Has Bernanke Printed A Lot of Money?

When politicians and political pundits want to sound smart and make headlines, they begin oversimplifying things that they don't understand. Accordingly, the last several months has seen an increase in the accusation that the Fed has "printed money."

As stated above, though, this is way oversimplified. Normally when the Fed wants to print money, it gives cash to banks in exchange for an asset like a T-Bond or fixed income security. Then the bank can spend that money however it wants by giving consumers, homeowners, and business owners loans.

Chairman Bernanke made a decision though. He analyzed the crisis and found that banks needed liquidity (cash), but consumers, homeowners and business owners should not be the end-recipient of this money because inflation could get out of hand in the long run. He therefore went to Congress and asked for permission to pay interest on the extra money banks keep at the Federal Reserve. This way, the banks would make as much money by doing nothing than they would by giving loans to the public (this is because the interest rate paid by the Fed is almost equal to the interest they would recieve in profit from a loan).

This gives the Fed a great tool to fight inflation. The Fed hasn't printed money because almost all of the cash that has been given to banks is sitting UNUSED in the bank's account at the Federal Reserve! At the same time, banks meet liquidity standards by having the money held with out issuing a loan.