We are now on our second round of “quantitative easing”. In round one Fed Chairman Ben Bernanke increased our national debt by about 2.1 Trillion by buying up US Treasuries. These bonds were purchased from various banks and financial institutions such as Goldman Sachs. Now we are on round two and doing it again to the tune of 600 billion dollars.
The reason given for doing so was to stimulate the economy, incentive banks to lend money and reduce unemployment. The problem? The “genius” behind the decision now says it probably won’t work but full steam ahead anyway.
This and other revelations were dropped like financial bombs on Chairman Bernanke’s December 5th interview with 60 Minutes on CBS.
Chairman Ben basically says in this interview that any real reduction in unemployment will take “5 to 6 years”. He also claims that they are using “their own reserves” to execute the 600 billion of quantitative easing. The problem with this claim is that it ignores the fact that the Fed creates reserves by buying US treasury bonds.
He also ignores that they buy treasuries by simply entering numbers in a computer, this takes the bonds out of the hands of the banks, allows the Fed to now be the holder of the debt and puts money back into the banks. None of this actually costs the Fed a single penny, again it is simply making a computer entry and that entry creates brand new money right out of thin air.
The net result is the Banks simply are buying bonds short term solely for the purpose of flipping them back to the Fed for a quick profit. In the end the profits are simply reinvested in new bonds (more debt) and it costs the Fed nothing to do this at all, not a single penny.
This might sound totally impossible or at least hard to believe. Well the Federal Reserve says this is exactly how it works, the following is a quote from one of their publications called, “Putting it Simply”
“When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money.”
In the end we the people end up owing more money to the Fed and more money to the banks and foreign governments.
So basically what Chairman Bernanke is telling us here is that…
- He created trillions of dollars in new debt with the first round of quantitative easing
- He did this to stimulate the economy and create jobs
- It did not work
- So now he is creating another 600 billion in new debt
- The goal is to stimulate the economy and create jobs
- It probably won’t work
- He is going to do it anyway
Does this seem to not make sense to you? I guess the problem is that you and I didn’t study economics at Harvard and MIT the way he did? I guess it is just me but I always thought you only spent 2.6 trillion dollars if you were going to get what you paid for? If you have the stomach for it you can listen to Mr. Bernanke’s entire interview with 60 minutes below.