Wednesday, February 11, 2009
by Martin Denholm, Managing Editor, Smart Profits Report
Dear Smart Profits Report Reader,
Federal Reserve governor Ben Bernanke and Bank of England governor Mervyn King both used to be teachers.
I’m glad I wasn’t a student in their classes.
Teachers are supposed to make complex things simple. But these two guys are about as clear as mud, as they dance around monetary policy jargon like drunken nightclubbers.
I’ll get to Merv in a minute, since he had more dire things to say about the state of Britain’s economy this morning. First up, though, let’s wrestle with Mr. Bernanke’s latest explanation of current monetary policy…
What’s In A Name? A Lot If You Listen To These Guys
Let’s get one thing straight, folks… don’t call it “quantitative easing,” okay?
It’s “credit easing.”
Get it wrong and you’ll find yourself in detention with the guv’nors.
“Credit easing” is the term Bernanke uses to describe the Fed’s monetary policy, now that interest rates are practically at zero.
In “normal” times, banks use conventional methods like adjusting interest rates to control the flow of money into an economy. Low rates encourage consumers to buy more and financial institutions to lend more money. High rates are supposed to slow consumer buying and lending.
But these aren’t “normal” times. Simply put, there’s only so far you can go to make money cheap. And with rates cut just about as far as they can go, both the Fed and Bank of England have pretty much exhausted their traditional monetary policy tool. That’s when more drastic measures need to be considered.
Entering stage right… “quantitative easing.”
Or not.
If you listen to Messrs. Bernanke and King, they’re foxtrotting their way around the issue to avoid describing it this way.
Desperate Times Call For Quantitative Measures
Quantitative easing can include targeting the cash that commercial banks have with the central bank. But instead of using an interest rate, it sets a target on the balance that the banks have with the central bank.
