Saturday, August 28, 2010

Indications Roubini Doesn't Understand What Bernanke Is Up To

Nouriel Roubini tweets:
Fed policy is impotent & more QE is useless :banks aren't lending 1 trillion of free reserves: why would they lend a second trillion of QE?
As I have pointed out before, the Fed's re-investing of MBS cash flow will pump new money into the system (exact quantities depending on several factors).

The new money will enter the system because the re-investments made by the Fed will to some degree not result in just purchases from banks that can place money as excess reserves with the Fed, but by individuals and other institutions that will result in the money entering the system.

Thus, Roubini doesn't get it. Money will enter the system. How much will depend on what banks do with money that is deposited by those outside the system. But to the degree that first round hits those outside the banking system that will result in an increase in the money supply. As I have pointed out, it isn't clear what the multiplier effect will be, but some will get in the system.

Thus, Roubini is off, in fact way off. The Fed is far from impotent. To the degree it pumps money beyond the inside loop banking system, that money will enter the economy, and the Fed never has to stop such activities. Thus, rather than being impotent the Fed has at its disposal the capability of printing any amount of money and getting it in the system.

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