"Open market operations"

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trendfollower's picture
trendfollower
Status: Member (Offline)
Joined: Oct 24 2008
Posts: 2
"Open market operations"

Hi, I am really enjoying the presentation.  I am going to have to distribute it far and wide.

I really wanted to suggest some clarification regarding the purchase of bonds by the federal reserve.

There is a great article on it here.  

http://ingrimayne.com/econ/Banking/FedMonPol.html

I had to stop the presentation and google "federal reserve buy treasury bonds" because I didn't believe it, it may be worth extrapolating, the purchasing of government issued bonds by the federal reserve is specifically executed for the creation of new money.  I guess I found it a bit opaque as to why the fed would buy the bonds.  In short, I didn't understand the obvious motivation for the fed to buy any t-bonds.

The wikipedia page on this is also a good reference.  http://en.wikipedia.org/wiki/Open_market_operations

And another here...

http://blogs.wsj.com/economics/2007/08/12/how-does-the-fed-inject-money-...

Ok, onto chapter 9.  Maybe some of this information comes later.  I wouldn't have learnt what I just did there from google had I not been stimulated by watching the crash course in any case. Smile 

Carl Veritas's picture
Carl Veritas
Status: Gold Member (Offline)
Joined: Oct 23 2008
Posts: 294
Re: "Open market operations"

 

The links explained the mechanics of how the Fed increases the money supply.

Since its creation in 1913 the US dollars purchasing power has been steadily decreased:

$1.00  in  1913  is  $22.10  in  2008

 

Remember also that there is a huge difference when the Fed buys government bonds from the commercial banks.

The payment that the banks receive ---in the form of credit to their acct with the district Fed branch---become the fresh

reserves banks use to expand their loan portfolio,  by virtue of the fractional reserve system in place.

The business loan market is where the economic booms originate,  carrying its own seed of destruction. 

trendfollower's picture
trendfollower
Status: Member (Offline)
Joined: Oct 24 2008
Posts: 2
Re: "Open market operations"

 

It is interesting, that ultimately, the government is in debt to the Federal Reserve, whom are the ultimate holders of the treasuries.

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