On March 18th 2009, FED has made a move it haven’t done since 1960 (the so-called Operation Trust conceived by the Kennedy administration): it steped into the market in order to buy long term securities for an amount of some 1.25 trillion dollars. FED also announced a program to restart consumer and small businesses lending. FED also said this program could be expanded to include a lot of other financial assets. The key issue here is the money resulting from this quantitative easing action taken by FED has not US economy as main destination, but, throw IMF, US are due to become the main creditor of the world.market, consumer, small businesses, lending

Cristi SPULBAR

Cristian STANCIU

Raluca DRACEA

Sabin RIZESCU

English

Research Papers in Economics

250                                                                        Finance – Challenges of the Future   
SOME REMARKS ON THE RECENT  “QUANTITATIVE 
EASING” ACTION TAKEN BY FED 
 
Lect. Sabin RIZESCU, PhD 
Lect. Cristian STANCIU, PhD 
Assoc. Prof. Raluca DRĂCEA, PhD 
Assoc. Prof. Cristi SPULBĂR, PhD 
University of Craiova 
 
On March 18
th this year, FED 
has made a move it haven’t done since 
1960 (the so-called Operation Trust 
conceived by the Kennedy 
administration): it steped into the market 
in order to buy long term securities for an 
amount of some 1.25 trillion dollars. The 
move is due to take place following two 
steps: 
 -1
st step: an immediate release of 
300 billion dollars in order to buy long 
term Treasuries (especially 10year T-
bonds) 
 -  2
nd step: the purchase (in an 
unspecified period of time) of mortgage 
backed securities guaranteed by Fannie 
Mae and Freddie Mac for the rest of 750 
billion dollars. 
  The move is aimed at re-launch 
the banking system credit operations and 
lifting the US economy out of recession 
by lowering rates on mortgages and 
other consumer debt of any kind. 
  In the same kind of respect, FED 
also announced a program to restart 
consumer and small businesses lending. 
FED also said this program could be 
expanded to include a lot of other 
financial assets. The program is 
designed on spurring lending for autos, 
credit cards and loans for businesses’ 
capital spending. However, FED 
suggested that the help for the embattled 
mortgage industry might be over – at 
least for a while – saying any broadening 
of the program will be beyond this area. 
  Since the last FOMC meeting in 
late January ”the US economy continues 
to contract” the FED members stated. 
Also, they noticed that “job losses, 
declining equity and housing wealth and 
tight credit conditions have weighed on 
consumer sentiment and spending”. 
  But, there was a remark that kept 
our attention in a very particular way. In 
its statement, FED said that “problems 
overseas have crimped demand for US 
exports, dealing domestic companies 
another blow”. And all that when the US 
international trade gap has became less 
than half (26 billion dollars in February) of 
its picks reached in mid 2007 (more than 
60 billion dollars)! 
  Great investors like Warren 
Buffet and George Soros heavily 
criticized the FED action but they really 
meant what they said?! Among other 
issues they raised they were saying that, 
far from resuming the lending activity in 
the business sector, this move will only 
artificially and temporarily revamp the 
price of assets and of goods and services 
– finally conducting to inflation without 
gains in productivity (stagflation). 
  We argue that, at least for the 
time being, inflation is out question in US. 
We have only to remind that both values 
of PPI (Producer Price Index) and CPI 
(Consumer Price Index) were showing in 
recent months that inflation is well 
contained. More else, PPI has known its 
first Y/Y decline since 1955. Also, we 
have to add to the picture that for the 
month of April 2009 we’ve just seen a 
monthly decline in the CPI number (-
0.1% M/M) and only a modest increase in 
the PPI number (+0.1 M/M) while in their 
Y/Y dynamics both numbers have shown 
sharp year/year declines: 
  April PPI Y/Y:       - 3.6%!!! Year VIII, No.9/2009                                                                                                  251 
 
  April CPI Y/Y:      - 0.4%  
  Also, we have to say that the 
recent monthly job losses in US were 
huge indeed and that could mean 
everything (anything!) but inflation. In the 
last three months we’ve seen dramatic 
declines in the non-farm payrolls number 
as well as well as in the jobless rate 
number: 
  April non-farm payrolls M/M: 
actual: - 663,000!!! 
consensus forecast: - 650,000  
 April  jobless  rate:      
actual: 8.5%!!! in line with expectations   
                  
                 
  US wants to puts an end to the 
“consumerism era” and to put its 
economy back on track by regaining in 
terms of productivity in order generate a 
new kind of growth based more on 
added-value and less on assets. The 
ignition of such a process seems to be 
this main contribution it made to the IMF 
efforts in assisting emerging economies. 
These economies will restart to re-think 
their own kind of growth and are suppose 
to buy more capital goods “made in USA” 
and, so, lifting more pressure of its 
already 6 months sharp narrowing trade 
deficit. 
  March non-farm payrolls M/M: 
actual: - 651,000!!! 
consensus forecast: - 648,000 
 March  jobless  rate:      
actual: 8.1%!!! 
consensus forecast: 7.9% 
  So, assuming that all money 
released by FED is to have the US 
economy as destination, still we don’t see 
any inflationary pressures to develop at 
least for the next 6 to 12 months ahead. 
  But, the key issue here is the 
money resulting from this quantitative 
easing action taken by FED has not US 
economy as main destination! 
  The last G20 meeting (April the 
2
nd  2009) has given free way for 500 
billion dollars at the IMF disposal in order 
to help emerging economies. We have to 
remember that Romania itself has 
borrowed money from IMF just recently!  
  We did notice that the main 
contributor - as a sovereign country – to 
this kind of “world stimulus package” is, 
actually, the United States of America 
(100 billion dollars)! 
So, US are due to become the 
main creditor of the world, but in a very 
strange way – and that because US is 
also the main debtor of the world. 
  So, a third of those 300 billion 
dollars released by FED by purchasing 
long term T bonds are actually designed 
to finance emerging economies. 
  At the last G20 meeting, the 
status of the US dollar as world’s reserve 
currency was subject of serious 
discussion actually for the first time in the 
post World War II era. 
It seems , in the aftermath, that 
America has learned its lesson in 
recognizing that the “laissez-fair 
economic policy” and excessive 
deregulation in the banking system were 
mistakes. 
  Growing demand overseas for 
US made goods and services will 
stimulate the entire business sector and 
the US economy will start to generate 
some new and fresh liquidities. We also 
have to add to the picture that the 
average American homeowner will never-
ever spend (especially on imported 
goods) the way he or she has done in the 
last decade. The US dollar is due to 
remain weak, at least for a while, and 
that will also be a “plus” for the American 
international trade position. As the US 
international trade will improve, this 
country will start to pay down its national 
debt. The US economic growth engine 
will never be the same it was in the last 
four decades. The work will be re-priced 
as well as capital gains.       
  Our guess is that “easy money 
policy” will reach its end sooner rather 
than later and that because the US 
economy has an enormous potential of 
growth. In this kind of respect we have to 
remind that this economy produced 
growth at 140 – 150 dollars/oil barrel and 
the recent sharp decline in oil prices has 
created a huge “productivity reserve” by 
diminishing energy costs in the entire US 252                                                                        Finance – Challenges of the Future   
business sector. So, the profit margins 
will benefit, too. 
  On the other hand, we have to 
notice that US is actually the only country 
being in a position to lend money to the 
world, directly or via IMF, with no bad 
effects on its own economy. That could 
happened because any other big dollars 
detainer (big exporters like China, for 
example, that has the US dollar as main 
currency in its reserves and continues to 
buy US debt) that eventually has 
intended or do intend to lend US dollars 
to the world will reach nothing but 
undermine its own economy by putting 
down the value of the dollar and 
diminishing its own reserves. 
  As many analysts already 
noticed, big exporters like China have 
created economic engines for nothing! 
  Also, we have to add that the US 
capital markets are the most liquid, the 
largest and the deepest in the world. 
These capital markets assure large doors 
for good capital coming to US as well as 
large doors for insane capital leaving US. 
In this kind of respect we have to notice 
that  US Treasury made its moves by 
using market instruments while the FED’s 
quantitative easing measure is, basically, 
an open market action.  
  The US economy is an 
innovation-based, versatile, and very 
dynamic one. Its workforce is the most 
flexible and mobile in the world. By re-
thinking the capital distribution and re-
pricing work, the US government will 
encourage the development of new 
products (goods and services) with good 
outcomes in terms of productivity gains.  
  As we’ve noticed earlier, the 
average American consumer’s behavior 
has changed dramatically in recent 
months and is due to continue this way. 
As the Americans will start to leave the 
consume-on-debt behavior by dropping 
down their credit cards and to save more, 
the behavior of the banking system will 
also change by switching from finance 
consumption to finance investment-
based activities. 
  It’s time to remind that US still 
has the most powerful and prestigious 
academic system in the world. Its well-
known universities ( MIT, Harvard) are 
still the places where the world top 
researches do work and put out their 
results. It is to expect that some of those 
results will soon reach some interests in 
the economy and will attract investments 
in order to create those new products we 
were talking about. 
  At the last G20 meeting the 
american voice was a little bit milder than 
usually, but, while the US dollar is 
contested indeed but nobody sees a 
valuable replacement for it, US is to 
remain the largest and the most powerful 
economy in the world and, of course, it 
will use the power of the dollar as the 
single world reserve currency.   
  The last FED action will relieve 
the world economic tensions and will be 
a support for growth to the developing 
countries (like Romania!). Those 
countries will start to consume more than 
they do now and the IMF will watch 
closely to their economic policies, 
avoiding mistakes made in the past. 
  The world has changed 
dramatically in recent months but the 
economic laws remain, basically, the 
same.  
  The economic war will continue 
reaching worldwide dimensions that 
world has never seen before. The US 
economy will face fierce challenges in 
fighting with its deficits but exporters like 
China and – why not ?! - Germany will 
face even tougher tasks. These big 
exporters have built their economic 
policies on the assumption that the US 
consumption market is kind of “black 
hole” and is to remain this way forever. 
They were deadly wrong – Germany 
output has already fallen 6% Y/Y and 
China’s recent slowdown has never been 
seen in the last two decades. Oil 
exporters like Russia and Arabic 
countries that built their economic plans 
and budgets assuming the oil price will 
remain above 100 US dollars/barell, will 
also be in trouble. The US mood to 
consume-on-debt has change 
dramatically. Year VIII, No.9/2009                                                                                                  253 
 
The world economy itself is 
about to experience dramatic changes. 
One thing will remain in place, at least for 
the foreseeable future: the US Dollar will 
remain the world reserve currency. 
 
 
 
 
REFERENCES 
 
Paul R. Krugman, 
Maurice Obstfeld 
International economics: Theory And Policy, Addison-Wesley, 2005; 
Michael Parkin, 
Melanie Powell, 
Kent Matthews 
Economics, Pearson Education, 2007; 
*****  www.federalreserve.gov; 
*****  www.ustreas.gov; 
*****  www.imf.com. 
 

Some remarks of the recent "quantitative easing" action take by FED

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