Reserve Bank

Summary

This 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

• 🏦 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.
• 💼 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.
• 📈 Monetary policy involves a set of policies used by the Reserve Bank to manage the economy, which includes controlling inflation and interest rates.
• 💵 Government securities, also known as bonds or treasuries, are debt instruments issued by a government to raise funds and are considered low-risk investments.
• 🏠 Mortgage-based securities represent an ownership interest in a pool of mortgage loans, providing liquidity to the mortgage market.
• 🔄 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.
• 📉 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.
• 💹 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.
• 📊 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.
• 🌐 The US Federal Reserve System was created in response to financial crises to provide a more centralized and responsive approach to monetary policy.
• 🔑 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

00:00

🏛 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.

05:01

💼 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.

10:03

📘 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.

15:06

🏦 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.

20:06

📉 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.

25:08

💹 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.

30:09

📊 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.

35:11

🌐 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.

40:11

📈 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.

🏛️ 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.

Keywords

💡Reserve Bank

The Reserve Bank, also known as the central bank in some countries, is a financial institution that oversees the monetary system and implements monetary policy for a country or group of countries. It plays a crucial role in maintaining economic stability, controlling inflation, and fostering sustainable economic growth. In the video, the Reserve Bank's functions are discussed, such as being the 'bank of banks,' issuing currency, and acting as a lender of last resort.

💡Monetary Policy

Monetary policy refers to the actions and strategies of a central bank to control the supply of money and interest rates in an economy. The goal is to maintain economic stability and control inflation. In the video, it is mentioned that the Reserve Bank uses monetary policy to manage the economy, which includes setting discount rates and reserve requirements, and conducting open market operations.

💡Government Securities

Government securities, also known as government bonds or treasuries, are debt instruments issued by a government to raise funds. They represent a form of borrowing where the government promises to pay back the principal amount along with periodic interest payments. In the script, government securities are likened to loans by the government, which are considered low-risk investments because they are backed by the government's ability to generate taxes.

💡Mortgage-Based Securities

Mortgage-based securities (MBS) are financial instruments that represent an ownership interest in a pool of mortgage loans. These loans are bundled together, and the cash flow from the underlying mortgages is used to create securities that can be bought and sold in the financial market. The video script explains that MBS provide liquidity to the mortgage market by allowing financial institutions to sell mortgage loans to investors.

💡Fractional Reserve Banking

Fractional reserve banking is a system where banks are only required to hold a fraction of the money deposited by customers in reserve, and they can lend out the rest. This system allows banks to generate interest from loans and grow their money supply. The video script discusses how this system works and contrasts it with full reserve banking, where all deposits are held in reserve.

💡Full Reserve Banking

Full reserve banking is a system where banks are required to hold in reserve the full amount of customers' deposits. This approach is more conservative and less common than fractional reserve banking. The video script explains that under full reserve banking, banks make money by charging customers for the service of holding their deposits in reserve.

💡Discount Rate

The discount rate is the interest rate that the Reserve Bank charges when lending money to commercial banks. It is a tool used by the central bank to influence the supply of money and credit conditions in the economy. In the video, the discount rate is discussed as a means to control the economy by affecting the cost of borrowing for commercial banks.

💡Reserve Requirements

Reserve requirements refer to the minimum amount of funds that banks must hold in reserve, as determined by the central bank. This requirement affects how much money banks can lend out. The video script explains that the Reserve Bank can change reserve requirements to control the money supply and influence the economy.

💡Open Market Operations

Open market operations are 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. The video script describes how open market operations can be used to either inject money into the economy by purchasing securities or to reduce the money supply by selling them.

💡Quantitative Easing

Quantitative easing (QE) is a monetary policy tool used by central banks to stimulate the economy when traditional methods, such as lowering interest rates, have been ineffective. QE involves the central bank purchasing financial assets, such as government securities, to increase the supply of money and lower long-term interest rates. The video script explains that QE is used to encourage borrowing and spending, thereby stimulating economic activity.

💡Fiscal Policy

Fiscal policy refers to the use of government spending and taxation to influence the economy. It is a tool employed by the government to achieve macroeconomic objectives such as economic growth, employment, and price stability. In the video, fiscal policy is discussed in contrast to monetary policy, with the government using fiscal measures to either stimulate or cool down the economy.

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