That credit created by the Fed does not leak out to the general economy to create inflation, yet. It is in a “closed loop” for government and conforming mortgage financing — more’s the pity that the economy as a whole doesn’t benefit from it.

“He will not stop this easing/printing/monetizing process until the American debt load, public and private is rendered manageable.”

The fed bought $160Bln of RMBS so far in first phase of QE, next up treasuries. How does this take down my debt service?

The fed is filling up the void in the shadow banking system, A BIG VOID, and banks hurtin balance sheets by purchasing assets from primary dealers via open market operations – the equivalent of electronically printing money as the transaction is funded through the creation of additional bank reserves. Take a look at excess reserves and tell me if that money is leaking into the system OR is being hoarded to further repair balance sheets and keep dollars on hand to further cushion against future losses on delinquent loans and as marked down securities see their income streams actually collapse.

The amount the fed is electronically printing is NOT greater than the wealth destruction in the shadow banking system thus far.

Actually, it does solve that. I don’t know why so many people are struggling with this issue, but Bernanke has made it perfectly clear that he intends to clear away debts through inflation. He will not stop this easing/printing/monetizing process until the American debt load, public and private is rendered manageable. There will be no “taking away the punch bowl” this time.

Of course, that will create an entire new set of problems, not least being a newly destitute class of former savers and a complete loss of trust in our currency. But that’s somewhere down the road and Bernanke has deemed it less consequential.

fed buys 2s, 5s and 10s with new money. treasury takes new money to buy guns, butter, preferred shares, trash securitizations from banks, tax refund checks, etc.

whatever it is treasury buys, the money in the system quickly finds its way to banks, either as deposits or as loan paydowns. banks take cash and — because there are so few good loans to be made — park it as excess reserves at the fed. fed takes excess reserves and expands TALF.

result: banks are helped by increasing deposits and expanded one-way swaps with fed — but are still faced with massive loss reserving obligations and — critically, even if they atually want to lend — a lack of borrowers. lower floating rates, however, actually lengthen the time banks will need to recapitalize from net interest rate differential.

result: massive growth in both currency in circulation and excess reserves at fed — i think QE will balloon the fed balance sheet more than bernanke intends.

result: households remain in debt reduction/high savings mode — asset price deflation remains the predominant concern, as does economic contraction — except to the extent that government borrowing to fund fiscal stimulus offsets aggregate private sector debt repayment/savings, thereby giving excess reserves an avenue out of the banking system.

the broken link in the montary recirculation chain is loan demand, and it renders monetary policy moot until the private sector aggregate balance sheet has been repaired.

see richard koo for elaboration. this is going to be a very tough ten years for asset prices, and if the administration does not reconcile itself to massive deficit spending for the duration it will be even tougher times for GDP as well.

1)Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.

2)Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly prosed FASB accounting rule change.

3)Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.

4)Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.