James Hamilton for Fortune here provides an excellent explanation and illustration of how the Federal Reserve "printed" money with which to buy assets from troubled banks, who in turn have kept the "cash" on deposit with the Fed, earning interest, in an effort to re-structure their balance sheets.
Here is an excerpt:
Here is an excerpt:
But if the Fed didn't print any money as part of QE2 and earlier asset purchases, how did it pay for the stuff it bought? The answer is that the Fed simply credited the accounts that banks that are members of the Federal Reserve System hold with the Fed. These electronic credits, or reserve balances, are what has exploded since 2008. The blue area in the graph below is the total currency in circulation, whose growth we have just seen has been pretty modest. The maroon area represents reserves.
Despite all the rhetoric to the contrary from the Fed, this operation is not designed to stimulate job growth or boost stock prices. It is designed to do one thing and one thing only: rescue the banks.
And don't even think about maintaining a strong dollar.
When that maroon area returns to an imperceptible sliver, if it ever does, you'll know things are back to "normal." Unlike George Bailey who had two dollars left from his two thousand dollar honeymoon stash at the end of that day when there was a run on his bank, the Federal Reserve can theoretically keep on running this shell game indefinitely. But the consequences for the value of the dollar will be, and are, grave indeed, which makes Mr. Bernanke's warnings to Congress to get its spending under control almost amusing.
Come, sir; come, sir; come, sir; foh, sir! Why, you
bald-pated, lying rascal, you must be hooded, must
you? Show your knave's visage, with a pox to you!
show your sheep-biting face, and be hanged an hour!
Will't not off?
-- Lucio, in William Shakespeare's Measure for Measure, V, 1
