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But where does the Fed get the money to do all these things? Simple: It counterfeits it.

Well, I shouldn't really say that. It's perfectly legal when the Fed does it. But if you or I did the same thing, we'd be thrown in jail. Let's just say the Fed prints the money. Or better yet, that the Fed creates it.

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is actually false; the Fed so far hasn't created any money directly (afaik).


Here's a better article that covers both sides of the balance sheet:
http://www.econbrowser.com/archives/2008/12/federal_reserve_1.html

Some images from the article:
Assets:

Liabilities:


An important point is that they are not printing currency to expand the balance sheet, but instead are encouraging banks to hold reserves with the Fed by paying interest on them and funding certain programs through the Treasury. So far, at least, there hasn't been real quantitative easing.

Keeping extra bank reserves is pretty direct; instead of the banks lending to each other, they just let the Fed lend their funds out.
For the Treasury part, the Treasury issued bonds in an amount equal to the increase in their deposits with the Fed, and the Fed lent out an amount equal to the new deposits, so the actual amount of cash in circulation didn't change - public bought treasury bonds and then borrowed an equal amount through the CPLF and similar Fed facilities.

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False. Sellers no longer have a coupon payment, so the Fed pays a premium greater than remaining PV, incentivizing the seller to part with bonds in exchange for cash. Doing this in a noninflationary environment with short term securities, the premium is small. Sellers are happy to book a small profit. But attempting it in a crisis environment with longer term bonds and hyperinflation on the horizon, there is a possibility of panic selling and total collapse of the bond market. Impairment of Treasury's ability to float more debt is right in front of our noses, whether the Fed prints more currency deposits or not.

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"We have a careful separation of powers, asking the Fed to take responsibility for inflation and letting the Treasury worry about how to pay its bills."

This is disingenuous at best. The bond market sets interest rates, not the FOMC. The only leverage the Fed had was to raise or lower bank reserve requirements -- and they've been shovelling cash as fast as possible to shore up bank capital, accepting worthless paper as "collateral." The Bernanke crew is in crisis mode and conspiring with Treasury to explain away the collapse of two primary dealers, insolvency of AIG and the GSEs, collapse of share prices, abrupt conversion of GS and MS to Federal banks, cessation of CP lending and global lockdown on commercial letters of credit. Both the Fed and Treasury were caught flat-footed after a full year of assuring everyone that "subprime" was contained.

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"Historically there [is] really just one big story -- the Fed created deposits primarily by buying Treasury securities, and these ultimately ended up as cash held by the public."

Worse than wrong, it's wrong twice. How was the Fed initially capitalized to start buying Treasury securities ?? and if greenbacks have any intrinsic value, are you saying that cash is backed by future tax revenue ?? Nothing could be farther from the truth. In the early 70s when I was at UW Madison, we were lectured by Fed officials that they had an M3 annual monetary expansion target of 3-5%, on the theory that cash in circulation (bank created and multiplied by lending) should mirror (or drive) 3-5% annual GDP growth -- all of which was patently false. Treasury borrowing requirements drive Fed policy, the economy and private wealth be damned. We get paper IOUs backed by nothing but mounting deficits. Social Security and Medicare trust funds are nonexistent.

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As to your third point, between June 27, 1996 and June 28, 2007, the Fed's holdings of securities went from $383 B to $790 B, an increase of $407 B. Currency held by the public went from $425 B to $812 B, an increase of $387 B. Hence it is quite accurate to claim that "the Fed created deposits primarily by buying Treasury securities, and these ultimately ended up as cash held by the public."

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phi1618 said:

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I just noticed that your post is copypasta from the given link - are you "Alan von Altendorf"?

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How will purchases under the agency MBS program be financed?
Purchases will be financed through the creation of additional bank reserves.

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the Federal Reserve's balance sheet... slipped to $1.834 trillion on Feb 4, from $1.911 trillion on Jan. 28.

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Years and years and years ago before Ben Bernanke was Fed Chairman, back when he was at some medial post (I don't know what he was doing at the time, as the story I was told didn't contain those details) my Federal Reserve Policy teacher was at an economic conference hosted by some econ big shot at the time.  The crowd was talking amongst themselves, waiting for the presentations to begin - and in walked Bernanke.  Immediately a hush fell over the crowd as they observed the entrance of this brilliant man.

This is now the man in charge of the most properous nation in the world's monetary policy.  He's smarter then you, then the creator of the YouTube videos you watch, and even smarter than the professors who educated the creators of those YouTube videos.

Trust the man.

Have faith in the man.

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I agree Zorb. The problem as I see it is corruption. The crooks (all of them) will find ways to use this money for everything but stimulus just like the last handout.

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zorbman said:

What do you think?

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Fed Lets Some Air Out of Its Balance Sheet
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The Federal Reserve's balance sheet is shrinking as financial market conditions slowly improve and year-end funding needs fade. Assets on the Fed's balance sheet declined by $76 billion to $1.85 trillion. This was the fifth consecutive decline and puts assets held by the Fed at their lowest level since October. The Fed's balance sheet has declined 16% from its peak in early November. With traditional monetary policy sidelined, the central bank will continue to use its balance sheet as its primary weapon to counteract the financial panic and deep recession.


A $78 billion drop in the Fed's currency swap lines was the major catalyst behind the decline in the size of the balance sheet. Meanwhile, banks borrowed less from most of the Fed's lending facilities. Borrowing from both the discount window and the Primary Dealer Credit Facility declined in the week ending February 4. Holdings of the Commercial Paper Funding Facility increased by $10 billion to $258 billion. The Fed provided $17 billionin credit through its asset-backed commercial paper money-market mutual fund liquidity facility.


The decline in the Fed's balance sheet is consistent with the gradual improvement in financial market conditions. The TED spread has narrowed sharply over the past several months to where it was before the bankruptcy of Lehman Brothers. Although they remain elevated, the VIX and A2/P2 spreads are below their financial panic highs.


The improvement in financial markets is encouraging, but they are still not operating properly. Therefore, the central bank will remain on high alert and act quickly and forcefully to help financial markets improve further. The Fed recognizes that a stable financial market is a prerequisite for a self-sustaining recovery.


Earlier this week, the Fed announced the extension of lending facilities scheduled to expire in April. By extending its programs, the Fed is committing to keeping interest rates at historic lows for the foreseeable future. More lending is needed to help financial conditions improve more quickly. Further, the decline in consumer prices is complicating matters for the Fed, as it is increasing real interest rates.

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