US and Japanese quantitative easing

0:00When 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.

0:17It 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.

0:35But 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.

0:50So 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.

1:06Let'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.

1:26So 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.

1:44He 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?

2:05And 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.

2:26But 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.

2:45In 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.