Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

How exactly quantitative easing works remains a subject of controversy.74 Large-scale purchasing of mainly short-term bonds drives up bond prices and thus reduces yields. Reduced short-term rates may help to lever down long-term rates and thus to stimulate investment. But that depends on there being businesses willing to invest, which cannot be taken for granted at a time of crisis. The most direct effect of QE comes via financial markets. As the central bank hoovers up bonds, it drives down yields, forcing asset managers to go in search of yields in other classes of assets. Switching out of bonds into stocks inflates the stock market, increasing the wealth of those with stock portfolios, tending to make them more willing to both invest and consume. This, to say the least, is an uncertain and indirect method of stimulating the economy. By boosting the wealth of already wealthy households, it is predestined to increase inequality. Low-income households have no way of participating in capital gains. QE was never anything other than an emergency expedient adopted by the Fed in light of the fiscal policy logjam in Congress. But the Fed itself was not insulated from the polarization of American politics.75 The FOMC vote on QE2 was split three ways. A vocal minority argued that the stimulus should have been much larger. The markets had already priced in a QE2 announcement at $75 billion. To have a substantial impact the Fed needed to deliver a surprise. Bernanke demurred. He did...