I worry when someone from the Fed says something that I agree with. However, this paper does a decent job of addressing the concerns that the growth in the base money supply and the banks’ excess reserves is inflationary (it isn’t because the money multiplier isn’t taking hold. Banks are not lending). It also gives a reasonable explanation that the Fed liquidity programs do not have an impact on lending. I suppose the purpose is to show that the liquidity programs are not discourage lending, but it also reinforces the argument against inflation. The paper does offer the explanation that paying interest on reserves discourages lending, though. In fact, that is one of the tools it proposes as a way of preventing inflation in the future. There is one very discouraging aspect of this paper. When banks do decide to lend, and the money multiplier starts to cause obscene inflation, the only hope appears to be the Fed doing the right thing at the right time. We now have decades of data points of the Fed waiting too long to reverse course. This is not encouraging.

Also, I’m a little troubled by the graph at the end. Somehow the value of securities is higher now than it was before this downturn really began. This doesn’t make a lot of sense to me. The values of any securities aren’t anywhere near where they were, so this means that a lot of purchasing has been going on. If there’s a significant leg down, the whole banking system is even more at risk than before.