Not Quantitative Easing

On today’s show we’re going to run a small experiment. Let’s imagine that you went into the casino in Vegas wearing a baseball cap that says Federal Reserve. You sit down at one of the card tables and start playing.

But one player, the one with the baseball cap has some special powers. They can print cards at will. Moreover, they don’t exactly deal out the newly minted cards uniformly at the table. What do you suppose would happen?

They’d be hauled out into a back alley behind the casino and some thugs would probably break their knees.

But that’s just a hypothetical situation. Let’s get back to the real world. The year was 2008, there was a real banking crisis underway. Some of the largest financial institutions in the US and in fact around the globe were at risk of collapsing.

President George W. Bush signed the $700 billion bank bailout bill on October 3, 2008. ... $700 billion was a shockingly large number. It made headlines around the world for weeks. It was the subject of books and movies.

The situation was truly a crisis and it called for desperate measures. By implementing these emergency measures, Treasury Secretary Henry Paulson wanted to take these debts off the books of the banks, hedge funds, and pension funds that held them. His goal was to renew confidence in the functioning of the global banking system and end the financial crisis.

The economy was in uncharted territory. Government was in uncharted territory. It needed a new vocabulary. The term quantitative easing was brought into the financial lexicon. This fancy term was much more palatable than the crass synonym of printing money.

Thankfully, today the economy is healthy. Unemployment is near 50 year lows. Inflation is low, worryingly low according to some government officials. We have a US federal election coming in a little over a year.

So then why would the Federal Reserve be printing, um, I mean quantitative, no that’s not it, Why would the Federal Reserve be buying US Treasuries?

The Federal Reserve began buying short-term Treasury debt Tuesday at an initial pace of $60 billion a month, but officials say these purchases are nothing like the bond-buying stimulus campaigns unleashed by the central bank between 2008 and 2014 to support the economy.

When private investors buy bonds, they use cash, borrow funds or sell assets to raise money to fund those purchases. The Fed is different. It doesn’t have to do any of that because it can electronically credit money to the bank accounts of bond dealers that sell mortgage and Treasury securities. The Fed gets the bonds, and the sellers’ bank account increases by the same amount as the bonds’ value. Banks keep deposits at the Fed, known as reserves, and when the Fed buys bonds from banks, their reserves rise by an equal amount.

They’re like that special player at the card table.

The Fed bought bonds to stimulate the economy between 2008 and 2014. Isn’t this the same thing?

Not according to the Fed. The central bank has taken pains to emphasize that these purchases don’t represent a return to what is known as quantitative easing. We’re not allowed to call these purchases QE, but they look exactly like the QE bond purchases of 2008. Now at $60 billion a month, that comes to $720 billion a year. But wait a minute, the Fed printed $700 billion in the middle of the biggest crisis in decades. Now 10 years later, with no crisis, they’re going to print $720 billion a year.