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MORE POWER TO THE FED Brad Seltzer writes about the Federal Reserve


What? they are giving more power to the Fed?

Brad Seltzer writes

I have found the Federal Reserve extremely eager and anxious to explain how it intends to unwind the large increase in the money supply when monetary velocity starts to recover. The basic problem, I learned back in my first year of graduate school, is that the central bank's ability to soak up excess liquidity in an economy and reduce the supply of "monnaie" is limited by its balance sheet: it needs to be able to induce banks to part with their cash by offering them something else to hold, and the Fed cannot offer what it does not itself have to trade. The solution the Federal Reserve is proposing is to allow it to create additional kinds of liabilities on its balance sheet. If congress grants the Federal Reserve the power to accept not just interest-free but interest-paying reserve deposits (which it has) and the power to issue and sell its own interest-bearing bonds (which I hope it will), then the Federal Reserve will have no trouble reducing the transactions balances that make up our monetary base when it wishes to do so. Once again, we have already been told the plan--and it is unfair to claim that Bernanke and company have not told us.

L4D's Comments:

This makes sense. The Federal Reserve has the most bloated balance sheet of any time in its history. The Federal Government is the most indebted than it has been at any time in its history. The solution to this problem is to let the Federal Reserve issue and sell it's own type of debt. We will shrink the balance sheet by first expanding the balance sheet.