Federal Reserve Money Injections Since 2000 Haven’t Worked as Advertised.

Plot of the US Federal Reserve Open Market Pur...

Plot of the US Federal Reserve Open Market Purchases of Repo Mortgage Backed Securities (MBS), 2000–2007; based on US government data from http://www.newyorkfed.org/markets/omo/dmm/historical/tomo/search.cfm (Photo credit: Wikipedia).

In an article by Phoenix Capital Research on ZeroHedge.com, it lists all the money injections by the Federal Reserve and the Government from 2008 through 2012. One way the Fed pushes money into the economy is by purchasing Mortgage Backed Securities from the entities that hold them, namely banks. The mortgage is now on the balance sheet of the Fed, and the money is now held, as reserve currency (numbers electronically created), on account at the Fed. The bank can now loan ten dollars for every one dollar held as reserves. The reason they can do this is because we operate under a ten percent fractional reserve banking system which means, if the bank has one million in reserves it can loan out ten million dollars that do not exist. No money changes hands, it is electronically transferred from the bank to the person who qualified for the loan.

If we look at the chart above we see money in billions pushed into the system via the purchase of Mortgage Backed Securities from 2000 until the crisis in 2007. But remember the billions injected can be multiplied by ten. So the actual amount of loanable funds is incomprehensible. This money injection from 00 to 07 along with the lowering of interest rates to a quarter percent by 07 created the housing bubble. We will be looking into the Austrian Business Cycle explanation of the bubble in some future posts. I want us to look at the amount of money injected into the system from 00 to o7 and compare it to the amount of money, from the list below, injected from 08 through QE3 just two weeks ago.

The amount of money from 00 to 07 is chump change compared to the amount from 08 to 12. Keep in mind the money listed below eventually becomes reserves in banks, and through the magic of fractional reserve banking can be multiplied by ten. If the money that was pushed into the system in 00 to 07 couldn’t keep high rates of growth going, according to the Keynesian Theory of stimulating the economy by spending through money injection, and the enormous amount of money injected from 08 through 11 hasn’t worked as the “experts” thought in reigniting the economy, how can more unending money injection possibly work as planned? Wouldn’t any sane person take a step back and look at the possibility that the money injections have caused the problem and therefore can’t be the solution. These people are so invested in their visions and theories they can’t admit that they might be wrong. Their only choice is to try to keep the inevitable liquidation of the malinvestments and misallocations caused by their money injections, from happening on their watch.

Here is the list of some of the money injections provided by Phoenix Capital Research.

  • Cutting interest rates from 5.25-0.25% (Sept ’07-today).
  • The Bear Stearns deal/ taking on $30 billion in junk mortgages (Mar ’08).
  • Opening various lending windows to investment banks (Mar ’08).
  • Hank Paulson spends $400 billion on Fannie/ Freddie (Sept ’08).
  • The Fed takes over insurance company AIG for $85 billion (Sept ’08).
  • The Fed doles out $25 billion for the automakers (Sept ’08)
  • The Feds kick off the $700 billion TARP program (Oct ’08)
  • The Fed buys commercial paper from non-financial firms (Oct ’08)
  • The Fed offers $540 billion to backstop money market funds (Oct ’08)
  • The Fed agrees to back up to $280 billion of Citigroup’s liabilities (Oct ’08).
  • $40 billion more to AIG (Nov ’08)
  • The Fed backstops $140 billion of Bank of America’s liabilities (Jan ’09)
  • Obama’s $787 Billion Stimulus (Jan ’09)
  • QE 1 buys $1.25 trillion in Treasuries and mortgage debt (March ’09)
  • QE lite buys $200-300 billion of Treasuries and mortgage debt (Aug ’10)
  • QE 2 buys $600 billion in Treasuries (Nov ’10)
  • Operation Twist 2 (Nov ’11)
  • QE 3 buys $40 billion in Mortgage Backed Securities every month from now on (Sept. ’12

Multiply this amount of money times ten and you get the idea of how much has been electronically printed since 2008.

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