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The Fed was apparently pretty busy printing another trillion and pumping it in:http://www.pbs.org/n
Fed buys Treasury bonds
RAY SUAREZ: Help us understand what it means for the Fed to buy Treasury bonds. Isn't that like putting your hand in your left pocket and just shifting the money to your right pocket?
GREG IP: Well, step back a second and ask, what is a Treasury bond? It's essentially one of the ways that the government finances itself. When they want to provide us with services, whether it's Social Security checks or funding the Department of Defense, they can either raise taxes, they can borrow the money from households or from foreign investors, or they can ask the Fed to print it.
And when the Fed purchases bonds from the Treasury, they are basically printing money. They say, "We'll take that bond," and, hey, presto, we will create this money in an account for the government to spend.
RAY SUAREZ: So the Fed creates the money and then just lends it to the Treasury?
GREG IP: That's exactly what happens, and the Treasury goes out, and they spend the money. Now, in this case, they did not directly give the money to the Treasury. They actually will purchase the bonds on the open market. They will purchase them from people who previously bought them from the Treasury, but it is, essentially, printing money.
LIAQUAT AHAMED: Well, here's what keeps me up at night. In the Great Depression, the banking system in this country was actually relatively simple and it was not very large. The total size of the banking system was about 50 percent of GNP. So even though they let it go under, it was actually controllable.
The banking system and the sort of ancillary shadow banking system that we have now in this country accounts for 150 percent of GNP. In Britain, it accounts for 450 percent of GNP. I mean, the extreme case is Iceland, where it accounted for 900 percent of GNP.
So I worry that we've created a sort of financial Frankenstein that we're unable to control.
Mr. Ahamed is the author of "Lords Of Finance: Bankers Who Broke The World".
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