More on quantitative easing (and credit easing)발음듣기
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More on quantitative easing (and credit easing)
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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 13th, 2009.발음듣기
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So this is shortly after a lot of the craziness of the financial crisis was happening but it was still going on.발음듣기
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And he's saying, "Our approach, which could be described as 'credit easing' - resembles quantitative easing in one respect."발음듣기
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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.발음듣기
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This is their current assets, and let's say that is is their liabilities over here, so liabilities, and then this is their equity, although the federal reserve's equity is a little bit strange, it's not like traditional equity, that they get all the excess profits and all of that, all the excess profits actually go to the US government.발음듣기
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But when the fed prints money, what they literally do is that they create offsetting liabilities and assets.발음듣기
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So when they print money they'll, so literally let's say that they're printing some money right over here,발음듣기
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so that's money that they're printing, so this is literally, it would be federal reserve notes being created, so these are notes, which are essentially dollar bills.발음듣기
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And then they have an offsetting liability which is just notes outstanding, which is literally saying that hey, these are notes that we've created.발음듣기
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So, just to parse the statement, when he says, "credit easing resembles quantitative easing in one respect it involves an expansion of the central bank's balance sheet."발음듣기
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And the federal bank will get these notes into circulation by going out into the market and buying assets.발음듣기
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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,발음듣기
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and so it will lower the interest rate for people buying and selling dollars, or I should say borrowing and lending dollars, not buying and selling.발음듣기
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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.발음듣기
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And they're saying, look, quantitative easing is just this idea of expanding that balance sheet.발음듣기
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Let's keep reading: "However, in a pure quantitative easing regime, the focus of quality 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."발음듣기
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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,발음듣기
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And the height here is proportional to how much money they print, so maybe this is another trillion dollars they're printing.발음듣기
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But what the federal reserve is saying, in traditional quantitative easing, all the central bank cares about is printing this money and getting it out there into circulation,발음듣기
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So whenever they get this money into circulation they do go out there and they do buy assets usually treasury assets, and then they say even, "Indeed, although the bank of Japan's policy," - so he's comparing relative to what Japan did when they kind of faced deflationary crisis.발음듣기
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'"Indeed, although the bank of Japan's policy approach 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."발음듣기
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So you're saying look, 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,발음듣기
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they did use that money to go buy a bunch of assets, but their focus of their intervention was just, how much did they print?발음듣기
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They really weren't trying to change what happens in the markets that they were participating in.발음듣기
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'"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."발음듣기
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So what he's saying is that, we are mechanically doing the same thing that Japan did, we're increasing our balance sheet, which is analogous to printing money.발음듣기
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And we are also buying a bunch of stuff, just like Japan did, Japan had a multifaceted approach,발음듣기
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but what Bernanke is saying is that our approach isn't just focused on the amount of cash that we are printing,발음듣기
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our focus is where are we putting that cash toward, how can we use this cash that we printed to kind of, provide liquidity, to ease up things in certain parts of the economy.발음듣기
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Let me draw this yield curve right over here, so this is maturity on the horizontal axis, and this is yield, and I'm gonna draw the yield curve for treasuries.발음듣기
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So let's say the short-term overnight borrowing for, let's say, let's do the yield curve for treasuries, maybe it looks something like this.발음듣기
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So short-term interest rates are already pretty darn close to zero, and maybe you know this is some, I don't know what percentage, maybe this is like 4% or something.발음듣기
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Maybe you have AAA corporate debt, a very safe corporate debt, a perceived safe corporate debt, but it's not quite as safe as US treasuries,발음듣기
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so maybe it's yield curve might look something like this and this difference, for any maturities, maybe this is a 10 year, this is 10 year debt right here.발음듣기
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And maybe the fed is able to, through intervention, first they're able to print money, normally they buy shorter-term debt, maybe they start buying longer-term treasury debt,발음듣기
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But maybe the AAA corporate debts don't react, maybe the spread doesn't stay constant maybe the spread widens.발음듣기
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This is highly rated mortgage backed securities, maybe they have a slightly higher interest rate.발음듣기
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And once again, even though the treasury interest rates are coming down, while they're intervening because of all the craziness that is happening in the economy,발음듣기
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the spread between treasuries, and AAA mortgage backed securities, or the spread between treasuries and AAA corporate debt that widens,발음듣기
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or another way to think about it is the treasury interest rates are coming down while these things aren't following it,발음듣기
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What we are going to do is go buy things like highly rated mortgage backed securities, or things like commercial paper, AAA corporate debt, so that those things, the interest on those things goes down.발음듣기
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Obviously if someone is 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.발음듣기
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And so what they're doing is, what Bernanke is saying, is he cares more about what winds up on the asset side of the Fed's balance sheet, because it takes these dollars that it printed, and goes and buys other stuff,발음듣기
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and it wants to put some mortgage backed securities over here, it wants to put some AAA corporate debt over here.발음듣기
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