Fiscal and Monetary Policy explained

hi it's Patti her shop marketplace and today I want to talk about the difference between fiscal policy and monetary policy it seems to be a bit of confusion here people conflate the two people also conflate the roles of the Treasury and the Fed and Congress let's see if we can sort the sight straight explainer no analogies just to just a bats ma'am okay so first we have fiscal policy okay and fiscal policy is what the government does okay to continue to work on the economy and essentially it's got three main tools that it can use taxes spending and then if it has any shortfall their debt which is of course the issue of government debt and the agent of the government's fiscal policy is a course our good friend Tim Geithner there he is mr. G okay he is of course the secretary of the Treasury all right so that's fiscal policy all right that is the use of taxes spending and debt to control or influence the state of the economy so what's monetary policy okay monetary policy is also used by the government but it is used by a certain branch of the government which isn't really a branch of the government little bit confusing what I'm talking about is of course the Federal Reserve otherwise known as the Fed headed by our big man of course a good friend I'm call Ben Bernanke because of his beard okay mister be the chairman of the Fed all right so here's the thing about the Fed all right the Chairman and the twelve governors of the Federal Reserve were appointed by Congress and the Federal Reserve itself okay is overseen by Congress but the Federal Reserve is much more independent it's not a branch of government like the Treasury is it's very independent it could use all of the tools that it has as it likes in order has to do is just check in with Congress every now and again and you've seen Ben Bernanke sitting on the hill talking to them so what does the Fed got in its toolbox to influence the economy in so-called monetary policy it's got a number of things I'm just going to run through them the first thing is interest rates okay we've all heard about things you know if they have a target rate they want banks to lend at a certain rate that can influence how much money goes in and out of the banks the next thing is the money supply also called us which is influenced by what's called open market operations okay so open market operations and what that is that's when the Fed goes out and it buys debt buyers Treasuries from the banks but more Treasuries that it buys the more money that goes into the banks and them but the banks will presumably lend the next thing is the use of the discount window okay the discount window is where the banks go to borrow from the Federal Reserve and depending on what the rate is and the discount window the banks will be able to borrow more or less you know and again hopefully be able to lend out more or lend out less depending on whether rate is the next thing is the currency peg which they could use which doesn't happen often that's when the you know the Fed might say well we're gonna peg our currency to another currency I mean that's that's kind of like way out of way out there but it is true that other organ countries do occasionally use currency pegs and in fact Switzerland was considering doing it it was like on the agenda of consideration whenever they were worried about protecting the Swiss franc although you know that that obviously didn't happen the next thing is reserve requirements okay so reserve requirements that's when the Fed requires the banks to park certain amount of money at the Fed so it gets a bunch of their assets a bunch of their said their cash or Treasury bonds and they Park them at the Fed and what that does is it forces them you know to put a certain extra amount of money aside and then it means they can't lend that money out so that's another way of slowing down the economy or if if they cut the reserve requirement it would mean more money going into the banks have more money to lend so more money going out into the economy so that's another way that the Fed can influence those and can influence the banks to to get money into the system so those are the usual ways that the Fed would use monetary policy now there were the unusual ways the first unusual way is quantitative easing so-called QE you've done a why put on this before this isn't a nun this is whenever interest rates are at zero which they are now and that's when the Fed will buy pretty much anything vast amounts of Treasury bonds in order to get money into the system it is in an emergency situation which is what of course where we are right now and that said a lot of people call this printing money because essentially all the Fed has to do is buy Treasury bonds and then just credit the account of the banks that's essentially making money out of thin air just one thing about printing money by the way the Fed prints money actually through monetary policy but the actual people who print money either mint actually controlled by the Treasury so that's kind of a weird thing that people get mixed up anyway the final unconventional method of monetary policy is called signaling okay and that is when the the Federal Reserve signals that Reserve that rates are going to be a certain level for a certain period of time and we've heard that this has happened recently when the Fed said it's going to remain or it's going to keep interest rates at zero for the next couple of years and that signaling allows banks then to to say okay we're going to be safe for now we can we can lend money into the system so of course what we have now is with the Fed has exhausted all of the options that it has pretty much in monetary policy okay so much so whether it's into these unconventional methods which means it's now passed the buck right back to the government again and we're into the year into the realm of fiscal policy in order to influence the economy of course this is a big problem because that means that politicians have to get together whereas the Fed can pretty much do what it wants anytime it wants that whenever we have fiscal policy it's politicians have to decide what to do in order to give mr. Geithner at the 2nd to Treasury secretary the power to act which means they have to agree on how much to tax how much to spend and how much to borrow and they can't which is what's leaving all of us at the end of pretty much every day very badly needing a drink

Channel: Marketplace APM

Views: 170,954

Keywords: Whiteboard, Paddy Hirsch, economy, economics, NPR, Marketplace, FED, fiscal policy, monetary policy, money, explainer, stock market, Borrow, Spend, Cost, Supply, Demand, Big banks, Put up dough, Stake, Trust fund, Exchange, Barter, Vend, Offer, Auction, Traffic, Unload, Deal, Dump, Hustle, Recession, Austerity, Financial crisis, Thrift, Layoff, Field, Trade, Work, Career, Livelihood, Occupation, Vocation, Commerce, Financial affairs, Money, Accounts, Economy, Analysis, News, regulation

Id: TvzsjOmWgKI

Length: 5min 49sec (349 seconds)

Published: Fri Sep 02 2011