When I first looked this up last year, no good explanation came about, so let me explain in my own words.

According to my understanding, I don’t think what the Fed buys (Treasury issued debt vs. other things) is the heart of the distinction in defining quantitative easing at all. The Fed is just like any bank. In the most harmless and normal case, the Fed uses its own equity to buy and sell assets. A step away from that, the Fed can loan out its assets in exchange for other assets. Another step away from that — and the Fed has been doing this since last October — is to absorb deposits and make loans using those deposits. Since this last step is multipliable, it is credit creation, and the exact amount created can be quantitatively targetted by the Fed; this is exactly what is meant by “quantitative easing”.

Is this printing money? It isn’t any different than normal bank credit creation if you simply view the Fed as another bank. The only difference is the Fed isn’t subject to reserve ratios or capital leverage requirements (e.g. it’s extremely levered), so it can, not necessarily will, create credit much too imprudently.

The Fed can acquire bad assets no matter what asset it takes. US debt may be one such bad asset but is it really worse than the rest of the stuff? By definition, the Fed is buying all of them at rates above what they are worth when marked to market. But the idea is this is for longer term benefit and hence not imprudent.

I think the outcry about the Fed buying government bonds rather than other assets is the Fed’s special relationship with the Treasury and the potential for abuse. The Fed has a chummy depositor who will never participate in a run on it, and that is the Treasury. And such a depositor will get any amount of money it needs to deposit with the Fed by issuing debt that even if nobody wants, the Fed will happily buy. The metaphorical printing press is in two pieces, mediated by the accounting trick that is permanent debt issuance. So if the two collude, they can put the printing press together and make it work. Whether such collusion is or is not happening is debatable, as there is no sharp line to cross. Everybody is still happy to leave their deposits with the Fed and presumably still believes the Fed (or the government) that the Treasury means to retire these debts eventually, to unwind these positions.

But if this economy doesn’t turn better soon, these assumptions will become untenable.