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The central banks are not a budget department

by on 06/09/2012

The article points some very right points.

1. The Fed almost tripled the monetary base  since 2008,

2. Most of the additional liquidity is deposited in the excess reserves in the Fed so until now it did not cause major change in the economic activity.

3. If the Fed will start to purchase other than the Treasury securities, it directly interferes in the federal budget policy, without any need for legal approval.
I remember similar situation, when the Israeli Government, using guaranties, increased  its expenses without legal budget approval. It was in the seventies when the annual inflation reached three digits.
3. All this function of Fed to trade with government securities, is necessary only because the Government is not an institution to be trusted as to  budget obedience.
4. Because of the huge excess reserves hold by the commercial banks in the Fed,  I believe, when the pendulum will turn and the banks will start to withdraw their excess money, the Fed will have to change the minimum reserve ratio, and it will become a major monetary tool, and not only a tool to secure stability of the commercial banks. And if so Why not to finance the government deficit directly by printing money? To make it work, all is needed is to make disobedience to budget discipline an offense of treason.

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