The Fed’s emergency lending programs phased out as loan programs shrank and reverse repos were retired. Had the Fed not embarked upon QE1 and subsequently QE2, its balance sheet would have shrunk. But with the start of QE1 and QE2 the rundown in the Fed’s assets due to shrinkage of its lending programs was offset by the simultaneous purchase of agency mortgage-backed securities and purchases of long-term Treasuries. In fact, those purchased exceeded the amount of outstanding emergency loans the Fed had previously granted.
Funding for the Federal Reserve’s QE1 and QE2 asset purchases, the Fed first printed high powered money through its emergency lending programs and as those programs were phased out the Fed again purchased agency mortgage-backed securities and Treasuries from the public by printing money, and the proceeds of those purchases show up as customer deposits in banks, with the offsetting asset being not new loans but excess reserves held at the Fed.
Now there is talk that we will need to borrow 600 billion in August, to cover the cost of government. if this is true when will the borrowing stop. The Obama administration has already asked to increase the debt by 1.6 trillion to cover the cost of government for the rest of the year. There does not seem to be an end to the excesses of this administration. We have to stop borrowing and start cutting our spending. If we don't, hold on for a bumpy ride.
Samuel Burns
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