At this point it's hard to say who they're buying from, as there are so many different liquidity programs they're doing. Generally, financial institutions, but I'm not sure on some of the newer asset-backed security liquidity programs, like the corporate bond stuff.
What do you mean by "can they lend with fiduciary money"?
Regarding the accounting, as far as I know, any assets the fed purchases is purely electronic. When they purchase, say, $1 million in treasury securities from a bank, the Fed increases a treasury security asset account for $1 million on their balance sheet, and decrease a cash account by the same amount. The bank does the opposite: decrease the treasuries asset account, increase the cash account. Now, theoretically, the bank has $1 million dollars they can lend out to a client.
This process can indeed be inflationary, because when the Fed purchases securities, they are creating new money in the system. In normal times, they do this using "open market operations" -- buying and selling treasuries -- in order to maintain the target Federal Funds rate.
In a liquidity crisis like we're in now (and similarly in 2008), dollars are fleeing the system in large amounts at rapid velocity. Consider the typical bank run scenario: people run to the bank to withdraw their money from accounts to take a stuff under a mattress, or maybe to buy gold. When this happens, money -- better thought of in this context as credit -- is removed from the system.
In a fractional reserve system, banks can lend (credit) up to a specific percentage of deposit accounts (money) held at the bank out into the economy.
This is essentially what happens in a liquidity crisis, writ large across the entire system. Instead of individuals running to the bank, it's hedge fund clients and sovereign wealth and foreign investors liquidating (often leveraged) positions and taking money home overseas, putting it into gold, or buying US treasuries. All of this has the harmful effect of reducing the amount of available credit in the system. Eventually, this has a contractionary, deflationary effect in the economy.
So, in these crisis scenarios, basically what the Fed is trying to do is shore up the system, and replace rapidly evaporating credit in the system. |
