The Fed announced today that it would continue it's bond buying binge to the tune of $ 85 billion monthly, a policy that has been in place since the 2008 financial collapse. This has expanded the once miniscule Fed balance sheet to over $ 4 trillion.
The Fed, of course, can create money digitally. That's what it uses to buy the bonds. It just says: "let there be money" and there is money. This massive expansion in the monetary base has created huge excess reserves in the nation's commercial banking system. Why doesn't anyone loan this money out?
The pitiful loan activity is a result of two factors. Dodd-Frank and activism in the Justice Department and others has made it a criminal activity to loan money to anyone who doesn't have the very, very best credit. And people with that kind of credit have lost interest in borrowing to build businesses in the new Obama world of massive regulation and impending soaring health care costs. So, not too many loans are getting on bank books. The reserves are simply piling up.
But what happens if, heaven forbid, the economy recovers? Ah, an outcome not contemplated by the Obama-Bernanke clique. So far, they have successfully prevented any serious chance of a strong economic recovery that would quickly expand loans and the money supply, bringing on the inevitable out-of-control inflation. But, that won't happen if you keep the economy from recovering. I think that I am beginning to understand the Obama-Bernanke plan. It's working.