Quantitative easing has begun
– John Kemp is a Reuters columnist. The views expressed are his own –
Quietly, without fanfare, the Federal Reserve has turned on the printing presses. The central bank is flooding the market with enough excess liquidity to refloat the banking system — and hopes to generate an upturn in both economic activity and inflation in the next 12-18 months to prevent the economy falling into a prolonged slump.
Since the banking crisis intensified in September, the Fed has been rapidly expanding the credit side of its balance sheet, providing an ever-increasing array of facilities to support the financial system (repos, term auction credit, primary discount credit, broker-dealer credit, commercial paper funding, money market mutual fund liquidity and term securities lending).
Total credit extended by the central bank has surged from an average of $885 billion in the week ending August 27 to $2.198 trillion in the week ending November 12. Credit extensions surged another $142 billion last week alone — mostly in form of increased term auction credit (+$114 billion) and other miscellaneous credits the central bank does not break out (+$41 billion).
Until fairly recently, the expansion on the asset side of the Fed’s balance sheet was matched by increased non-bank liabilities, mostly in the form of higher balances deposited by the US Treasury into its regular and special supplementary financing accounts at the central bank.
Since the Treasury was borrowing this money in the open market by issuing cash management bills, the impact of the Fed’s balance sheet expansion was being fully sterilized.
The Fed was providing liquidity in the narrow sense (helping commercial banks cover short-term funding problems arising from illiquid assets on their books) but not in the broader sense of inflating the money supply (money in circulation plus vault cash plus reserve balances).
Moving beyond conventional remedies
Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed here are her own.
WASHINGTON (Reuters.com) – The stock market is falling, retail sales are down, GM and Xerox announce layoffs, and economists predict GDP declines in the 3rd and 4th quarters. Even Fed Chairman Ben Bernanke has called for a stimulus package.
House Speaker Nancy Pelosi’s prescription for economic stimulus centers on more infrastructure spending, as well as more aid to states, Food Stamps, rebate checks, and unemployment benefits, a package that could cost up to $300 billion.
This is the Keynesian “solution” that didn’t work in the 1930s—more government spending. It’s time for new ideas.
Infrastructure spending—building more roads, bridges, water and sewer systems, and light rail—is too slow. Spending occurs years after authorization because plans have to be updated, contractors hired, and inevitable environmental impact suits resolved.
Infrastructure projects are not necessarily undertaken in places suffering the most economic damage, but are spread around to win members’ votes.
The rest of Mrs. Pelosi’s plan wouldn’t rescue the economy. Extending unemployment benefits from 26 to 39 weeks increases unemployment, raising unemployment rates. And rebate checks didn’t save us from a recession when they were mailed out in May and June—why would they help now?
Why invest in infrastructure? It’s not as if we have major bridges falling down or anything… right?
Quantitative easing whereby newly printed notes are handed over to banks in the expectation that bank lending will be revived does nothing to solve the main problem of banking namely defaulting borrowers. The fiscal solution to defaulting borrowers involves giving an annual $1500 housing benefit to all United States citizens in reduction of their toxic bank overdrafts where appropriate, these toxic debts will then cease to be toxic.