Thursday, March 19, 2009

Now we're printin' money

The Fed has begun "quantitative easing", which I think means inventing money out of thin air and using it to buy stuff:
Good Evening: After months of threats, the Fed finally pushed the monetization button. Federal Reserve Chairman Bernanke and the rest of the FOMC decided today to embark upon the one strategy central bankers have always considered the dreaded last option — Quantitative Easing. It’s one thing for the Fed to push the “Easy” button and lower rates or temporarily inject reserves into the banking system, but to push the “QE” button (creating currency out of thin air with which to purchase assets) is an action reserved for only the direst of circumstances. If such a device truly existed in the Board room of the Eccles building, it would be a red button under glass with a “Press Only in Case of Emergency” warning stenciled underneath.

I don't know enough economics to know if it's a good thing or not. It seems like the biggest risk of this would be inflation, but that hasn't been a problem recently. But if people around the world started dumping dollar-denominated assets (like the Chinese who own a lot of US debt), that could be a big problem.

UPDATE: The WSJ has a roundup of reactions. Here's one:
  • If there’s one aspect of the current environment that still amazes, it’s the fact that nothing amazes anymore. Even today’s announcement that the Federal Reserve plans on purchasing everything in America that isn’t nailed down raised relatively few eyebrows on our end… Effectively, the Fed is monetizing the Treasury’s debt, a strategy that appears in the encyclopedia under the heading “how to trigger inflation.” In any other environment, this monetization would be deeply troubling, but given the lack of end user demand, the prospects for a near term pop in prices is rather remote. The aggressiveness also suggests that the Federal Reserve remains highly concerned about deflation. –Guy LeBas, Janney Montgomery Scott
Ezra Klein makes the point that the AIG bonuses are one ten thousandth the size of this "money from helicopters" move by the Fed, but it's not getting nearly the attention.

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