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Current time:0:00Total duration:9:15

Video transcript

to get a better understanding of quantitative easing in the American context especially the context that Ben Bernanke is talking about I want to read this quote from a speech that Ben Bernanke gave at the London School of Economics on January 13 2009 so this is shortly after a lot of the craziness of the financial crisis was happening but it was still going on so he's saying our our approach which could be described as credit easing resembles quantitative easing in one respect so he's saying it's not quite quantitative easing although it really is it involves an expansion it involves an expansion of the central bank's balance sheet so just to understand what he's talking about the central bank it has liabilities and assets like any corporation and they have to the liabilities plus the equity has to match up to the assets but just for simplicity let's just have the assets and the liabilities lining up together so let's say that this is the central bank's balance sheet right over here this is their current assets and let's say that this is their liabilities over here so liabilities and then this is their equity although the Federals the Federal Reserve's equity is a little bit strange it's not like traditional equity that they get to get all the excess profits and all of that all the excess profits actually go to the US government but when the Fed prints money what they literally do is that they create offsetting liabilities and assets so when they print money they'll so literally let's say that they're printing some money right over here so that's money that they're printing so this is literally you would be Federal Reserve notes being created so these are notes which are essentially dollar bills so these are dollar bills right here being printed either physically or electronically and then they have an offsetting liability which is just notes outstanding was just literally saying that hey these are notes that we've created notes outstanding is the other side of the balance sheet so just to parse this statement when he says credit easing it resembles quantitative easing in one respect it involves an expansion of the central bank's balance sheet so this is the expansion of the central bank's balance sheet which is essentially the same thing as printing money and then the federal bank will get these notes into circulation by going out into the market and buying assets traditionally when the Fed is more focused on short-term interest rates on overnight borrowing rates between banks it will use these to buy shorter term debt that increases the amount of currency out there the amount of dollars out there and so it'll lower the interest rate for people buying and selling dollars or I should say borrowing and lending dollars not buying and selling borrowing and lending dollars the overnight rate for banks will go down because there's more dollars out there the cost of borrowing them will go down and that's normally what the Fed is concerned about and they're saying what quantitative easing is just this idea of expanding that balance sheet let's keep reading however in a pure quantitative easing regime the focus of policy is the quantity of bank reserves which are liabilities of the central bank the composition of loans and securities on the asset side of the central bank's balance sheet is incidental so he's saying in traditional quantitative easing the central bank says look I just care about printing money I just care about printing money so they're their liabilities increase accordingly so this is notes outstanding again notes outstanding again and the height here is proportional to how much money they prints and maybe this is another trillion dollars they're printing but what the Federal Reserve saying is in traditional quantitative easing all the central bank cares about is get printing this money and getting it out there into circulation and they don't really care what they're what they're using this money for so whenever they get this money in circulation they do go out there and they do go buy assets usually Treasury assets and then they say even indeed although the Bank of Japan's policy so he's talking he's comparing relative to what Japan did when they kind of faced a deflationary crisis indeed although the Bank of Japan's policy approach during quantitative easing during the quantitative easing period was quite multifaceted the overall stance of its policy was gauged primarily in terms of its target for bank reserves so you're saying look what the Japanese were trying to fight a deflationary bank crisis they kept printing money so they kept increasing the liability side of their balance sheet they kept printing money and they did use this money for a bunch of stuff they did use those that money to go buy a bunch of assets but there their focus of the intervention was just how much did they print they didn't really care they didn't really engineer where that money went to they really weren't trying to change what happens in the markets that they were participating in let's keep reading what the Fed is saying in contrast the Federal Reserve's credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses so what he's saying is is that we are mechanically doing the same thing that Japan did we're increasing we're increasing our balance sheet which is analogous to printing money and we are also buying a bunch of stuff just like Japan did Japan had a multi-faceted approach that's how they put the money into circulation but what Bernanke is saying is that our approach isn't just focused on the amount of cash that we are printing our focus is where are we putting that cash to work where how are we how can we use this cash that we've printed to kind of provide liquidity to ease up things in certain parts of the economy to understand what he's talking about let me draw a yield curve right over here let me draw this yield curve right over here so this is this is maturity on the horizontal axis and this is yield and I'm gonna draw the yield curve for Treasuries so let's say the short-term overnight borrowing for well let's say let's do the yield curve for Treasuries maybe it looks maybe it looks something like this so short-term interest rates are already are already pretty darn close to zero and maybe you know this is some I don't know what percentage this is maybe this is like 4% or something it's not accurate but just gives you an idea so this is the Treasury yield curve this is the Treasury yield curve now you could also have a yield curve for other types of for other types of debt maybe you have triple-a corporate debt so very safe corporate debt or perceived safe corporate debt but it's not quite as safe as US Treasuries so maybe that it's yield curve might look something like this maybe it's yield curve looks something like this and this difference for any maturity so maybe this is a 10-year this is ten-year debt right here this difference between this triple a this triple a corporate debt and the Treasury that is the yield spread and maybe the the the Fed is able to buy through interventions at first they're able to print money normally they buy shorter term debt but maybe they start buying longer-term Treasury debt maybe they buy longer-term Treasury debt and maybe that helps get the yield curve for longer-term Treasuries down a little bit helps bring it down but maybe the triple a corporate debts don't react maybe the spread doesn't stay constant maybe the spread maybe the spread widens maybe the same thing for other types of debt maybe this is this is highly rated mortgage-backed securities maybe they have a slightly higher interest rate and once again even though the Treasury interest rates are coming down while they're intervening because of all the craziness that's happening in the economy the spread between Treasuries and true and triple-a mortgage-backed securities or the spread between Treasuries and triple-a corporate debt that widens or is another way to think about the Treasury interest rates are coming down while these things aren't following it so what Ben Bernanke is saying it's like look at we are doing quantitative easing that we are printing money and we are using that money to go buy things in the economy and we're increasing the amount of cash that there is in the economy but where our point isn't to increase the amount of reserves or increase the amount of cash because it's really not changing the behavior of banks what we are going to do is go by things like highly rated mortgage-backed securities or things like like commercial paper triple-a corporate debt so that those things so that those things the interest on those things goes down obviously if someone's willing to pay more for a certain amount of debt and I've gone over this in another video maybe it's not so obvious then the interest rates on it will go down and so what they're doing is the what Bernanke saying is he cares more about what ends up on the asset side of the Fed's balance sheet because it takes these dollars that it prints it and goes buys other stuff and it wants to put some mortgage-backed securities over here it wants to put some Triple A corporate debt over here and maybe it also does some longer-term Treasury securities or whatever else