Investopedia article on central banks

[09Ag]

I got into an argument with a friend of mine about the fed printing money. He tried to tell me that wasn't true and the fed just uses measures like bonds to affect the money supply. He used this article to make his point. I'm not very informed about monetary policy, but this article is incorrect, is it not?

http://www.investopedia.com/ask/answers/07/central-banks.asp?viewed=1

 

[malkusm]

What he says is technically true, and this article is correct. However -

Finally, the Fed can affect the money supply by conducting open market operations, which affects the federal funds rate. In open operations, the Fed buys and sells government securities in the open market. If the Fed wants to increase the money supply, it buys government bonds. This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply. Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system.

Buys government bonds - with what? Money that it printed, of course.

 

[TheState]

While the fed doesn't print money directly, it does increase the money supply. Your friend was right when he said they do this through US bond purchases, but lately they have also been buying mortgage backed securities, which also increases the money supply (well the M0 monetary base). Currently, this new money that was created to buy these securities is being held by the banks as excess reserves.

 

[09Ag]

So what is Judge Napolitano talking about when he says the Fed just adds zeros to a companies bank account out of thin air (as a loan), and then gets paid back in real money?

 

[hugolp]

So what is Judge Napolitano talking about when he says the Fed just adds zeros to a companies bank account out of thin air (as a loan), and then gets paid back in real money?

It does that (adding zeros to a company bank account). I dont unerstand what he means that it gets paid banc in real money.

 

[TheState]

I think what he means is that the Fed creates this money out of thin air and loans it to banks. Banks use this money and make loans to businesses and people. Businesses and people create actual wealth from the loans through production. They repay the loans with the wealth they created legitimately (not just printed), and this gets transfered back to the Fed.

It's not like a the dollar getting paid back to the Fed is any more real or fake than the one it created. It's just that the money getting paid back to the Fed was created legitimately and is being taken from the private sector.

I think.... hah