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Comment by nostromo | Hacker News Reader

Let's put aside the Federal Government (and taxes and spending) for a moment and focus on the Federal Reserve.

The Federal Reserve printed a large amount of money in response to the crisis. (That was a silent tax on anyone holding cash.) To inject this money into the economy, they bought a bunch of securities. My question is simply: why use asset buying as a vehicle for injecting money into the economy and not cash to citizens? Cash to citizens seems more fair than picking winners and losers and propping up assets that would otherwise be worth much less. It seems the Federal Reserve's strategy of the past 5 years has done very little to reboot the economy, and has worsened wealth inequality dramatically.

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> The Federal Reserve printed a large amount of money in response to the crisis. (That was a silent tax on anyone holding cash.) To inject this money into the economy, they bought a bunch of securities. My question is simply: why use asset buying as a vehicle for injecting money into the economy and not cash to citizens?

Because that's all that the Federal Reserve can do. If you want someone to do something else, you'll need to talk to the government, not the Fed (even if that is just talking to the government about changing the rules on what the Fed can do.)

Of course, the more you give flexibility to the Fed to do more of the things that otherwise would be within the domain of the government, the more you undercut the whole point of an independent central bank (while simultaneously undercutting democratic accountability.)

> It seems the Federal Reserve's strategy of the past 5 years has done very little to reboot the economy, and has worsened wealth inequality dramatically.

The Federal Reserve, by design, does not have a general set of tools for dealing with the economy, but a very limited set of tools for managing the money supply.

Because that's all that the Federal Reserve can do.

Yes. Pretty much.

Problem is "unemployment" is such a fake number the entire mandate of the fed has been based on flawed stats. The fed is happy to lower the "unemployment" rate by forcing people onto "disability" (permanent welfare) and un-paid leave of the workforce.

That's not reducing unemployment in any meaningful sense. Its just statistical arbitrage/3-card-monty.

Because just as the Federal Reserve can arbitrarily expand its balance sheet to purchase assets, it can also arbitrarily shrink its balance sheet when it sells those assets.

In other words, the Fed can print money to buy assets, increasing money supply, but given the large increases during the recovery, if inflation picks up the Fed might want to shrink the money supply. It can only do that by selling assets and destroying the money it receives.

I think the 2008 events have shown that the Fed's purpose is to keep the "financial system" happy. Regular citizens don't really count anymore.

But don't you think that if the financial system gets unhappy, you'll quickly follow in that unhappiness ?

2008 was really bad for the financial system. 2009 was really, really bad for everyone else. One was the direct cause of the other.

Part of the reason for the purchase of securities was to lower the interest rate on longer term securities like the 10 year treasury note. This lowered the rate a lot of consumer loans like mortgages, car loans, etc. with the hope of stimulating the economy. Usually the Federal Reserve just changes the discount rate (overnight rate to banks) to try and stimulate the economy but lowering the discount rate through 2007 and 2008 wasn't lowering the longer term interest rates and thus consumer borrowing rates. Thus Bernanke took the unprecedented step of buying the securities to drive down the longer term interest rates as well.

In effect they printed money to do this but inflation remained quite low by standard measures. Bernanke requested Congress to help stimulate the economy in the near term, but politically it was impossible for Congress to achieve even a short term second stimulus package. History will be the final judge of the extraordinary actions taken by the Federal Reserve but to me it seemed like the best of a lot of bad options. Even as I'm glad that some agency was trying to stimulate the economy I'm concerned about the historical precedent that a small unelected group can decide to take on so much debt with no public comment.

> (That was a silent tax on anyone holding cash.)

Not really, because...

> To inject this money into the economy, they bought a bunch of securities.

Trading one financial asset for another is not the same thing as handing out cash for nothing.

Unless you want to make the case that a torrent of spending was being frustrated by being stuck in illiquid assets (and has subsequently materialized but has not been reflected in official statistics).

When the fed buys securities, the securities go on their balance sheet. Now... granted some of the securities may be junk, but there is an entry on the balance sheet. What would go on their balance sheet if they gave away money? The fed is a bank. Not a government. It's (arguably) the governments job to redistribute income. Not the job of a private institution.

Because all the Fed can do is issue/buy back treasuries (and MBS since Bernanke), as well as act as a lender of last resort. Banks are the ones who hold the vast majority of treasuries so they're the ones who are getting the cash for them. How else do you expect it to work?

That would help too (the effects are somewhat similar: inflation is sort of a flat tax on wealth, and wealth distribution is extremely unequal in this country; debtors would greatly benefit), but again, you’re going to get cries of “socialism”.

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