad for the economy.