“Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.
But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.”[/quote]
There are liberal economists that I respect, and then there are political hacks like Krugman.
The reality is, banks ARE lending again. In fact, some lenders are going so far as to once again offer exotic loans such as interest only, etc..But in today’s world, banks will lend only to applicants that are qualified, and thats the way it should be.
As a result of Fed/bank action, sales activity has increased substantially during the last three months, which has created bidding wars and higher prices.
But the true inflationary effect of the Fed actions will take time to filter throughout the entire economy, and Krugman knows this, but since his objective in this article was to bash banks, he conveniently left out that fact.
