The Bookkeeper’s Pen, But Which Bookkeeper?

In the chaotic days of the early “recovery”, those opposed to the Federal Reserve’s response largely fell into the wrong camp. The central bank had done too muchthey claimed. Never mind how the first global panic in four generations had developed and then crushed the global economy, such deflation was over to be taken apart by rapid inflation if not hyperinflation.

The Fed was printing money, everyone believed, a big no-no as demonstrated throughout history. Weimar Germany comes to DC.

Not so, the central bank pushed back. You can be afraid of money printing all you like, but what we are doing isn’t money printing. The creation of bank reserves is nothing more than an accounting remainder.

Here’s one (of many) FRBNY response to the inflationistas from December 2009:

However, a careful examination of the balance sheet effects of central bank actions shows that the high level of reserves is simply a by-product of the Fed’s new lending facilities and asset purchase programs. The total quantity of reserves in the banking system reflects the scale of the Fed’s policy initiatives, but conveys no information about the initiatives’ effects on bank lending or on the economy more broadly. [emphasis added]

The paper goes through the accounting details of LSAP’s with quite a satisfactory sufficiency. I have even used these very examples as the basis for going further, the bank structure for Eurodollar University both Series 1 and Series 2 (as well as looking at the implications starting here).

QE was nothing more than an asset swap (in my view, not a very useful one, either). Officials were, at first, well aware of this fact if only to shield themselves from growing mainstream criticism. A lot of that was tied not just to visions of hyperinflation but also restarting the stock bubble. The two were taken as the same; money printing would unleash consumer and asset inflation.

It was all unsophisticated noise, however, this condemnation originating from the same position of eurodollar ignorance that ironically derived from believing too much in the central bank itself. The consequences of its critics being wrong on inflation somehow has meant the central bank cannot be criticized at all. Politicians are now scared.

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Gary Anderson 4 months ago Contributor's comment

Snider and Sumner and Selgin disagree lots, but on excess reserves they all seem to agree. Excess reserves are a head fake, not stimulus in any way.