Does the Fed print money?
Our recent attempt to answer this seemingly simple question prompted a torrent of comments, much of it negative and unfit for publication on a family-friendly Web site. (See: No, the Fed Does NOT 'Print Money': Just Explain It)
In the accompanying video, Jim Bianco, president of Bianco Research, offers bit more sophisticated critique of our coverage on this controversial issue.
While the U.S. Treasury does indeed control the printing of hard currency in America, Bianco says we goofed by omitting the realities of the Fed's electronic printing press.
"The ability of the Fed to increase the amount of money in banks' reserve accounts; that's what most people mean when they talk about money printing and that's under the direction of the Fed," Bianco says.
All U.S. banks must keep a certain percentage of their assets on reserve with the Fed, in order to insure a margin of safety and so they can access the Fed's lending facility in times of crisis. Back in 2008, Goldman Sachs (GS) and Morgan Stanley (MS) converted to bank holding companies for this very reason.
The Fed can try to stimulate or restrict bank lending by either raising or lowering the amount of money banks are required to keep on reserve, respectively. This seems pretty straightforward. But "the Fed has the ability to go in and just change the number on [banks'] reserve accounts" -- literally creating money electronically by changing the amount of money in reserve accounts, Bianco notes.
"If you or I did that it would be fraud, it would be counterfeiting and we'd go to jail," he quips. "But when the Fed does it, it's sophisticated monetary policy."
Quantitative easing (QE) is one way in which the Fed prints money, Bianco says, suggesting the Fed "pays" for securities owned by banks by just changing the amount of money in their reserve accounts.
"We live in a fractional banking system," he says. "When banks have more reserves and ability to lend that is a form of money creation."
According to the minutes of the Fed's January meeting, released this week, some FOMC members are keen to do more of it.
"A few participants' assessments of appropriate monetary policy incorporated additional purchases of longer-term securities in 2012, and a number of participants indicated that they remained open to a consideration of additional asset purchases if the economic outlook deteriorated," the minutes said.