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The Fed loans money to banks. Their unorthodox response to the financial crisis involved (1) creating new lending mechanisms allowing loans to be rolled over fo

The Fed loans money to banks. Their unorthodox response to the financial crisis involved (1) creating new lending mechanisms allowing loans to be rolled over for longer periods of time, and (2) accepting illiquid securities as collateral instead of just things like Treasury Bonds. But these are still short-term loans measured in months not years, and they are still taking collateral for them. Which makes it trivial for the Fed to shrink the money supply by however much it wants pretty much whenever it wants. It just stops rolling over the loans and takes the cash out of circulation as the banks give it back. It is always possible that some banks will default on repayment and collapse. But that scenario isn't consistent with inflation because any significant collapse would be deflationary. And in a deflationary environment you want to be expanding the money supply. Simply put, what the Fed giveth the Fed can taketh away. Be grateful Bernanke is a grown up, and that political posturing on the debt issue isn't keeping policy makers from preventing this thing from becoming a lot worse. The policy response is pretty good, especially when considered in light of how much worse this could easily have been: http://delong.typepad.com/sdj/2009/09/i-see-one-third-of-a-great-depression.html http://delong.typepad.com/sdj/2009/09/i-see-one-third-of-a-g...

va_coder 17y ago
>>Which makes it trivial for the Fed to shrink the money supply It will be very hard politically. >>and they are still taking collateral for them. Real estate that has collapsed in value >>The policy response is pretty good, especially when considered in light of how much worse this could easily have been How do you know? Supposed it collapsed: stocks, houses all dropped. Maybe that was the natural order of things. My thought on the supposed worse case scenario if there were no bailouts: #1 We have plenty of houses, commercial retail space, etc. So no one would have gone homeless. #2 The midwest is still the breadbasket to the world. We wouldn't go hungry. #3 Banks would have gotten a good lesson in respecting risk. In 5 years from now they'll be taking new risks that are just as stupid as the ones they took today because they know they will get bailed out.
- trevelyan 17y ago
  > Real estate that has collapsed in value The value of the collateral is meaningless. Either there is inflation or not. If there is no inflation the increase in the money supply is good because it prevents deflation. If there is inflation you're out of a liquidity trap and there is no need for these special measures. > How do you know? Not me. We. Regression analyses on the relationship between employment and inflation/deflation levels are measurable and can be calculated with robust large scale data sets. This is called the Phillip's Curve: http://en.wikipedia.org/wiki/Phillips_curve http://en.wikipedia.org/wiki/Phillips_curve

va_coder 17y ago

>>Which makes it trivial for the Fed to shrink the money supply It will be very hard politically. >>and they are still taking collateral for them. Real estate that has collapsed in value >>The policy response is pretty good, especially when considered in light of how much worse this could easily have been How do you know? Supposed it collapsed: stocks, houses all dropped. Maybe that was the natural order of things. My thought on the supposed worse case scenario if there were no bailouts: #1 We have plenty of houses, commercial retail space, etc. So no one would have gone homeless. #2 The midwest is still the breadbasket to the world. We wouldn't go hungry. #3 Banks would have gotten a good lesson in respecting risk. In 5 years from now they'll be taking new risks that are just as stupid as the ones they took today because they know they will get bailed out.

trevelyan 17y ago
> Real estate that has collapsed in value The value of the collateral is meaningless. Either there is inflation or not. If there is no inflation the increase in the money supply is good because it prevents deflation. If there is inflation you're out of a liquidity trap and there is no need for these special measures. > How do you know? Not me. We. Regression analyses on the relationship between employment and inflation/deflation levels are measurable and can be calculated with robust large scale data sets. This is called the Phillip's Curve: http://en.wikipedia.org/wiki/Phillips_curve http://en.wikipedia.org/wiki/Phillips_curve