Thursday, March 19, 2009

"Quantitative Easing, aka Printing Money"

So I guess the Fed is taking the threat of deflation fairly seriously.

Though, as Kevin notes, it's certainly more important to figure out exactly when Obama and Timmeh Geither knew AIG was doling out the big bonuses. This whole "monetizing Treasury's debt" thing is totally boring.

UPDATE: So that's where Helicopter Ben got his name...
As the federal government issues trillions in new debt to finance stimulus spending and the daily operations of government, the quasi-governmental Fed will now be buying hundreds of billions of it, in the process creating new money out of thin air (the Fed doesn't actually have money set aside to buy stuff; when it buys something, the money suddenly, magically exists).

It's a very weird, somewhat circular transaction, and it was last done in a big way during World War II. At the time the Fed wasn't so much making monetary policy as doing its patriotic bit to finance the war (it was a de facto division of the Treasury Department at the time), but it worked on both counts: The deflationary tendencies of the 1930s were finally fully expunged from the economy, and we beat the bad guys. Later on, Milton Friedman described this kind of transaction as the functional equivalent of a "helicopter drop" of money, and after Ben Bernanke mentioned this in a speech in 2002 he became known as Helicopter Ben.

I don't think I'd ever heard that the Fed buying up Treasury debt during WWII was a big reason for the end of the Depression. Interesting.