Quantitative Easing

You are probably familiar with the various bank bailout plans floating around (in the U.S., U.K., Belgium in conjunction with the Netherlands and so on). These plans require government to lay out cash which can come from one of two sources:

1. Treasury borrowing
2. The central bank "printing" money (or Quantitative Easing)

This last source is achieved by the central bank buying usually (and lately in the U.S., not only) Treasury securities from investors (usually dealers). How does the central bank pay for these purchased securities securities? By an electronic transaction that debits the traders' accounts in their respective commercial banks. These electronic checks represent new reserves for the commercial banking system that can now proceed to extend new credit to customers (the Money Multiplier). The problem of late is that even as the Federal Reserves Bank increases the banking system's reserves, these banks do not use them to extend additional credit to customers. Read an article in today's Financial Times about it: "Bank set to deploy quantitative easing"