US Person thinks the Hawaiian guy should channel Hjalmar Schacht between golf rounds instead of Grover Cleveland. As pointed out by several leading economists, Fed QE operations increase bank reserve balances because the assets purchased by the Fed are payed for by increasing the banks' reserve balances at the Fed. This is the so-called electronic money printing. The key point is that banks cannot from a bookkeeping standpoint, or do not, create consumer loans using reserve funds. They are largely used for settling accounts between banks. Thus, increasing the banks' reserve balances does nothing to expand the economy at large but is psychologically soothing for Wall Street, as demonstrated by the recent $3 trillion dollar sell-off in the global equity markets when it was rumored QE3 was ending.
In the view of some experts Fed buying of treasury securities may be "squeezing" the shadow banking system (unregulated hedge funds, money market funds, investment banks and other firms creating non-deposit based credit) by depriving it of preferred treasury debt collateral which is repo-ed and re-hypothecated to a multiplier of about 3. It is the modern way to make money not covered in Samuelson's textbook. At the end of 2007 about $3.4 trillion in collateral was turned into about $10 trillion in pledged collateral, compared to the traditional fractional reserve method of lending to create about $7 trillion of M2.[chart, above] Here is the danger: there are no reserves in this daisy chain of paper. If a run started the shadow system could be as much as $11.2 trillion short of collateral. No wonder the Fed wants to keep the big guys happy!