Federal Reserve Chairman Ben Bernanke gave a speech at the London School of Economics today in which he outlined the measures the Federal Reserve was prepared to take in order to deal with the financial crisis. Of particular note, Bernanke indicated that the U.S. central bank would keep interest rates low and that it would buy mortgage-backed assets in order to increase its direct control over the interest rates borrowers actually see.
Bernanke also clarified his position on quantitative easing (QE), explaining that the Fed is more concerned about the asset side of the balance sheet than the BOJ (Bank of Japan) was when Japan engaged in quantitative easing. One could take this to mean that the Fed is engaging in both qualitative easing as well as quantitative easing. The Fed means to supply liquidity to the financial system and to buy poorer quality assets (i.e. Mortgage-Backed Securities instead of Treasury bonds), whereas the BOJ was merely supplying liquidity. Bernanke was careful to note that the Fed was taking a ‘haircut’ and receiving enhancements in its experiment with QE so as to prevent any impairment in the Fed’s balance sheet. However, I did not find this part of Bernanke’s talk particularly convincing.
Another interesting tidbit from the speech was Bernanke’s defense of Fannie Mae and Freddie Mac and their business conduct during the housing bubble. Bernanke does not feel their actions were reckless, nor does he believed they contributed negatively to the situation.
On the whole, Bernanke was refreshingly clear regarding both his intentions and his reasoning. Below are three videos of Bernanke’s speech on CNBC.