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.