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Politics : Politics for Pros- moderated
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To: skinowski who wrote (391504)11/5/2010 6:41:59 PM
From: rich evans2 Recommendations  Read Replies (1) of 794358
 
This is how the banking system works. The FED is unrstrained and can make these loans or purchases. Your local bank can also. If you go for a loan , they simply deposit funds in your account out of thin air. The difference is that the banks are constrained by capital requirements to back up a percent of their loans in case of losses. This is about 10%. The Feds also do not allow the banks to loan more then 10 times their deposit in the reserves at the central bank. This is the system. The problem as Lindy says is that the banks are restrained because of loan losses so they can not loan too much because of their capital requirements. So as Lindy says the Banks just keep the money they got for selling bonds in their accunts at the FED REserve. Will this change? That is the risk for inflation if the banks start lending. But they can't because of their loan losses and capital requirements. Thus this QE is just perception. Bernanke in his textbook on page 179 talks about this perception. Frankly this situation will exist for years Because their is little lending or commerical or residential construction. So don't worry, be happy. The best thing the FED did was not QE but their facilities desk. There they loaned money to AIG and also bought commercial paper from GE and the likes. This unfroze the commercial paper market etc. No One talks about this but you can see it all on the FED web site . This was a great success and saved on from a financial meltdown.

Ricn
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