Here is a helpful link to a Financial Times Lexicon on Quantitative Easing and a portion of that entry:
Central banks normally set the price of money using official interest rates to regulate the economy. These interest rates radiate out to the rest of the economy. They affect the cost of loans paid by companies, the cost of mortgages for households and the return on saving money. Higher interest rates make borrowing less attractive because taking out a loan becomes more expensive. They also make saving more attractive, demand and spending reduces. Lower interest rates have the reverse effect.
But interest rates cannot be cut below zero and when official rates get close to zero the effect they have on regulating the economy becomes muted. Banks still need to make a profit and in troubled times the gap between the official interest rate and the rates faced by companies and households can rise, because lenders want a greater return for the additional risk of granting a loan when times are tough.
When interest rates are close to zero there is another way of affecting the price of money: Quantitative Easing (QE). The aim is still to bring down interest rates faced by companies and households and the most important step in QE is that the central bank creates new money for use in an economy.
Only a central bank can do this because its money is accepted as payment by everybody. Sometimes dubbed incorrectly “printing money” a central bank simply creates new money at the stroke of a computer key, in effect increasing the credit in its own bank account.
Being who I am, here is an excerpt from an interview with Michael Hudson that offers some even more valuable insights on QE and Mr. Draghi’s loyalty to such interventions !
PERIES: So, Michael, what’s wrong with with the ECB has announced in terms of a trillion euros worth of quantitative easing for Europe?
HUDSON: They head of the European Central Bank, Mario Draghi, has said that he’ll do whatever it takes to keep banks afloat. He doesn’t say whatever it takes to help economic recovery or to help labor more; it’s to help banks make more money because he used to be vice chairman of Goldman Sachs during 2002 to 2005. And his view is that of Wall Street and of the financial sector. It’s not a vantage point of helping labor or helping economies grow. So it’s not surprising that the trillion euros of new money that the Central Bank of Europe is creating hasn’t gone to help Greece, for instance, survive, hasn’t gone to help Greece, Spain, Italy, or Portugal get out of depression by fueling government spending. It’s been given away to the banks to buy bonds and stocks, including buying American stocks and bonds. It’s all the idea that if you can make the financial sector richer, if you can make the one percent and the 10 percent richer, it’s all going to trickle down. This is the view of Paul Krugman, it’s the view of the advisers that Obama has had. It’s trickle-down economics. And instead of trickling down, what it does is drive a wedge in the economy by increasing the value of stocks and bonds and real estate and wealth against labor. So it’s quantitative easing that is largely behind the fact that the distribution of wealth has become worse rather than better since 2008.