In a lecture given to George Washington University students today, Federal Reserve Chairman Ben Bernanke presented a simple explanation of how long-term asset purchases actually work to stimulate the economy.
His explanation is key to understanding whether or not this was the best course of action for the U.S. at the time.
Bernanke noted that the Federal Reserve traditionally owns a significant quantity of long-term asset purchases, and owned about $800 billion before the crisis.
According to his explanation, here’s how the process worked:
- The Fed began purchasing Treasuries and government-sponsored enterprise (GSE) securities, making them more difficult for commercial banks to obtain.
- In doing so, the Fed drastically increased the demand for Treasuries, so bondholders could raise the price they charged for the securities in comparison to the return.
- This had the effect of reducing interest rates without direct monetary policy, since interest rates are closely related to the rate of return on Treasuries.
- Low availability drove investors to put money in corporate bonds, thus stimulating the economy.
To keep in mind, this chart demonstrates the massive scale of this program.
Click for larger image.
Further, Bernanke rebuffed analyst descriptions of how the Fed “printed money” in order to finance these asset purchases. Instead, the Fed credits “the accounts that commercial banks hold with the Fed [which are] part of what’s called the monetary base,” but not part of the cash supply.
In order to offset asset purchases and normalize its balance sheet, the Fed simply ticked up the number of assets that commercial banks held with the Fed. Therefore, the Fed did not add to the cash supply, but it did some behind-the-scenes balance sheet manipulations that had the effect of expanding the money in the system.
This chart breaks down the liabilities side of the Fed’s balance sheet:
Click for larger image.
These were inflationary measures, but at the time the Fed was far more worried about deflation than inflation, so on the whole did not consider this a concern.
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All of this has been public information, most of which is readily available on the Fed’s website, for years now.
Funny how they feel the need to push the idea that they were never printing money, just when they are trying to figure out how to QE without “printing money.” This misconception was never a problem when oil was around $75 and they just wanted to goose the market higher at any cost.
Bingo.
It’s a distinction without a difference. Do I fucking care whether or not they directly let dollars go into the system, or simply “loaned” them out for the next 100 years?
No I don’t fucking care. Because I’ll be dead before they recuperate that money from the system…if ever.
Right Cain, it doesn’t matter that Ben “ingeniously” found a way to stack shit up on a shadow balance sheet. Now corporate bonds, stocks, AND commodoties are just way overvalued and the wealth effect has kicked in. I think those calling for a repeat of 2008 are going to be scarily correct…
We’ve been through this before. If you pay TOO MUCH for a shitty asset, your end result is going to be inflation, which then bleeds into the legitimate system. If you don’t allow for capital value destruction (as well as creation), you poison the entire edifice by driving up the price of quality assets.
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