The Villain - Magazine - The Atlantic
EXCERPTS:
"The critique from the right is that the continued steps to stimulate the economy are both unnecessary, given that the financial crisis has passed, and inflationary. Allan Meltzer, an economist and historian of the Fed, says Bernanke is trying to do what is beyond his powers. “The current high unemployment is not a monetary problem,” Meltzer says, meaning we are past the point where further rate cuts will stimulate hiring. Bernanke has been accused of trying too many remedies with poor odds of success. Possibly, he would plead guilty to this. He has said he admires Franklin Roosevelt’s catchall approach to fighting the Depression, which was less an ideology than an enthusiasm for enthusiasms. The fear now is that the Fed’s balance sheet—that $2.9 trillion—represents kindling for inflation that one day will catch.
The mechanism for ignition would be as follows: Each time the Fed purchases a Treasury security or a mortgage-backed bond, it credits the selling bank with a “reserve” in the same dollar amount. Bank reserves exist as electronic notations, but they represent real money available for loans, and much of that money is sitting idle today, partly because loan demand is weak. If banks, presently, were to lend all their excess reserves, say in the form of cash, the supply of currency would nearly triple overnight, and the price of a burger would, you can bet, do the same. And if the Fed were faced with such an onslaught, and chose to soak up the excess reserves by quickly selling its assets, the deluge would overwhelm markets, send interest rates soaring, and snuff out the recovery.
