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Current time:0:00Total duration:2:47

Video transcript

let's say the United States economy is going into a recession or maybe even worse than a recession and you are the chairman of the Federal Reserve and you need to do something about it well the first thing you would do is that you would lower the federal funds rate and that's the rate that banks lend to each other overnight and the way that you lower it if the banks don't do it on their on their ownafter you say you want to lower it is that you print money you print money as the Federal Reserve and you use it to buy usually short-term Treasury securities and then that money gets deposited in banks so the demand for reserves because that's what these things are the demand for reserves goes down the supply goes up and the federal funds rate should go down but what happens if you keep doing this and you keep lowering the federal funds rate all the way down so that the overnight borrowing rate is approximately 0% what do you do then if the economy still looks like it's in a bit of a tailspin well you could still print money you could still print money but using that money to buy short-term debt won't help any because you're not going to lower the short-term overnight interbank interest rate anymore so you can go out and buy other things you could buy other things and those other things can be longer-term Treasuries longer-term Treasuries or it could be other types of securities it could be you could buy mortgage-backed securities mortgage-backed securities you could buy commercial debt commercial debt and this idea of printing money not just for target interest rate but essentially to get that money into circulation and maybe to affect other parts of the market this is called quantitative easing quantitative easing and in Bernanke's mind although that's exactly what he's doing he's printing money to buy other things and what the Fed traditionally does when it cares about the overnight borrowing rate he calls it not necessarily quantitative easing but credit easing and in his mind even though mechanically they are the same thing in his mind he's saying look I'm printing this money not just for the sake of the printing the money and putting it in circulation I'm printing money so that I can buy particular assets particular assets where it seems like there might be a log jam in the credit markets because with just printing money and buying government securities maybe the interest rates on government debt goes down but maybe because of panic or crisis interest or the the prices on these things don't behave properly so in order to fix that credit easing in the Byrne and Bernanke sense would be the beat would go out and buy this type of asset