Finance and capital markets
Comparing quantitative easing in Japan to "credit easing" in the United States. Created by Sal Khan.
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- Would it not be better to dump these bad banks and instead of buy up their bad loans, bad mortgages etc, put the billions of dollars into capital work programs for the unemployed as well give the low income individual loans to start a business or re-education programs. It seems to me all this lending and printing of money is just going into an already fat bloated oligarchy/elites -1%'rs?(4 votes)
- Is it not true that so called "money"-paper printed,with no value behind it- is at the heart of the problem We face now? How then will printing more of it slove the problem?(1 vote)
- Printing money helps temporarily with the problem of inadequate money in circulation (inadequate volume of spending), which is crucial for economic health. It has played a critical role in forestalling economic collapse in the US, which could have been as bad as or worse than the Great Depression (we were well on our way after the collapse of Bear Stearns and Lehman Brothers). But it does nothing to solve the underlying problems causing inadequate monetary circulation in the first place. In the US, the biggest of these structural problems is the immense hoarding of wealth by the top tenth of one percent of the population, to a degree that now equals or exceeds the amount of hoarding at the top that helped to precipitate the Great Depression. Although much of this money may be invested in hedge funds, etc., such investment is a wholly different action from actually spending money to put it into free circulation. When a country's income distribution becomes overly concentrated in the way of an aristocracy (or oligarchy if you prefer), that nation's economic strength suffers greatly, as evidenced by the chart in the attached link. The chart shows that when the GINI index of income distribution is greater than approximately 38, there is a steep drop-off in per capita GDP.
As you can see, the US, whose GINI index 30 years ago was in the mid 30's, now has a GINI index of about 45. The US economy now resembles a game of Monopoly that has moved into the phase of domination by one or two. Laws of economics will cause the US economy (GDP per capita) to move sharply downward as long as this structural problem exists, just as the Atlantic City economy in a Monopoly game falls precipitously each time a player goes bankrupt. Mr. Bernanke is fighting those natural deflationary forces by expanding credit (just as US consumers did for decades until they were completely tapped out), but these actions are not sustainable in the long run. The last major oligarchy in the US was broken up by FDR in the thirties, setting the stage for a healthy playing field for capitalism once again. What will happen this time around? Will it be financial collapse from lack of monetary circulation after Mr. Bernanke can no longer suppress interest rates? Or will something or someone come along to break up the oligarchy once again, in time to prevent collapse? The American Dream believes anyone should be able to have as much money as he or she can accumulate, even if it is all the money in the world. But Americans have failed to see that this dream, when carried to its ultimate end for the very few at the top, extinguishes the economy that was initially created by this very dream.(6 votes)
- I don't understand. Where does the Fed get all this money to keep on buying Treasuries? Isn't this just taking from one pocket and putting it into another? Is this approved by Congress? How does the Treasury Dept. fit in?(1 vote)
- The Fed is a separate entity from Congress and does not need permission to implement monetary policy. If the Fed needed congressional approval for it's actions, Congress could use monetary policy for political gain, which would be very dangerous.
It might be hard to comprehend, but the Fed literally has an unlimited balance sheet. This is necessary in order to provide stability to the financial system. Knowing that there is a lender of last resort that can literally lend an unlimited amount of money, is a very stabilizing thing to have in a financial system. When the Fed wants to buy a treasury, it creates bank reserves out of thin air. It then goes to a primary dealer bank and takes the bank's treasury in exchange for bank reserves. The amount of assets in the financial system does not change, just the make up of those assets. Treasuries leave and bank reserves enter.
The Treasury department is not involved in this process. The Treasury actions off treasury bonds, which helps fund the federal government.(7 votes)
- What happens if the MBS and other toxic loans that the FED has bought, don't get repaid? What happens if assets on the FED balance sheet become bad debt. Can the FED just print more money to make up the difference?(2 votes)
- There wouldn't be any need to print money because of that. The Fed turns its profits over to the US government. If the Fed loses money on some investments, it will turn less profit over to the government. Ultimately the taxpayers will bear the cost if the Fed purchases securities that have to be written off.(4 votes)
- Question about payback of debt accumulated during QE:.
I have heard that the Fed is likely never to sell back the bonds/mortgages that it has bought during QE, but rather just hold them to maturity. The impression that one gets in reading about this is that the problem of a large debt overhang just kind of "goes away" by doing this. I don't understand how holding these bonds/mortgages until maturity does anything other than "push the problem further down the road".
The Fed is currently buying bonds/mortgages at a rate of about $1T per year. Certainly , the maturity dates on the bonds/mortgages bought in any one year do not all mature in the same future year. However, since the maturity dates on the buys that take place each month of each QE year are probably also spread over a range of maturity dates, as a first approximation, one might estimate that in any one year, something like $1T of bonds/mortgages mature and have to be paid off. Doesn't this imply that once these bonds/mortgages start to mature, something like $1T per year will be withdrawn from the economy for several years to pay them off ?
Since the GDP is something g like $16T, this would imply withdrawing something like 6% of the GDP each year for several years. This sounds to me like a prescription for a severe depression.
What am I missing here in my thinking?(2 votes)
- Whoa, I just found that Japan's Debt-to-GDP ratio is over 250% even more than that for Greece! Is this because of what happened with Japan's quantitative easing? Is this a good thing? Bad thing?(2 votes)
- After the fed increases the money supply, how long does it actually take for something like the interest rates between commercial banks to go down?(1 vote)
- The fed funds rate adjusts almost immediately because the fed has changed the supply/demand balance for those funds.
The issue the Fed faces is that it can manipulate the fed funds rate but that does not necessarily translate into changes in longer term rates, which are the rates that are relevant when it comes to making investment decisions. Banks don't lend money to people overnight, they lend for 3 years or 5 years or 10 or 15 or 30 years.(2 votes)
- How does the FED help the credit market when they buy Assets that are in a Logjam like Mortgage Backed Securities.
How does FED help the Mortgage Market or whatever when they buy Mortgage Backed Securities?
How does that ease the credit market?
Thank you!(1 vote)
- Since the last debacle was blamed upon Tranches of improperly loaned assets of low quality and monetizing them through investment bankers to retail lenders in mortgages, autos etc. how does reinflating the bubble do anything other than recreate the bubble sparing immediate pain of revaluation to real value and save the lenders by transferring debt to the central bank who can then , it seems, print it out of existence? Will there ultimately be an end to the financial party?(1 vote)
- That is a pretty loaded question.
First of all, yes the mortgage backed security market is currently alive and well. That doesn't mean it is anything like it was back in 2006/07. Things have changed quite dramatically over the past few years. Banks still expend an incredible amount of resources cleaning up their balances sheets from the last recession. We are still very much in recovery mode, not new bubble mode. Of course that can change over time. But seeing as household debt just started increasing for the first time in 4 years, it might be a while.
Second, you have to realize that the QE videos on this site are simplistic and not exactly accurate. The Fed doesn't actually print cash. They buy bonds and the banks get bank reserves in exchange. So, bonds leave the system and reserves enter. No change is made to the net amount of financial assets in the system. QE doesn't actually inflate anything it just swaps one asset for another. The only way money is created is if banks lend against those reserves. Luckily there is no correlation between bank reserves and lending.(1 vote)
- As far as I'm concern the European Central Bank (ECB) have limited action for handling liquidity problems comparing to what the Federal Reserve Bank can do. Thus, what are the instruments used by the ECB to resolve the current financial crisis in the European Union? It was nice to see a video about this particular issue.(1 vote)
When Japan faced its own banking and debt crisis in the 1990s, the first thing it did is it started to lower its target interest rate or the rate that banks borrow reserves from each other. And the way to do that is you print money. In the case of Japan, the central break prints yen. It buys short-term government securities. But the byproduct of that is it increases the amount of currency or reserves in circulation. All banks have more reserves. So the demand for that reserves will go down or the cost of borrowing it will go down. And so it lowers the interest rate. But Japan did that enough so that it got to a 0% interest rate. But then it really couldn't lower that interest rate anymore. And that's exactly what Bernanke is faced with the US credit crisis. So the next thing that Japan said is OK, we still want more money to enter into circulation. So we're going to keep printing more yen. We're going to keep printing more yen. But since it's really of no use just to buy the short-term debt anymore because we've already kind of priced those as high as we can. We've lowered short-term interest rates as much as possible. Let's use this stuff to buy other things. Let's just get this money into circulation any which way we can. So let's by long-term Japanese treasuries. Let's buy corporate debt. So they did buy a bunch of stuff, but their intention was literally just to increase the quantity of money. So what the Japanese did was kind of pure quantitative easing. They were trying to print money at any cost and let that money go into circulation in any which way possible. And they would buy a bunch of stuff to do it. What Bernanke's doing mechanically is not that different than what the Japanese did. He started off trying to lower short-term interest rates so he would buy short-term securities. It would increase the amount of reserves in circulation, lower the overnight borrowing rate, lower the federal funds rate. But when that went to 0%, so they both hit this floor at 0%, Bernanke is like, well, how do I solve the logjam in the credit markets? And Bernanke, just like Japan, says, well, I'm going to start printing more money and I'm going to use it to buy assets that the Fed does not traditionally buy. And Japan did this as well. The difference-- and this is how a Bernanke explains the difference-- is he doesn't view this as pure quantitative easing, not because it's mechanically different, because it really is mechanically the same thing. But he calls it credit easing. And in his mind, the difference between quantitative and credit easing is the intent and where you direct that extra money that you've printed. In Japan's case, they printed money for the sake of printing money and they bought all of this stuff just to get that money into circulation. In Bernanke's case, he is printing money. He does want their money in circulation, but that's not the end that he's trying to achieve. The end is to increase demand for some of these types of securities where maybe there's a logjam. So even though mechanically they're the same, Bernanke says this is credit easing because I'm trying to fix a problem in the commercial debt market, or I'm trying to fix the problem in the mortgage backed security market, while Japan was just trying to print money for the sake of printing money.