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View Full Version : Bernanke on QE and the exit strategy



we_are_toast
01-13-09, 10:12 AM
Credit Easing versus Quantitative Easing
The Federal Reserve’s approach to supporting credit markets is conceptually distinct from quantitative easing (QE), the policy approach used by the Bank of Japan from 2001 to 2006. Our approach–which could be described as “credit easing”–resembles quantitative easing in one respect: It involves an expansion of the central bank’s balance sheet. However, in a pure QE 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. Indeed, although the Bank of Japan’s policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. 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. This difference does not reflect any doctrinal disagreement with the Japanese approach, but rather the differences in financial and economic conditions between the two episodes. In particular, credit spreads are much wider and credit markets more dysfunctional in the United States today than was the case during the Japanese experiment with quantitative easing. To stimulate aggregate demand in the current environment, the Federal Reserve must focus its policies on reducing those spreads and improving the functioning of private credit markets more generally.and more:

http://ftalphaville.ft.com/blog/

thedanimal
01-13-09, 10:46 AM
Thanks for this. Here's a link to the whole speech (http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm).

vinoveri
01-13-09, 10:55 AM
Pay no attention to that man and those facts behind the curtain, ... just keep listening and believing what I say ... (and pay no mind that we've refused to tell you specifically where all the money is going and what assets we are purchasing)

GRG55
01-14-09, 12:08 AM
Pay no attention to that man and those facts behind the curtain, ... just keep listening and believing what I say ... (and pay no mind that we've refused to tell you specifically where all the money is going and what assets we are purchasing)

This part of Bernanke's speech sounded familiar...


"...Public purchases of troubled assets are one possibility. Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks. Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank..."
Isn't the first alternative the justification, subsequently discarded, for TARP in the first place? And the third alternative appears barely distinguishable from Paulson's Super-SIV [M-LEC] proposal from late-2007?

vinoveri
01-14-09, 10:11 AM
"...Public purchases of troubled assets are one possibility. Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks. Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank..."


The 2nd one got my most attention - note the word "absorb". Up till now, the rescue has been pitched as infusing capital to stabilize the system, with the intent of getting paid back (at least that's the way I had read it). Now the talk is progressing into what will be reality, that the government (i.e., me, you and our children) will absorb the losses, i.e., tranfer (read: forgive) the private debt onto the public. Pretty soon, we will begin to hear legislators begin to jawbone about how there will be losses to the taxpayer, but they will be small compared to the overall fix and well worth it ...

don
01-14-09, 11:21 AM
The 2nd one got my most attention - note the word "absorb". Up till now, the rescue has been pitched as infusing capital to stabilize the system, with the intent of getting paid back (at least that's the way I had read it). Now the talk is progressing into what will be reality, that the government (i.e., me, you and our children) will absorb the losses, i.e., tranfer (read: forgive) the private debt onto the public. Pretty soon, we will begin to hear legislators begin to jawbone about how there will be losses to the taxpayer, but they will be small compared to the overall fix and well worth it ...

When the system is stressed is when the system appears undressed. We've had more than a little slip showing, getting a glimpse of the real world chain of command, more than the norm. The upcoming role of the pols is well put. You can bet they're reading their FIRE Faxes. Of course the delivery to us will come in the guise of the Kabuki Theater of Liberals and Conservatives.