Reserve Bank
Summary
TLDRThis video script offers an in-depth exploration of the role of the Reserve Bank in economic control, contrasting it with fiscal policy. It delves into the bank's functions, the significance of government securities, and the impact of monetary policy tools like open market operations and quantitative easing. The script also discusses the US Federal Reserve's structure, the concept of fractional and full reserve banking, and the importance of maintaining economic stability and controlling inflation through various measures.
Takeaways
- π¦ The Reserve Bank's primary role is to oversee the monetary system and implement monetary policy for economic stability, controlling inflation, and fostering sustainable economic growth.
- πΌ Central banks are often referred to as the 'Bank of banks' and are responsible for distributing money and ensuring its proper flow within the country's economy.
- π Monetary policy involves a set of policies used by the Reserve Bank to manage the economy, which includes controlling inflation and interest rates.
- π΅ Government securities, also known as bonds or treasuries, are debt instruments issued by a government to raise funds and are considered low-risk investments.
- π Mortgage-based securities represent an ownership interest in a pool of mortgage loans, providing liquidity to the mortgage market.
- π Fractional Reserve Banking allows banks to lend out a portion of the deposits they receive, while Full Reserve Banking requires banks to keep the full amount deposited.
- π Open market operations involve the buying and selling of government securities by the Central Bank to influence the money supply, interest rates, and credit conditions in the economy.
- πΉ Quantitative Easing (QE) is a monetary policy tool used to stimulate the economy by increasing the supply of money and lowering long-term interest rates, often when traditional methods are ineffective.
- π Fiscal policy refers to the government's use of spending and taxation to influence the economy, with expansionary fiscal policy aiming to stimulate economic activity and contractionary fiscal policy aiming to cool it down.
- π The US Federal Reserve System was created in response to financial crises to provide a more centralized and responsive approach to monetary policy.
- π The independence of the Reserve Bank from political structures is crucial to ensure unbiased monetary policy decisions for the long-term benefit of the country.
Q & A
What is the primary role of a Reserve Bank or central bank in a country?
-A Reserve Bank or central bank has the primary role of overseeing the monetary system and implementing monetary policy for a country or a group of countries. It plays a crucial role in maintaining economic stability, controlling inflation, and fostering sustainable economic growth.
What is a government security and why are they considered low-risk investments?
-A government security, also known as government bonds or treasuries, is a debt instrument issued by a government to raise funds. They represent a form of borrowing where the government borrows money from investors in exchange for the promise to pay back the principal amount along with periodic interest payments. They are considered low-risk investments because they are backed by the government's ability to generate taxes.
Can you explain the concept of a mortgage-based security?
-A mortgage-based security is a financial instrument that represents an ownership interest in a pool of mortgage loans. These loans are typically bundled together, and the cash flow from the underlying mortgages is used to create securities that can be bought and sold in a financial market. They are a way of providing liquidity to the mortgage market by allowing financial institutions to sell mortgage loans to investors.
What is the difference between fractional reserve banking and full reserve banking?
-Fractional reserve banking is a system where banks only keep a fraction of the deposits as reserves and lend out the rest, generating income through interest on loans. Full reserve banking, on the other hand, requires banks to keep the entire amount of deposits as reserves and charge a fee for storing the money, which is their source of income. Full reserve banking is a more conservative approach and is rarely used.
Why was the Reserve Bank created?
-The Reserve Bank was created for several reasons, including the issuance and standardization of currency, maintaining financial stability, acting as a lender of last resort, implementing monetary policy, ensuring economic stability, financing the government, controlling inflation, managing foreign exchange, and maintaining independence from political pressures.
What was the Panic of 1907, and how did it lead to the creation of the US Federal Reserve System?
-The Panic of 1907, also known as the Banker's Panic, was a severe financial crisis in the United States characterized by bank runs, a sharp stock market decline, and a lack of effective response from the existing banking structure. This crisis highlighted the need for a more centralized and responsive system to manage financial panics, leading to the Federal Reserve Act of 1913, which established the Federal Reserve System as the central banking authority of the United States.
How does the Federal Reserve control the economy?
-The Federal Reserve controls the economy through various measures, including setting discount rates (the rate at which it lends money to commercial banks), adjusting reserve requirements, paying interest on excess reserves that banks keep, using forward guidance to communicate its policy intentions, and managing inflation and employment through its dual mandate.
What are open market operations, and how do they influence the economy?
-Open market operations refer to the buying and selling of government securities by a central bank in the open market. The primary objective is to influence the supply of money, interest rates, and credit conditions in the economy. When the central bank buys securities, it injects money into the system, decreasing interest rates and encouraging borrowing and spending. Conversely, when it sells securities, it reduces the money supply, increases interest rates, and can curb inflation.
What is quantitative easing, and how does it work?
-Quantitative easing is a monetary policy tool used by central banks to stimulate the economy when traditional methods like lowering interest rates are ineffective. It involves the central bank buying financial assets, such as government securities or mortgage-backed securities, in the open market to increase the supply of money and lower long-term interest rates, thereby encouraging borrowing and spending.
What is the difference between expansionary and contractionary monetary policy?
-Expansionary monetary policy aims to stimulate economic growth and employment by injecting more economic activity into the system, typically through lowering interest rates, open market operations, and lowering reserve requirements. Contractionary monetary policy, on the other hand, aims to curb inflation and cool down an overheating economy by raising interest rates, selling government securities, and raising reserve requirements.
What is fiscal policy, and how does it differ from monetary policy?
-Fiscal policy refers to the use of government spending and taxation to influence the economy. It is one of the primary tools employed by the government to achieve macroeconomic objectives such as economic growth, employment, price stability, and economic distribution. Fiscal policy can be expansionary, aiming to stimulate economic activity, or contractionary, aiming to cool it down. It differs from monetary policy, which is implemented by the central bank to control the money supply and manage interest rates.
Outlines
π Introduction to Economic Control Measures
The video begins with an introduction to economic control measures, focusing on the role of the Reserve Bank and other entities like government exploration in managing the economy. The speaker outlines the structure of the video, which includes definitions, explanations of the Reserve Bank's creation and functions, and a discussion on fiscal policy. The video promises to cover a range of topics, including government securities, mortgage-based securities, fractional and full reserve banking, and a comparison between the US and South African Reserve Banks.
πΌ Understanding Government Securities and Banking Systems
This paragraph delves into the concept of government securities, which are debt instruments issued by governments to raise funds, promising to pay back the principal along with interest. It contrasts this with mortgage-based securities, which are backed by a pool of mortgage loans. The speaker also explains fractional reserve banking, where banks only keep a fraction of deposits as reserves and lend out the rest, versus full reserve banking, where the entire deposit is reserved, and the bank charges a fee for this service.
π The Role and Functions of the Reserve Bank
The speaker explains the purpose of the Reserve Bank, also known as the central bank, which oversees the monetary system and implements monetary policy to maintain economic stability, control inflation, and foster growth. The paragraph covers the bank's functions, including monetary policy, currency issuance, acting as a banker to the government and commercial banks, and ensuring financial stability. It also touches on the importance of the Reserve Bank's independence from political structures.
π¦ The Creation and Structure of the US Federal Reserve Bank
The paragraph discusses the creation of the US Federal Reserve Bank in response to the financial crisis of 1907, which exposed the weaknesses in the US banking system. The Federal Reserve Act of 1913 established a centralized system to manage financial panics. The structure of the Federal Reserve System is outlined, including the roles of Congress, the Federal Open Market Committee (FOMC), the Board of Governors, the 12 Federal Reserve Banks, and various councils and advisory committees.
π Tools of the Federal Reserve: Discount Rates and Reserve Requirements
The speaker describes how the Federal Reserve uses discount rates, the interest rate at which it lends to commercial banks, and reserve requirements, the percentage of deposits banks must hold, to control the economy. The paragraph explains how adjusting these tools can influence the interest rates charged by banks and the amount of lending activity in the economy.
πΉ Open Market Operations and Quantitative Easing
This paragraph explores open market operations, where the Central Bank buys or sells government securities to influence the money supply, interest rates, and credit conditions. It also introduces quantitative easing, a policy tool used when traditional monetary policy becomes ineffective, involving the purchase of financial assets to increase the money supply and stimulate the economy.
π Advantages and Disadvantages of Open Market Operations and Quantitative Easing
The speaker discusses the advantages of open market operations, such as precision in monetary policy and flexibility, as well as the ability to send market signals. However, it also covers the potential disadvantages, including market distortions and dependency, where the effectiveness of these operations may be limited if market participants prefer liquidity over other options.
π The Impact of Quantitative Easing on the Economy
Quantitative easing is further explained as a means to stimulate economic activity, address deflationary pressures, and support asset prices. While it has benefits such as increasing long-term investment and potentially boosting economic growth, the paragraph also highlights the risks, including the potential for asset bubbles and exacerbating income inequality.
π Monetary Policy: Strategies for Economic Management
The final paragraph defines monetary policy as the strategies used by a central bank to control the money supply for price stability, employment opportunities, and economic growth. It differentiates between expansionary and contractionary monetary policy, detailing the tools used in each to either stimulate or cool down the economy, and provides examples of their implementation.
ποΈ Fiscal Policy: Government's Role in Economic Influence
The video concludes with a brief overview of fiscal policy, which involves government spending and taxation to influence the economy. The speaker contrasts expansionary fiscal policy, aimed at stimulating economic activity, with contractionary fiscal policy, intended to cool down an overheating economy. Advantages and disadvantages of both approaches are mentioned, along with examples of their application.
Mindmap
Keywords
π‘Reserve Bank
π‘Monetary Policy
π‘Government Securities
π‘Mortgage-Based Securities
π‘Fractional Reserve Banking
π‘Full Reserve Banking
π‘Discount Rate
π‘Reserve Requirements
π‘Open Market Operations
π‘Quantitative Easing
π‘Fiscal Policy
Highlights
The Reserve Bank's role in controlling the economy through various measures.
Economic control mechanisms outside of the Reserve Bank, including government exploration.
Definitions of government securities, also known as bonds or treasuries, as debt instruments issued by governments.
Explanation of mortgage-based securities as financial instruments representing ownership in a pool of mortgage loans.
The concept of fractional reserve banking where banks only reserve a fraction of deposits and lend the rest.
Full reserve banking as a more conservative approach where banks reserve the entire deposit amount.
The central bank's function as the 'Bank of banks', controlling the economy and money distribution.
The South African Reserve Bank's structure and functions, including its independence from political structures.
The creation of the US Federal Reserve Bank in response to the Panic of 1907 to manage financial panics.
The Federal Reserve's decentralized system of regional banks overseen by a central Board of Governors.
How the Federal Reserve controls the economy through discount rates, reserve requirements, and interest on excess reserves.
The dual mandate of the Federal Reserve to achieve maximum sustainable employment and stable prices.
Open market operations as a tool for influencing money supply, interest rates, and credit conditions.
Quantitative easing as a policy tool used when traditional monetary policy becomes ineffective.
Monetary policy strategies for controlling the economy, including expansionary and contractionary approaches.
Fiscal policy as the government's use of spending and taxation to influence the economy.
Advantages and disadvantages of expansionary and contractionary fiscal policies with real-world examples.
Transcripts
all right uh welcome back everyone to
kzn training and today in economics
we're going to be discussing the Reserve
Bank and the different measures it takes
to control the economy we're going to be
looking at economic control outside of
the Reserve Bank as well so looking at
things like government's exploration and
how they control the
economy in terms of what to expect from
today so I'm going to give you a couple
of definitions that I want you guys to
understand it's not going to be a
particular long video despite the fact
that it's 10 uh topics deep so we're
going to go through some definitions I'm
going to explain to you what the Reserve
Bank is we're going to talk about why it
was created we're going to look at the
US system of the Reserve Bank we're
going to look at the South African
Reserve Bank and then of course the
measures it uses to control the economy
then lastly we're going to have a short
discussion about fiscal policy um before
we leave and I know that you guys are
already thinking where's the discussion
about inflation hyper inflation
deflation we're going to have that con
conversation in the next video I may
touch on it a little bit here as
well but yes let's get into the
definitions that we need to cover so the
first thing we're going to need to
understand is what a government security
is so I'm going to read the screen then
I'm going to try simplify it for you so
a government security also known as
government bonds or treasuries are debt
instruments issued by a government to
raise funds these Securities represent a
form of borrowing where the government
ESS borrows money from investors in
exchange for the promise to pay back the
principal amount uh along with periodic
interest payments over a specific period
government securities are considered
lowrisk Investments because they are
backed by the government's ability to
generate taxes if you don't already uh
know at present what government
securities are based on what I've just
read so essentially it is and and I want
you to think of it as simply as this
even though there's a lot more
complexities to it it it's essentially a
loan by the government so the the
government asks the private sector or
individuals in the private sector for a
loan and that
loan is low risk because the government
always uh takes taxes and they can
probably pay it back they don't just pay
back the principal amount they pay back
the principal amount along with
interests so for the purposes of
discussions I want you guys to
understand the government security as
that
then a mortgage-based
security we will consider to think of
Securities like a loan right um a
mortgage-based security is the same
conversation as a loan but this time
around the system that's used to pay it
back is the collective mortgages of
multiple people so let's read what the
definition says mortgage-based
Securities are financial instruments
that represent an ownership interest in
a pool of mortgage loans these loans are
typically bundled together and the cash
flow from the underlying mortgages is
used to create Securities that can be
bought and sold in a financial Market uh
MBs are often issued by guaranteed are
issued and guaranteed by government
sponsored Enterprises like Fanny May and
Freddy Mack or by private institutions
they are a way of providing liquidity to
the mortgage Market by allowing
financial institutions to sell mortgage
loans to investors so essentially we're
going to think about it as a loan a loan
system where the system to pay back the
loan is via a bunch of mortgages so the
mortgages are the security for the loan
that's a mortgage based security then
we're going to look at two terms and
these terms are not going to feature at
all in the presentation but it's
important that you understand what they
mean and how they operate in order for
you to understand the concept of the
presentation so the first one is
fractional Reserve Banking and the
second one is full Reserve banking so
not going to read the whole thing you
guys can read what what it means and
then you can you know come back and
reach your own conclusions but basically
basically what fractional Reserve
banking is is the idea that when you
take your money to the bank they
don't save all of that money when your
account says that you have 1,000 you've
deposited 1,000 Rand they don't really
have that entire 1,000 that you've given
them generally speaking they'll take a
small percentage of that and they will
reserve it so realistically they will
only take a small amount and you'll have
access to that the rest of that money is
money that they lend out to other people
so they give other people loans and in
exchange for giving them loans they get
an interest on those loans so they make
that money by being able to use your
money to get more money from people via
uh generating interest from those loans
so fractional Reserve banking means you
deposit an amount they take a fraction
of that amount they put it into an
account the rest of the amount is used
by the bank either as loans or for other
Financial activities that are intended
to grow the amount of money that the
bank has then there is full Reserve
banking full Reserve banking is when
Banks take the entire amount that you've
invested with them and they just reserve
it but you have to pay a specific amount
for them to reserve the money for you
this specific amount is how the bank
would then make their money it's a much
more conservative approach very few
Banks use this method uh of banking so
that's the difference between the two
we're going to have a conversation a bit
later about how these uh systems come
into
play now let's talk about what a Reserve
Bank is or otherwise referred to as a
central bank so a central bank also
known as a Reserve Bank in some
countries is a financial institution
that has a primary role in overseeing
the monetary system uh and implementing
monetary policy for a country and a
group of countries central banks play a
crucial role in maintaining economic
stability controlling inflation and
fostering sustainable economic growth
so and again when you come back to this
page after you've gone over the whole
definition a lot of things are going to
make more sense to you what monetary
policy is is going to make a lot more
sense to you what the The Reserve Bank
and the role that it plays in economic
stability is going to make a lot of
sense to you but right now what I want
you to think of the Reserve Bank or
central banks is is that it is the Bank
of banks it is the main bank that
distributes money um that controls the
economy and that is basically in charge
of making sure sure that money is going
well in the country we're going to look
at its functions in a second and we're
going to look at tools as to how it does
this uh and yes for no particular reason
there's a bunch of Dragon Ball Z imagery
uh interwoven into money in The Reserve
Bank in this presentation I don't know
whose fault it is whoever it is you
should punish them
dearly so let's look at the functions of
the Reserve Bank here so the first one
is with respect to monetary policy
monetary policy is basically and we'll
go over this in detail as well but it's
basically when the Reserve Bank creates
a set of policies to monitor the economy
and make sure that the economy is
staying afloat so monetary policy I want
you to think of it as the systems that
the Reserve Bank uses in order to manage
the um economy of a particular
country then the second function is
currency issuance so prior to the
existence of central banks and The
Reserve Bank there were a bunch of
private banks that used to issue their
own notes and there'd be a lot of like
inconsistency thereof so this time
around when there's a central bank it's
the bank that issues the currency and
kind of works on what the universal
value of what that currency is as
opposed to different banks operating on
their own ideas and own Notions then
there the third role is that it plays
the role of the banker to the government
so in the same way that you have your
bank uh I don't know you're on capit
Tech FNB whatever uh that is your Banker
the government Banker is the Reserve
Bank right and then the fourth purpose
that it plays is that it's the banker of
commercial Banks so the Central Bank
lends money to commercial Banks IT
issues commercial Banks your commercial
banks are your FNB
uh capex all of those guys that you bank
with those are your commercial Banks you
know who they bank with they bank with
the central bank so that's essentially
another role that the Reserve Bank plays
and then the fourth one is financial
stability so this is um where central
banks they monitor and they promote the
stability of the financial system which
I think to some degree we've already
spoken about another really important
thing that I want you guys to think
about here is that in each country well
should be but most countries the C bank
is meant to operate independently from
political structures so in South Africa
the uh sub which is the South African
Reserve Bank is an independent
institution that is not at all riant on
the politics of the government and it
shouldn't have any government officials
that mingle in it essentially but we're
going to have a slide conversation
through just little bits of shade as to
why that's not always true and why
that's not always the
case so let's get into why the Reserve
Bank was created firstly it's the
issuing of currency and the
standardization so that um many private
banks that are out there are not issuing
their own notes and people are not
operating under their own guises there's
a centralized system of issuing money
and there's a centralized valuation of a
currency right secondly it's Financial
stability which we've already spoken
about when we look at the various roles
thirdly is that It's A lender of L
Resorts so what we mean by this is that
when the banks your commercial banks are
experiencing an issue or if they're down
and out they're down bad uh the
government's not doing anything
nothing's happening The Reserve Bank is
the last resort where they will lend
that bank money to make sure that the
economy doesn't tank or to make sure
that crucial economic players don't just
break down because remember the Reserve
Bank is interested in maintaining the
quality of the economy fourthly it's
through things that we've already spoken
about which is monetary
policy which means the actions that the
Reserve Bank takes in order to make sure
that the economy remains at a good place
and as well as economic stability which
both are otherwise the same thing that's
those were the reasons why it was
created more of them um firstly it was
to finance the government which we've
already spoken about it because it's uh
the bank of the government essentially
secondly it was to control inflation uh
again which we'll discuss a bit later
but it's to control the rates of
inflation cuz the one thing we don't
want is
hyperinflation that is when essentially
everything becomes valueless I want you
to think of it like that for now until
we discuss um exactly what
hyperinflation means and what it looks
like the third one is foreign exchange
and management so here central banks may
be responsible for managing the
country's foreign exchange reserves uh
and intervening in currency markets to
stabilize the nation's uh currency
currencies value so the scope of work
for the Reserve Bank is not only in
maintaining do domestic economic
activity but also International
intervention if necessary to make sure
that the currency is operating at the
level it should be operating at then the
fourth one is independence from
political pressures which we've already
discussed right to say that we don't
want them to be influenced by the
politics of the of the nation and the
economic approach that you know
particular political parties want to
take uh because often those are very
shortsighted and they're dependent on
their own incentives as opposed to the
long-term uh benefit of the
country cool now we're going to do a bit
of Exploration with respect to the US
Federal Reserve Bank and how it was
created so in the Panic of
1907 uh also known as the Banker's Panic
was a severe financial crisis that
highlighted the weaknesses in the US's
banking system the Panic was
characterized by Bank runs a sharp shock
uh a Sharp stock market decline and the
lack of effective response to the
existing banking structure the crisis
underscored the need for a more
centralized and responsive system to
manage Financial panics let's look at
what this financial Panic actually was
right so during the time one of the
Banks essentially fell and by fell I
mean it was no longer operational and it
failed because a bank is a business
right sometimes businesses fail
particularly business that do
probability based banking which is what
all of your Banks do uh for being honest
but yeah businesses fail sometimes when
they're in that space so that is what
underscored that Panic one of the banks
essentially failed and because people
saw that this one Bank failed failed
everyone was rushing to withdraw their
money that they had in reserves now
remember we spoke earlier about the fact
that Banks use fractional Reserve
banking which means that if you put in a
billion you don't actually have a
billion in your account most of it
probably went to someone else or some
other people so if everyone were to rush
and withdraw from the banks at once and
if that's what people want to do then
that's going to be a problem for the
bank because the bank doesn't really
have all of that money
so because of that Panic most of the
banks were faltering what was the
response to that uh an unnecessarily
wealthy individual by the name of JP
Morgan was able to lend out some money
to the banks so that they had more
reserves and that they could pay out
people so that was meant to fix the
problem um and and see see the issue
with this is that in order for it to
work it relies on very wealthy people
being invested to do things like this
and it concentrates power in the
incredibly wealthy group in society so
people came together and they realized
no we need a more centralized system
that is going to help us when we are in
conditions and situations like this as
opposed to relying on Wealthy
financiers so that is what led to the
Federal Reserve Act of
1913 uh that established a Federal
Reserve System as the Central Banking
authority of the United States
it created a decentralized system of
regional banks overseen by a central uh
Board of Governors to provide a more
flexible and responsive approach to
monetary policy basically the Federal
Reserve Act was like we need a Reserve
Bank in order to make sure that we're
not continuously experiencing the
problems here in short that's basically
what it
is look at how the US Federal Reserve
Bank operates uh as well as its just
general structure so the US Federal
Reserve Bank has Congress which oversees
the federal systems its entities and
make sure that it's working fine which
is why like the entire idea of a uh a
central bank or a Federal Reserve Bank
without political involvement is not
necessarily as true as people make it
out to be particularly because some
members of this federal system are
elected by the government by uh the
president so uh not not entirely A
system that is devoid of politics but oh
well so it consists of Congress which
oversees the entire system and then
there's the uh Federal Open Market
Committee uh otherwise known as Pharmacy
uh and the fomc is the body that is
responsible for making decisions about
monetary policy in the United States it
includes the seven members of the Board
of Governors and the president of the 12
federal reserve banks because remember
America doesn't just have one Central
Reserve Bank it has a bunch of federal
reserve banks that are distributed
across the country and then there's a
central Board of Governors that's meant
to govern over all of the different
reserve banks that are in the different
states uh yeah and then the fomc meets
regularly to assess economic conditions
and determine the appropriate monetary
policy
stuns other than that there's also the
Board of Governors now the Board of
Governors is the main governing body for
the Federal Reserve System it's located
in Washington DC and consists of seven
members appointed by the president of
the United States which is a
conversation we were just having um and
it's confirmed by the Senate right so
Governors uh serve a staggered 14-year
term which is insane to ensure
continuity and Independence the chairman
and vice chairman of the board are
appointed from am the among sitting
Governors and uh serve a four-year term
that's basically how the Board of
Governors uh operates
then there is the Federal Reserve Bank
so the Federal Reserve Banks is divided
into 12 Regional Banks and each serves a
specific District these federal reserve
banks are located in major cities across
the United States including New York San
Francisco Chicago and a bunch of other
cities and each Regional Bank is
responsible for carrying out the Federal
Reserves functions within its districts
such as conducting monetary policy
supervising and regulating uh the banks
and providing Finance cial Services uh
to depositary
institutions and there are other like
smaller councils as well such as the
advisory Council there's the federal
advisory Council which comprises of
representatives from each of the 12
Federal Reserve District uh and the FC
meets I think like four times a year
then there's the consumer advisory
Council this Council uh advises the
board on issues related to Consumer
Financial Services and then I think
there's also the community depositary
institutions advisory Council that
represents the interest of smaller
financial institutions and provides uh
input on their economic conditions oh
also let's not forget the member banks
so National Banks and state chartered
banks that choose to become uh members
of the Federal Reserve System are also
known as member banks and the me member
banks hold stocks the uh in their
respective regions uh in the Federal
Reserve System essentially and they
elect six uh of the nine members of each
Regional bank's board of directors so
member banks receive certain benefits
such as access to Federal Reserve uh
services and influences over the
governance of the regional Banks so
that's basically the structure and how
it operates but you don't need all of
the details I just gave you like if you
just understand what's going on in this
diagram then I think you should
otherwise be perfectly
fine
then if we want to look at the South
African Reserve Bank so it has a
slightly different structure so there is
a board of directors it's governed by a
board of directors which is responsible
for the management and administration of
the bank then there is the governor
which is the highest ranking official um
and it's responsible for the direction
and management of the bank there are a
bunch of Deputy Governors as well um and
then there's also the monetary policy
committee there's also the presedential
Authority as well as the financial
stability committee and the currency uh
management so you guys can go through
what each of these are um and what they
stand for I don't think it's too complex
to understand cool and then we want to
have a conversation and this is where
like I think it becomes more contentious
and more debate Orient orientated which
is the idea of how does the FED control
the economy so the first one is through
discount rates so essentially what
discount rates are is the rate at which
the Reserve Bank lends money to
commercial Banks right so the interest
rate that the Reserve Bank will apply on
the money that they give to Commercial
Bank is what we refer to as the discount
rate so it could either increase the
discount rate and obviously if it's
giving uh or if it's lending money to
reserve banks at an increased rate no I
mean if the Reserve Bank is lending
money to commercial banks at an
increased rate that obvious ly means
that the interest that banks are going
to charge is going to be higher
similarly if they are lowering the
amount of whatchamacallit it if they are
lowering their discount rate then that
means lower interest rates that the bank
is going to charge for Consumer loans so
that's that and then it's reserve and
then the second one is reserve
requirements so reserve requirements
referred to remember when we were
speaking about full Reserve Banking and
fractional Reserve banking so the
fraction that the bank needs to Reser
Reserve is often determined by the
Federal Reserve Bank so if it wants to
increase the reserve requirements to say
that you should maybe save 20 to 30% of
what you are being given by the person
then it can do that so it can change the
reserve requirements and we're going to
look at the conditions and the reasons
why it either increases it or dis or uh
decreases it the third one is that it
pays uh a interest rate on the excess
reserves that Banks keep so the excess
uh so the there's the reserve
requirement which is the minimum that
Banks need to keep then if banks decide
to keep extra or the excess reserves
that they keep there's an interest
that's paid by the FED based on uh that
and then by adjusting the interest rate
on excess reserves the FED can influence
the incentive for banks to either lend
or hold more reserves and obviously we
can look into why would want to do
either of those things then there's
forward guidance this is where the The
Reserve Bank essentially communicates
its policy and what it wants to do with
the commercial Banks and the rest of the
players so that they are aware of how
they are me to operate as well to make
sure that they are in line with the
policies of The Reserve Bank then
there's managing inflation and
employment so the FED has a dual Mandate
of achieving maximum sustainable
employment and stable prices um and it
does it aims to keep inflation at a
Target rate and make adjustments to
monetary policy so foster employment and
economic growth remember inflation isn't
always a bad thing right the one thing
we hate is hyperinflation because it
means that our currency ultimately
becomes valueless to some regards uh
when hyperinflation reaches uh horrible
blit let's say that so these are a few
ways that the Federal Reserve uh
controls the economy we're going to look
at two other ways really soon we're
going to look at open market uh
operations and we're also going to look
at um what is it quantitive easing
quantitative easing sorry all right open
market operations refer to the buying
and selling of government securities by
a Central Bank in the open market
remember we already spoke about what
government securities are they are loans
that are uh bagged up by taxes right
so it's the government saying we want a
loan but we're going to pay it back via
taxes that's what a government security
is so the primary objective of an open
market operation is to influence the
supply of money interest rates uh and
credit conditions in the economy right
so you can either buy Securities when
they buy Securities that's when the
Central Bank buys the government
Security in the open market so this is
in injecting money into the system uh
basically they the I think the simple
way I want to explain it is that the
government puts out a hit they're like
hey we need a loan so that is a
government-based security the Federal
Reserve is now going to buy that by buy
that we mean they're going to give that
loan and then after giving that loan um
they're injecting money into the economy
by giving them that loan and then the
government would have to pay back later
with an interest rate of course where
are they getting this money that they're
injecting into the loan sometimes they
are very much just creating it they are
pulling it from an invisible Place uh to
give so yes that's a real thing yeah
then selling securities is when the
Central Bank sells government securities
so the Securities the I use from the
government it takes them and it sells
them to the private sector it says hey
you guys can give this this money so
when it sells these Securities that's
meant to decrease the amount of money in
circulation it's usually used to curb
inflation in some cases all right then
we can discuss how it impacts interest
rates so the buying and selling of
Securities affects the supply and demand
of money in the financial system which
is something that we already spoke about
right so obviously the more money that
is available the increase the supply of
money then obviously that will affect
the interest rates in which people will
be buying and selling for there's a
decrease that will also if there's a
decrease in the amount of money that
will also affect the in interest rates
so when the Central Bank buys Securities
it increases the supply of money and
puts a downward pressure on shortterm
interest rates right so when it's
putting money into the economy that is
decreasing the interest rate conversely
when it sells securities it reduces the
supply of money and this leads to an
upward pressure on interest rates so
when it buys Securities there's an
increase in the interest rate right then
it also influences economic activities
it's very intuitive because remember we
just spoke about
how it influences interest rates and
interest rates increase the amount of
lending that happens in the economy when
people are able to get loans then people
are able to buy more things when people
pay back those loans again it's
circulation of money in the economy so
interest rates are very valuable towards
that entire process and they are
instrumental in implementing uh monetary
policy so the way that they're
instrumental in implementing monetary
policy is that it's not just the
government it's not just the Central
Bank saying hey we're going to do we're
going to change our interest our
discount rates in hopes that they'll
have the impact that we want no they are
strategically and directly buying
government securities that will yield
the kind of impact that they want so
they are participating in the economy
that they want to change which is very
valuable for uh monetary uh
policy so let's look at some ad
advantages so firstly there's it's more
precise in creating its monetary policy
we've already discussed that and then
there's greater
flexibility so because it's
participating in the economy by buying
these um what youall it by buying these
government securities then it's able to
adjust and be flexible in real time
because it is the act that is directly
participating in the process as opposed
to being as opposed to being passive
like when it changes discount rates
right um and then of course Market
signal you can also read up what that's
about um because it it's able to clearly
communicate its intentions in the
economy uh through the stocks that it
buys so economic players are able ble to
understand the reasons around it and
they're also able to adjust in order to
make sure that they are cooperating with
the monetary policy of The Reserve Bank
disadvantages is potential for market
distortions
so persistently buying government
securities can reduce the amount that
they yield which would affect market
pricing then we can chat about Market
dependency as well so in in cases like
this right if the market is under a lot
of stress open market policies may have
a limited impact if the market
participants have a strong preferability
towards liquidity so that is to say if
people simply are not complying with the
open market operations that won't change
the problems that exist so open market
operations may not always be effective
in creating the impact that they want
and also they can have a otherwise
negative or positive impact on uh on the
on the exchange rate depending on the
scale at which they're implemented as
well all right now we're going to
discuss quantitive quantitative easing
which should be easy to
understand based on the things that
we've already discussed so quantitative
easing is a monetary policy tool that is
used by central banks to stimulate the
economy when lowering interest rates and
everything else has been ineffective so
quantitive uh quantitative easing
involves central banks buying Financial
assets so these are government
securities like we spoke about um but
sometimes mortgage backed Securities as
well or any Securities that are
available in the open market essentially
so with the aim of increasing Supply the
supply of money uh and lowering
long-term interest rates by encouraging
borrowing and spending so what do we
mean by this so you put out an IOU there
which is what we said a security is for
now right you put it out out there and
what happens after that is the Reserve
Bank buys that IOU by buying it I mean
they finance it they give you that money
where are they getting that money from
absolutely nowhere sometimes they are
literally pulling that money from an
invisible place and pumping it into the
economy remember they are the guys that
print money and put it out they want to
do that and they can so the purpose of
this is to increase the amount of money
or increase the monetary flow within the
country at that time so that's why they
would um implement this process of Quant
of quantitative easing uh or you can
call it QE if you don't want to keep
saying it the way I'm saying it so it it
in the long term it lowers the interest
rates because remember when we have more
money in our economy the interest rate
is lower when we have less money in our
economy the interest rates is higher so
QE pumps money into the economy lowers
our interest rates
cool and then how it works very simple
they purchase the assets and purchasing
assets means more money in the economy
which means increase reserves
essentially so there's more money that
the banks can keep on hand which as a
consequence just like we spoke about low
is the inter the interest rate and
remember when the interest rate is lower
you're going to think hm not that bad I
can afford to take this loan because I
can pay it back so by encouraging
lending and spending in that way it also
affects the price of things and also
leads to inflation um in majority of
cases where it's been used actually so
the advantages of quantitive
quantitative easing is that it
stimulates economic activity like we
already spoke about IT addresses uh defl
deflationary pressures so if there's
deflation that's happening uh then
quantitative easing is what to implement
because it
essentially in it it contributes to
inflation right and remember none of
these things are bad in isolation we as
so long as they are used to maintain an
equilibrium in the economy that is
important hyperinflation is where we
start having an issue with it then uh
it's has the added advantage of
supporting asset prices so Quant uh QE
leads to the asset prices essentially
increasing right and then it like we
already said positive of increasing long
of U managing interest rates in the long
term it decreases them in the long term
I believe disadvantages are also really
really there so there's the risk of
creating an asset bubble um which is
basically it can contribute to inflating
asset prices potentially leading to the
formation of asset bubbles this poses
risk to financial stability as the
subsequent bursting bubbles could have a
negative effect
uh on the economy in its entirety this
is very similar to the discussion I've
already had with you guys with respect
to the
inflationary effect that it has
sometimes it's to an extent that is
harmful so it it leads to an increase in
the price of assets which is another
conversation about income inequality
because people who don't hold assets and
wealth don't benefit from the system at
all and it just makes the rich richer
sometimes and if it's applied in the
wrong conditions it can be ineffective
or it can have very little Effectiveness
here we can talk about the converse
measure to Quant quantitative easing
which is quantitative tightening so as
opposed to the government putting out or
as opposed to The Reserve Bank buying
money well no that's weird not buying
money sorry as opposed to The Reserve
Bank buying uh government back or
morgage government Securities or
mortgage backed Securities in this case
it would sell them so it would require
private assets and private people to put
money back into its system by selling
these Securities right so when it does
this it decreases the amount of monetary
flow in the economy and by decreasing
that monetary flow it combat uh factors
that could lead to
hyperinflation all right and then
monetary policy let's finally discuss it
so monetary policy refers to the
strategies that a country's Central Bank
or the monetary Authority uses to
control and manage the money supply
within the uh economy right we've
already discussed this so the primary
objectives of monetary policy include
price stability uh in and obviously
creating better employment opportunities
and and creating more economic growth so
central banks use various tools and
instruments to Implement monetary policy
we've already spoken about a lot of
these there are two types of monetary
policy so there's expansionary monetary
policy with expansionary monetary policy
the objective is to uh stimulate
economic growth and employment
particularly during economic downturns
or recession sorry about the caruse that
you're hearing in the background or
everything else that you might have
heard I don't know whatever but its main
purpose is to inject more economic
activity or to create more economic
activity what other tools that we've
spoken about that fall under
expansionary monetary policy lowering
interest rates because remember again
lowering an interest rate means that or
lowering the discount rate from the bank
means that the bank is able to lower its
interest rates which means you're going
to go hm not bad I can afford to take a
loan you taking a loan means you can buy
from other businesses and money will
just circulate better if the banks just
lower their discount rate then open
market Market policies which we've
already discussed and then lowering the
reserve requirements so decreasing the
amount of money that that the bank needs
to keep as reserves when they decrease
this amount of money it allows them to
do more Landing because they have more
money that's available to lend that's
expansionary monetary policy
contractionary monetary policy on the
other hand has the goal of curbing
inflation and cooling down and
overheating economy so when the economy
is doing too much it intends to slow
down uh the rate of it so it does this
through raising the interest rates cuz
remember when it's raising its discount
rate it's going to lend to you or the or
the banks the commercial banks are going
to lend to you at a higher interest rate
which means you're less likely to get a
loan and you're more likely to save
which means that we're going to decrease
the economic activity which is necessary
in inflation uh through open market
policies it's going to sell government
securities when it's selling government
security
that means that the private sector is
going to be using its money to
essentially give to the Reserve Bank
which will decrease the amount of money
that will be in circulation which is
necessary when we get into a
hyperinflation environment because the
Rand or the currency becomes virtually
useless because there's just too much of
it when we decrease its abundance then
we start increasing its value same chat
why diamonds are so valuable right
because it's seen as something that
that's rare and precious and then by
raising the reserve requirements again
we're decreasing the amount of money
that's in circulation by keeping most of
the money in the bank this contracts the
economy that's contractionary monetary
policy here are a couple of examples of
when expansionary monetary uh policy has
been implemented you can look into them
uh yeah I think they're very simple
self-explanatory I try to summarize them
as well as I can here are more examples
for you
cool and then let's talk about fiscal
policy for a second now we're moving
away from the um Whatchamacallit
The Reserve Bank and we're talking more
about the government now so fiscal
policy refers to when the government uh
or the use of the government spending
and Taxation to influence the economy so
this is so think about it like this
monetary policy is when the Reserve Bank
is influencing their economy fiscal
policy is when the government is
influencing the economy so it's one of
the primary tools that the government
employed to achieve macroeconomic
objectives such as economic growth uh
employment price stability and economic
distribution so um fiscal policy can be
expansionary or contractionary depending
on whether the government aims to
stimulate economic activity or cool it
down we've already um discussed uh
essentially what this looks like so here
we're looking at what the government
would do if it was doing expansionary or
contractionary um what is it uh fiscal
policy so if it was doing uh
expansionary fiscal policy it would
increase government spending so doing
things like providing more public goods
infrastructure stimulus packages all of
that stuff if it wants to decrease or oh
yes providing tax cuts as well so that
there's more money in circulation so if
it wants to decrease or cool down the
economy it would use contractionary
fiscal policy this would include
reducing the amount of government
spending uh and of course uh increasing
the amount of taxes so they are like
antagonistic essentially in how they uh
operate so
yeah then from there there are some
advantages to expansionary fiscal policy
uh which you can just Breeze through
here as well you can read them I don't
think that they're very complicated uh I
think if you understand this the system
and how I explained it you would very
very much understand their advantages
and disadvantages of it with relative
ease then there are the advantages and
disadvantages of contractionary fiscal
policy same charts there in terms of the
ease um in terms of how they
operate then I gave some examples of
where of where expansionary fiscal
policy has been applied so the United
States used it um both in Co when they
created the stimulus package and after
the recession from 2007 to 2009 uh and
it had some interesting ideas Euro Zone
countries I've also tried them you can
look at them the reason why I'm putting
these examples here is so that you guys
have access to examples in the case
where you encounter a debate where this
is necessary which is very
likely all right then there is the
applications of expansionary fiscal
policy again I gave you the example of
China um and when they have used it yeah
so read through it as well and I think
it'll be simple to understand I'm not
going to waste any more of your time so
thank you very much for paying attention
to this lecture and I hope it's been
beneficial to you please feel free to
send me messages and ask me questions
and everything in between cool have a
great day
guys
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