From 1913 to 2008,the Federal Reserve (Fed) gradually increased the money supply from $5 billion to $847 billion.Between late 2008 and early 2010,the Fed printed an astounding $1.2 trillion.This equates to an increase in the money supply in just over a yea...
The Federal Reserve: The Money-Printing King | ||
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| From 1913 to 2008, the Federal Reserve (Fed) gradually increased the money supply from $5 billion to $847 billion. Between late 2008 and early 2010, the Fed printed an astounding $1.2 trillion. This equates to an increase in the money supply in just over a year that would normally take a century. This sudden doubling of the 'monetary base' was unprecedented. The Fed has only one way to create money: by printing new dollars and putting them in the vaults of large banks. This excess reserve held by the banking system soared from $2 billion before the 2008 crisis to $1.2 trillion in February 2010, a 600-fold increase.
While it is often said that the Fed "sets interest rates" at the FOMC meeting held every six weeks, this actually means the Fed determines the price of very short-term loans. One of the Fed's most significant actions during the global financial crisis was effectively lowering interest rates to zero for the first time ever. Around 2010, the FOMC faced a dilemma: keeping rates at zero seemed insufficient. The economy was recovering but remained weak, with unemployment still hovering near the recession levels of 9.6%. Former Fed member, Hoenig, opposed quantitative easing because he knew it would inject unprecedented amounts of money into the system, with Wall Street's major banks being the primary beneficiaries. He believed this would exacerbate the wealth gap, benefiting a tiny number of wealthy individuals while harming the vast majority who rely on wages and savings. Living at the zero-bound forces banks to move further out on the yield curve. The key is to encourage people to take on greater risks. This is also a way to allocate resources. As money moves further out on the yield curve, it can lead to the second major problem Hoenig warned about in 2010: asset bubbles.
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