QUANTITATIVE EASING’S UNINTENDED CONSEQUENCES
IT CAUSED A $28 BILLION REDUCTION IN BUSINESS LENDING
BY TRACY SIMON

During the financial crisis, the Federal Reserve purchased $1.7 trillion worth of mortgage-backed securities. This move, part of quantitative easing to stabilize the U.S. economy, kept mortgage interest rates low. But, it likely caused a $28.2 billion reduction in corporate and industrial lending by financial institutions, according to new research by Indraneel Chakraborty, assistant professor of finance at the School. Banks, knowing they had a buyer ready to take home mortgages off their hands, tended to favor using their resources for mortgage lending over business lending, plus, home purchases and refinancings increased as interest rates stayed low.

“For some time, companies have been left asking why they can’t get a loan even though they have great credit history, which in turn slows down the investment companies can make toward new opportunities,” says Chakraborty, who conducted the study with colleagues from Virginia Tech and the Wharton School of the University of Pennsylvania.

Until now, there was no dollar figure to illustrate the overall impact of quantitative easing on businesses in need of loans. Now, the Federal Reserve is considering cooling a potentially overheated economy by selling some of those mortgage-backed securities. “In contemplating its next steps in regards to possibly pulling back on the second part of its economic stimulus strategy, the Fed can now look to a number that quantifies the unintended consequence suffered by businesses while it stimulated mortgage lending,” Chakraborty notes.

Spring 2017
links past
img_peq1.jpg
img_peq2.jpg
img_peq3.jpg
img_peq4.jpg

Is dealmaking important for good leadership?

banner_2017.jpg