If a 10-year-old walked up to you and asked, “What is quantitative easing?” what would you say?
I don’t know about you, but I think I’d struggle. I know in general it’s an effort by the Fed Chairman, Ben Bernanke, to stimulate the struggling U.S. economy. He announced the Fed would be buying hundreds of billion dollars in Treasury bonds until the employment situation and housing market show signs of improvement.
But the 10-year-olds I know generally ask lots of questions. And I’m afraid I’d be at a loss to answer them. Questions like:
How does buying mortgage-backed securities reduce unemployment?
Has this type of plan ever worked before?
Why do we need QE3? What happened to QE1 and QE2?
I saw a clever video that explains it all in language even a 10-year-old could understand. It’s a cartoon featuring two cute animals (not sure what they are: they could be anything from puppy dogs to panda bears). I never thought advanced economics could be funny, but this video is hilarious.
Actually, beyond the brilliant humor, it’s quite revealing. For example, did you know how Treasury bond purchases are executed? Here’s how the video describes these mammoth transactions (I’m quoting from the video):
#1: How does the Fed execute quantitative easing?
#2: They print the money, and then they buy the Treasury bonds.
#1: Do they buy the Treasury bonds from the Treasury Department?
#2: No, they buy the Treasury bonds from… Goldman Sachs.
#1: So let me get this straight: If I want to buy Treasury bonds with my money, I can buy them directly from the Treasury.
#1: But if Ben [Bernanke] wants to buy Treasury bonds using the American people’s money, he does not buy them from the Treasury, he buys them from… Goldman Sachs?
#1: Who inside the Fed is responsible for the buying of the Treasury bonds?
#2: The buying of the Treasury bonds is conducted by the New York branch of the Federal Reserve.
#1: And who is in charge of the New York branch?
#2: The head of the New York branch is… William Dudley.
#1: And what did William Dudley do before running the New York Fed?
#2: [He was] a partner at… Goldman Sachs.
#1: So the guy in charge of the American people’s money when dealing with… Goldman Sachs used to be a partner at… Goldman Sachs?
#1: And no one has a problem with this?
#2: Apparently not.
#1: Is this an episode of the Twilight Zone?
If you want a good laugh and a deeper understanding of a major driver in our economy -- or simply have an inquisitive 10-year-old -- go to: www.youtube.com/watch?v=PTUY16CkS-k
Paul Partridge is a senior partner at Sage Financial Partners, specializing in safe money strategies that protect savings from inflation, taxes, and market fluctuations. Sage Financial Partners is a Registered Investment Advisory firm and member of FINRA and the Better Business Bureau. The information above is not intended to be and should not be considered investment or tax advice.
Paul Partridge is co-founder of Sage Financial Partners. For a complimentary evaluation of your life insurance protection, contact Paul@SageFinancialPartners.com. Sage Financial Partners is a Registered Investment Advisory firm and member of FINRA and the Better Business Bureau. The information above is not intended to be and should not be considered investment or tax advice.