Amar Bhidé writes in the WSJ:
Governments may pay lip service, but in times of stress they face a strong temptation to force central bankers to cover budget deficits through the printing press. Often the bankers don’t wait to be told (witness the Federal Reserve’s recent rounds of quantitative easing).
Suppose that we are uncertain as to the force that is driving the Federal Reserve’s behavior. What probability should we assign to this chain of events? I suspect it is very low. Is there evidence to support this hypothesis other than simple correlations? There are a lot of reasons to criticize the Fed, I’m not sure this is one.
Which of these statements is untrue?
1. The Federal government runs a very large deficit.
2. Given the existing stock of debt, demand for debt is likely to be steeply downward sloping.
3. Without monetization Treasury would have to pay much higher rates and might even face a failed auction.
4. If Treasure faced much higher rates it would likely pressure the Fed to monetize the debt.
5. The Fed has, unasked, monetized the debt to keep down interest rates. Oh and it took a comedian to nail Chairman Bernanke’s double speak on whether quantitative easing constituted printing money
http://www.thedailyshow.com/watch/tue-december-7-2010/the-big-bank-theory
1. True
2. Perhaps
3. Conjecture
4. Perhaps
5. Conjecture. And who denies that when the Fed’s balance sheet gets bigger they are effectively printing money? Certainly not me.