Pundits predicted the end of American life as we know it after Fed Chairman Ben Bernanke announced on March 18 that he would be dropping yet another trillion dollars in "helicopter money here , with up to $300 billion of it to buy long-term government bonds, and an additional $750 billion to buy private debt, using the Term Asset-backed Securities Loan Facility (TALF), which was to be opened up for the sake of consumers and small businesses. The dollar then experienced its worst drop in 25 years, amid worries that the Fed's intervention would spur hyperinflation. Typical of the concerned commentators expressing these sentiments was Mark Larson, who wrote in "Money and Markets" on March 20:
"This is Banana Republic-type stuff! And I'm not talking about the clothing store. Printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes. We're essentially monetizing our country's debt and deliberately devaluing our country's currency!"
Tim Wood wrote in "Financial Sense" on March 21:
"I'm now beginning to wonder if the powers that be are really in their minds trying to 'fix' things or if they are actually trying to destroy the dollar, the free markets, and perhaps even the nation. To be honest, the latter is starting to make more sense to me because surely there is enough intelligence in Washington to understand the potential consequences of these actions."
Commentators on the Financial Sense Newshour suggested that the Fed's move toward "quantitative easing" would be looked back upon as the watershed event in the beginning of the end of the United States dollar. As explained in Wikipedia:
"The term quantitative easing refers to the creation of a pre-determined quantity of new money . . . In very simple layman's terms, the central bank creates new money out of thin air. It then uses this money to buy what is essentially an IOU [that is, to make a loan]. . . . Today the new money is generally created electronically rather than physically printed."
The Fed has the capacity to create money on its books and lend it to whomever it will. There is thus a danger that we may just see more money being funneled to those same Wall Street banks that got us into this crisis in the first place. But while the Fed's new "quantitative easing" tool is fraught with risk, it also has some interesting potential. This funding mechanism could be extended not only to replace the loans that banks have been unwilling or unable to make, but to fund Obama's stimulus package -- at little or no cost to the American taxpayer.
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