In quantitative easing when banks buy bonds (IOUs) from a government...?..Does that mean that the government will get money from selling the bond then will basically have to pay pay back money with interest to the banks. Where do the government get the bonds in the first place and how will this help to boost the economy overall. |
You've got it backwards. In quantitative easing, the Federal Reserve (or, more generally, the central bank - Japan has dabbled in it too) buys assets (such as bonds) from the banks. It "pays" for the assets by crediting the bank's account with the Fed, effectively creating the money from thin air (i.e. "printing" money).
http://en.wikipedia.org/wiki/Quantitativ...
Since the banks can now use that money, they have more to lend. If they do lend more, then that stimulates the economy. If they don't, or if they lend too much, then things can get worse.
Because of the risk, central banks do not even think about doing it unless they have no other choice. If interest rates are not close to 0, then lowering interest rates is a much safer stimulus mechanism. But, as now, when interest rates are essentially zero, the usual monetary policy doesn't work.
http://en.wikipedia.org/wiki/Quantitativ...
http://www.telegraph.co.uk/finance/break...
http://krugman.blogs.nytimes.com/2009/03/20/fiscal-aspects-of-quantitative-easing-wonkish/
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis_solutions_debate#Monetary_policy_and_.22credit_easing.22
