In an opinion column in the Wall Street Journal, Martin Feldstein of Harvard Uni

Question

In an opinion column in the Wall Street Journal, Martin Feldstein of Harvard University argued with respect to quantitative easing that, “low interest rates are generating excessive risk-taking by banks and other financial investors.” He also warned that the risks could have serious negative effects on the value of pension funds. a. What is quantitative easing? b. Why might quantitative easing have led investors, banks, and pension funds to engage in excessive risk taking? c. Why might this risk reduce the value of pension funds?

Explanation / Answer

Quantitative easing is an unconventional monetary policy in which acentral bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Quantitative easing is considered when short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.

they believe that there are some risks involved with damaging theeconomy. The prolonged period of low interested rates will prolongthe excessive risk. Treasure securities are safe investments, when these rates on securities drop to low levels the that some investorsand financial firms turned to low-rated corporate bonds and verylong-term government and corporate bonds o²ering higher returnsbut they have higher risk.

Such risk of prolonged periods of low interest rates may lead to speculative bubbles that would underestimate the process of long term growth

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