Fueled by my last post on this topic, I have been scouring the net for sources of ideas to fix the problem. Of course everyone is watching the US, so why not start with the current Chairman of the Federal Reserve System…

First, a little visual preamble…

 

Ben S Bernanke: The Federal Reserve’s balance sheet 

Speech by Mr Ben S Bernanke, Chairman of the Board of Governors of the US Federal 

Reserve System, at the Federal Reserve Bank of Richmond 2009 Credit Markets 

Symposium, Charlotte, North Carolina, 3 April 2009. 

The original speech, which contains various links to the documents mentioned, can be found on the US Federal 

Reserve System’s website. 

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In ordinary financial and economic times, my topic, “The Federal Reserve’s Balance Sheet, “might not be considered a “grabber.” But these are far from ordinary times. To address the current crisis, the Federal Reserve has taken a number of aggressive and creative policy actions, many of which are reflected in the size and composition of the Fed’s balance sheet. 

So, I thought that a brief guided tour of our balance sheet might be an instructive way to discuss the Fed’s policy strategy and some related issues. As I will discuss, we no longer live in a world in which central bank policies are confined to adjusting the short-term interest rate. Instead, by using their balance sheets, the Federal Reserve and other central banks are developing new tools to ease financial conditions and support economic growth.

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Some principles for balance sheet policy 

Before I get into the details of our balance sheet and how it reflects various Federal Reserve initiatives, I would like to note some general considerations that have been important in shaping our policy approach. As you know, financial markets and institutions both in the United States and globally have been under extraordinary stress for more than a year and a half. Relieving the disruptions in credit markets and restoring the flow of credit to households and businesses are essential if we are to see, as I expect, the gradual resumption of sustainable economic growth. To achieve this critical objective, the Federal Reserve has worked closely and cooperatively with the Treasury and other agencies. Such collaboration is not unusual. We have traditionally worked in close concert with other agencies in fostering stable financial conditions, even as we have maintained independent responsibility for making monetary policy.

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The balance sheet as a tool of monetary policy 

The severe disruption of credit markets that began late in the summer of 2007 and the associated tightening in credit conditions and declines in asset prices have weighed heavily on economic activity here and abroad. The Federal Reserve has responded by aggressively easing short-term interest rates, beginning in September 2007. In October 2008, as the financial crisis intensified, the Federal Reserve participated in an unprecedented coordinated rate cut with other major central banks. At its December 2008 meeting, the Federal Open Market Committee (FOMC) reduced its target for the federal funds rate close to its lower bound, setting a target range between 0 and 1/4 percent. And, with inflation expected to remain subdued for some time, the Committee has indicated that short-term interest rates are likely to remain low for an extended period. With conventional monetary policy having reached its limit, any further policy stimulus requires a different set of tools.

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Liquidity programs for financial firms 

The first of these categories of assets – short-term liquidity provided to financial institutions – totals almost $860 billion and today represents nearly 45 percent of the assets on our balance sheet. These loans are made to sound institutions, are fully secured, and are for maturities no greater than 90 days, usually less. Thus, they are very safe. The main components of this category are lending to commercial banks and primary dealers, as well as currency swaps with other central banks to support interconnected global dollar funding markets.4