Fed Admits Quantitative Easing

The Federal Reserve Bank of the USA has now commited $800 Billion more to unfreeze lending. They have just recently taken news steps to unfreeze credit for homebuyers, consumers and small businesses, with a new total of $800 billion. Effectively admitting to quantitative easing.

Almost as much as $600 billion dollars in debt will be purchased by the Federal Reserve. This will be purchased by debt issued or backed by government finance companies. A further $200 billion will also be allocated to help small businesses with loans.


With the most recent announcement, it appears as though the federal reserve has embarked on the use of some very unorthodox policy tools that Bernanke discussed 6 years ago. The ultimate goal of these recent policy changes is to prevent a collapse of the financial markets and stamp out the thread of deflation.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, the statement said.”

Estimated U.S. GDP for 2008 is about $14.3 trillion (IMF). I mention that because today Federal Reserve announced a new facility and thereby all but admitting to a policy of quantitative easing. This puts the total amount of money pledged to various facilities and bailouts at about $8 trillion dollars… or 56% of GDP.

What exactly is quantitative easing?

Quantitative easing was a tool of monetary policy that the Bank of Japan used to fight deflation in the early 2000s.

The BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. More recently, the BOJ has also been flooding commercial banks with excess liquidity to promote private lending, leaving commercial banks with large stocks of excess reserves, and therefore little risk of a liquidity shortage.

The BOJ accomplished this by buying much more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities, equities and extended the terms of its commercial paper purchasing operation.

Econompic Data goes into greater detail in Bailout Pledges More than $8 Trillion. This clearly means my Scary Fed Charts are going to get worse and the Federal Reserve Balance Sheet will continue to explode. Federal Receipts and Outlays have got to head in seriously opposite directions now. I’m talking the wrong way too, with outlays doing a moonshot while receipts go cliff diving.

The terrible tearing sound you’re barely hearing in the distance is the U.S. constitution and the U.S. social fabric simultaneously getting shredded.

None of this is surprising. The signs were there for all to see… Quantitative easing is here and who knows what it will do. It hasn't been of much use to Japan.