[CROSSTALK] Today's, today's Financial Times, has a number of references to the discussion that we had last time on Monday. if you might have noticed, there are several letters to the editor and, and, And Martin Wolf has a column about this. But it more or less says the same thing that we talked about on, on Monday. what's, what's new is on the, on the last page of the Market section, which is the second, the second section of the paper, there's a headline, feds expected q e move weighs on the dollar. And let me just, and let me just read you the first paragraph here. Its, and says, global stocks rallied and the dollar came under heavy selling pressure amid growing expectations that the US federal reserve would announce a third quarter of quantitative easing, and that Germany's constitutional court would rule in favor of Europe's new bailout fund. at the time they went to press, they didn't know the court had ruled, in fact, in favor of the new bailout fund. That it's, that it's legal. so that Germany's going to do its part. There's some reservations about that but it, it, it basically went through. So the, the issue that I want to talk about today is, is this business about the Fed's expected q e move. q e stands for quantitative easing. [SOUND] And this is a word that is basically not in the textbooks yet. because it was invented during the period that I'm showing in the, in the charts up here that are, that are being projected. this, this this chart is showing you the balance sheet of the Fed, of the Federal Reserve Bank of the United States during the crisis. and it starts in January of '07 and it goes through March of 2010. So it doesn't come up to the present. and so it's showing you the financial crisis. [INAUDIBLE]. there aree, these two vertical lines the first one is the collapse of Bear Stearns in March of '08. And the second one is the collapse of AIG and Lehman Brothers in September of '08. And this is the balance sheet of the Fed. Up on the top, you can see assets. So they're, they're plotted as positive numbers. And on the bottom, liabilities of the Fed. And so I'm plotting them as negative numbers. So it really is a balance sheet, and you can see both sides of the balance sheet in this, in this picture. And you can also see time. And, and you can see how the Fed responded to the, to the crisis. In fact the crisis began. Back here. Okay. In August of 2007. and the first thing the Fed did was to mess with interest rates. It lowered interest rates from 5% to 2% in various stages, okay, trying to help. Okay. We talked about that last time. Right. How the Fed might try to move interest, it tried to be more elastic. And so it's trying to help by moving interest rates. it moved all the way down and still in March of '07. Bear Stearns failed, okay, and when it failed, a lot of other bad things started to happen. So the Fed changed its strategy, and you can sort of, you can sort of see that in this, in this, in the, in the asset side of the balance sheet up there. The dark blue is treasury bills. So, the Fed before the crisis was holding treasury bills as assets, and, and issuing currency as its liabilities. That's what the dark blue is on the liabilities. So, it's basically treasury bills and currency and tiny bits of other stuff. Okay, but, it's basically treasury bills and currency. And after Bear Stearns, you can see they sold off the treasury bills. And or at least half of them. And they lent the proceeds to broker dealers and all kinds of people try, direct lending to, to banks and to, and to dealers to try to support financial markets. And that worked for, and there's no change in liabilities, you can see. That was just selling treasury bills and, and taking the proceeds and lending them out. Okay. But that wasn't enough. And after Lehman. And AIG collapsed in September of 2008, they went even, even farther. in order to lend to the market they actually expanded their own liabilities, they expanded their balance sheet on both sides. that was the original QE. [LAUGH] QE one for someone of a certain age, like me, okay, refers to an ocean liner, you know, the queen, the Queen Elizabeth. and I think maybe it was coined by the Financial Times, being a British paper. They, they have that sort of sense of humor. but so, you can see that the Fed's balance sheet basically doubled in a matter of weeks. and I was teaching money and banking actually during that, that semester. That was a lot of fun. and the and so, the asset side is increasing and the liability side is increasing. The first thing the Fed did was to make a lot of short-term, short-term loans. not only to domestic banks, but also to international banks. If you see the orange thing there, central bank liquidity swaps. That's $600 billion that was, that was lent to the European Central Bank, and Japanese Central Bank, and so forth, to help their banking systems. Because our problem was becoming a global, a global problem. that did calm things down a little bit, and you can see those lending facilities start to run off, about the turn of the year. And then there's that light green thing that grows there. That light green thing is mortgage-backed securities. The Fed started to buy mortgage-backed securities. It bought a trillion of them. that's QE two. When people refer to QE two, they refer to that, that's what they mean, that the Fed went into the market and actually bought mortgage backed securities. What the discussion is now, right, Feds expected QE move weighs on the dollar. It's, it's, it's the expectation of a possible QE three. And what they're imagining, the Fed was signaling at this, at this meeting in Jackson Hole a couple of weeks ago. some notion that the economy is softening and we have to do something. What are we going to do? And there was a, there was a lot of testing the waters about, well, we need to signal that we're going to keep interest rates low for much longer in order to keep the long-term interest rate on, interest rate down. So, their notion, remember I showed you the term structured of interest rates. It's all, you know, rates are pretty much zero now, pretty low at, at, [COUGH], at the at the short end here. And the Fed is where he is trying to get that long and down a little bit more, be even more easing an the question is how to do it, okay? One story they say is well, if we just tell the market that we're going to keep short rates low for a very, very long time, then, and they believe us, then long rates will fall. Okay. And that's operative through the expectations theory of the term structure, the notion that the long rates are just the expected average, and that somehow the Fed will, the, the population will believe us if only we say it loud enough. Okay. But another way you could try to lower these long rates is by entering into the market and buying long bonds and in fact probably you'll wind up doing both. But if you enter into the market and buy long bonds, okay, you're talking about that. Okay, about printing money in order to buy long bonds, expanding your balance sheet on, on, on both sides. That's why the market is all kind of excited at the moment, because if the Fed is entering to buy, that's going to push up prices. They say they want to push up prices and so that's a capital gain for anybody who owns, who owns long bonds. we'll see what the Fed decides to do. This, it's meeting right now and also tomorrow and the market is always is expecting, is acting in expectation of what the Fed is going to do. so, to be, to be continued, in later, in later, in later editions. I just wanted to give you some of the background, some of the language, for how to understand an article like this.
