Fed's Lockhart: I'm with Bennie, Let's Inflate

During a  speech  in Savannah, Ga., before the Savannah Rotary Club, Federal Reserve Bank of Atlanta President Dennis Lockhart said , “I am leaning in favor of additional monetary stimulus while acknowledging the longer-term risks the policy may present. At this juncture, and given the circumstances of sluggish growth and measured inflation that is too low, I give greater weight to the risk of further disinflation leading to deflation. In my mind, QE2 is a form of risk management—an insurance policy that is prudent to put in place at this time.”   Lockhart isn’t currently a voting member of the Federal Open Market Committee.

If you read Lockhart's entire speech, what stands out is that he does not acknowledge that the earlier Fed printing resulted in a trillion dollars in excess reserves. He seems to be operating under the bizarre premise that, say, another trillion will be just an addition to the trillion that has already been created. In facty, it will be very different.

These new funds WILL enter the system, unlike the first trillion. A trillion in high powered money entering the system is huge. Why will these funds enter the system, when the first trillion didn't? Largely because Bernanke's new "tools" are distorting Fed activities. The first trillion was, via a Bernanke new tool, delivered directly into the hands of the banking elite, who, for a variety of reasons, placed the funds as excess reserves. The new money that is about to be printed, although being funneled through the elite primary dealers. will end up in the hands of all sorts of sellers of Treasury securities. These sellers don't have rights to deposit funds at the Fed. Further, they are likely to be selling the securities because they have other plans for the cash, that is, the first round of Fed printing will hit the system. Whether there is a multiplier effect depends where the money is deposited after that and what the deposit facility will do with the funds. Thus, the first round money is going to hit the system (unlike with QE1) and most likely a multiplier will also kick in.

Lockhart doesn't appear to understand any of  this. Very scary.