Who Can Fix the Economy?

This is a great article in the current issue of Fortune Magazine that in 6 pages does a very good job of explaining what's wrong with the economy and why it is likely to take many years to fix it.  The article is too long for me to excerpt so I will provide this link instead. 

However, I found within the article a discussion of quantative easing where the author does a pretty decent job of explaining what it is and how it works.  I will excerpt that part below. Enjoy!

"The closest we're likely to come to free money is the Fed's proposed quantitative-easing moves to buy Treasury securities......Let's say the Fed buys $1 trillion of Treasury securities in the secondary market. Out of thin air, it creates $1 trillion in credit balances in the sellers' accounts. The sellers have $1 trillion more cash than they did, increasing the money supply. There is now $1 trillion less of publicly traded Treasuries, which props up their price. By contrast, if Goldman Sachs wanted to buy $1 trillion of Treasury securities, it would have to find $1 trillion of cash to pay for them. Sellers would have $1 trillion more cash than before, Goldman would have $1 trillion less. There would be no increase in the money supply or decrease in the Treasury supply.

If the Fed could buy endless amounts of Treasury securities without any side effects, it would be almost like free money. The securities would cost the Treasury little or nothing in the way of interest, because the Fed turns over its profits....to the Treasury. So if the Fed buys $1 trillion of 2.5%, 10-year Treasury notes, Treasury's $25 billion annual interest expense is offset by the $25 billion of extra profit the Fed would make, all (or almost all) of which would be turned over to the Treasury. See? Isn't that grand?

There is, however, a problem. The Fed can't do that indefinitely without touching off inflation, debasing the dollar, or both. Markets are bigger and more powerful than the Fed. Consider the reaction of people like veteran Wall Street value investor Hugh Lamle of M.D. Sass to quantitative easing. "It's one thing to do $800 billion once," he says. "But if the federal government is going to print $1 trillion a year for five years, maybe I don't want to be in dollars." A second factor is that long-term rates are already so low that it's not clear how much stimulus you get from cutting them more. It's a big deal to cut interest rates to 5% from 8%. But at lower levels, the result is less dramatic. Do you think the difference between 3% and 2.5% is going to matter? Meanwhile, these ultralow rates are penalizing American savers -- especially retirees relying on CD income to supplement Social Security. They tend to spend all their income, and it's down sharply. That's one reason the economy is weak."