In QE1, the Fed bought $1.2 trillion in toxic mortgage-backed securities off the books of the banks. QE1 mirrored TARP, the government’s Troubled Asset Relief Program, except that TARP was funded by the government with $700 billion in taxpayer money. QE1 was funded by the Federal Reserve with computer keystrokes, simply by crediting the banks’ reserve accounts at the Fed.
Pundits were predicting that QE2 would be more of the same, but it turned out to be something quite different. Immediately after the election, Bernanke announced that the Fed would be using its power to purchase assets to buy federal securities on the secondary market -- from banks, bond investors and hedge funds. (In the EU, the European Central Bank began a similar policy when it bought Greek bonds on the secondary market.) The bond dealers would then be likely to use the money to buy more Treasuries, increasing overall Treasury sales......read in full