“Bring It” says the Fed

Fed assets total $1.89 trillion in latest week – MarketWatch .

This is kind of cool, because it really reveals some interesting stuff about the economic crisis and how the Fed has been trying to deal with it.  

Traditionally, the Federal Reserve Bank controls money supply in the market.  It does this by “targeting” interest rates and literally putting money in or taking money out of the market by buying or selling bonds.  When it raises interest rates, people save more and spend less, prices drop and inflation goes down.  When it lowers rates, people spend more and inflation goes up.  Throw in some changes in the supply of money and the GDP moves around in desirable ways.  

For…a very long time, what is called the “monetary base” of the Fed – the money which it controls and regulates, which it utilizes to fuel the economy – has been relatively stable.  However, because even a target 0% interest rate (it’s literally set to 0-.25% right now) has had almost no effect on spending (some thoughts on this later…) and therefore GDP won’t budge, the Fed has had to change the way it has gone about business.

First, it started bailing out AIG, Fannie Mae, Freddie Mac, etc.  This meant that they basically started owning these institutions, and now the monetary base went up.  They then started a process of injecting money into other institutions through TARP and other tools and the base got even bigger.

And, as one can see right at the beginning of the article, what was $870 billion in December 2007 is now $1.89 TRILLION.  That’s how much the Fed has in assets.  

Bernanke, the Fed Chairman, has some good stuff…somewhere, about how this dollar amount will shrink naturally as certain items fall off the balance sheet, but the monetary base for the Fed will be higher moving forward.

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