In this excellent piece, Warren Mosler elaborates on the Fed Chief’s comments and provides a great deal of clarity to the current economic environment.  This is a must read in my opinion (Warren’s comments in bold):

“DUFFY: We had talked about the QE2 with Dr. Paul. When — when you buy assets, where does that money come from?

BERNANKE: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.

WM: Not exactly, as all govt spending is done by adding reserves to member bank reserve accounts.  Reserve accounts are held by member banks as assets, and so these balances are as much ‘out into the public’ as any.
What doesn’t change is net financial assets, as QE debits securities accounts at the Fed and credits reserve accounts. But yes, spending is in no case operationally constrained by revenues.
DUFFY: Does it come from tax dollars, though, to buy those assets?

BERNANKE: It does not.

WM: Operationally he is correct, and in this case, to the extent QE does not add to aggregate demand, he is further correct.  In fact, to the extent that QE removes interest income from the economy, it actually acts as a tax on the economy, and not as a govt. expenditure.
However, and ironically,  I submit he believes that QE adds to aggregate demand, and therefore ‘uses up’ some of the aggregate demand created by taxation, and therefore, in that sense, it would be taxpayer dollars that he’s spending.

DUFFY: Are you basically printing money to buy those assets?

BERNANKE: We’re not printing money. We’re creating reserves in the banking system.

WM: Technically correct in that he’s not printing pieces of paper. But he is adding net balances to private sector accounts, which, functionally, is what is creating new dollars which is generally referred to as ‘printing money’
All govt spending can be thought of as printing dollars, taxing unprinting dollars, and borrowing shifting dollars from reserve accounts to securities accounts.

DUFFY: In your testimony — I only have 20 seconds left — you talked about a potential additional stimulus. Can you assure us today that there is going to be no QE3? Or is that something that you’re considering?

BERNANKE: I think we have to keep all the options on the table. We don’t know where the economy is going to go. And if we get to a point where we’re like, you know, the economy — recovery is faltering and — and we’re looking at inflation dropping down toward zero or something, you know, where inflation issues are not relevant, then, you know, we have to look at all the options.

DUFFY: And QE3 is one of those?


WM: Very hesitant, as it still looks to me like there’s an tacit understanding with China that there won’t be any more QE, as per China’s statement earlier today.

“PAUL: I hate to interrupt, but my time is about up. I would like to suggest that you say it’s not spending money. Well, it’s money out of thin air. You put it into the market. You hold assets and assets aren’t — you know, they are diminishing in value when you buy up bad assets.

But very quickly, if you could answer another question because I’m curious about this. You know, the price of gold today is $1,580. The dollar during these last three years was devalued almost 50 percent. When you wake up in the morning, do you care about the price of gold?

BERNANKE: Well, I pay attention to the price of gold, but I think it reflects a lot of things. It reflects global uncertainties. I think people are — the reason people hold gold is as a protection against what we call “tail risk” — really, really bad outcomes. And to the extent that the last few years have made people more worried about the
potential of a major crisis, then they have gold as a protection.

PAUL: Do you think gold is money?

BERNANKE: No. It’s not money.


PAUL: Even if it has been money for 6,000 years, somebody reversed that and eliminated that economic law?

BERNANKE: Well, you know, it’s an asset. I mean, it’s the same — would you say Treasury bills are money? I don’t think they’re money either, but they’re a financial asset.

WM: Right answer would have been gold used to be demanded/accepted as payment of taxes, which caused it to circulate as money.  Today the US dollar is what’s demanded for payment of US taxes, so it circulates as money. In fact, if you try to spend a gold coin today, in most parts of the world you have to accept a discount to spot market prices to get anyone to take it.

PAUL: Well, why do — why do central banks hold it?

BERNANKE: Well, it’s a form of reserves.

WM: Yes, much like govt. land, the strategic petroleum reserve, etc.

PAUL: Why don’t they hold diamonds?

WM: Some probably do.

BERNANKE: Well, it’s tradition, long-term tradition.

PAUL: Well, some people still think it’s money.”

“CLAY: Has the Federal Reserve examined what may happen on another level on August 3rd if we do not lift the debt ceiling?

BERNANKE: Yes, we’ve — of course, we’ve looked at it and thought about making preparations and so on. The arithmetic is very simple. The revenue that we get in from taxes is both irregular and much less than the current rate of spending. That’s what it means to have a deficit.

So immediately, there would have to be something on the order of a 40 percent cut in outgo. The assumption is that as long as possible the Treasury would want to try to make payments on the principal and interest of the government debt because failure to do that would certainly throw the financial system into enormous disarray and have major impacts on the global economy.

So this is a matter of arithmetic. Fairly soon after that date, there would have to be significant cuts in Social Security, Medicare, military pay or some combination of those in order to avoid borrowing more money.

If in fact we ended up defaulting on the debt, or even if we didn’t, I think, you know, it’s possible that simply defaulting on our obligations to our citizens might be enough to create a downgrade in credit ratings and higher interest rates for us, which would be counterproductive, of course, since it makes the deficit worse.

But clearly, if we went so far as to default on the debt, it would be a major crisis because the Treasury security is viewed as the safest and most liquid security in the world. It’s the foundation for most of our financial — for much of our financial system. And the notion that it would become suddenly unreliable and illiquid would throw shock waves through the entire global financial system.

And higher interest rates would also impact the individual American consumer. Is that correct?

BERNANKE: Absolutely. The Treasury rates are the benchmark for mortgage rates, car loan rates and all other types of consumer rates.”

BERNANKE: A second problem is the housing market. Clearly, that’s an area that should get some more attention because that’s been one of the major reasons why the economy has grown so slowly. And I think many of your colleagues would agree that the tax code needs a look to try to improve its efficiency and to promote economic growth as well.”

WM: While housing isn’t growing as in the past, housing or anything else is only a source of drag if it’s shrinking. It’s not that case that if housing were never to grow we could not be at levels of aggregate demand high enough to sustain full employment levels of sales and output.
We’d just be doing other things than in past cycles.

G. MILLER: Well, the problem I had with the Fannie-Freddie hybrid concept was the taxpayers were at risk and private sector made all the profits.

BERNANKE: That’s right.

WM: That’s the same with banking in general with today’s insured deposits, a necessary condition for banking.   Taxpayers are protected by regulation of assets.  The liability side is not the place for market discipline, as has been learned the hard way over the course of history.

G. MILLER: That — that’s unacceptable. What do you see the barriers to private capital entering mortgage lending (inaudible) market for home loans would be?

BERNANKE: Well, currently, there’s not much private capital because of concerns about the housing market, concerns about still high default rates. I suspect, though, that, you know, when the housing market begins to show signs of life, that there will be expanded interest.

I think another reason — and go back what Mr. Hensarling was saying — is that the regulatory structure under which securitization, et cetera, will be taking place has not been tied down yet. So there’s a lot of things that have to happen. But I don’t see any reason why the private sector can’t play a big role in the housing market securitization, et cetera, going forward.”

WM: As above, bank lending is still a public/private partnership, presumably operating for public purpose. see:
And there’s no reason securitization has to play any role.  Housing starts peaked in 1972 at 2.6 million units with a population of only 200 million, with only simple savings and loans staffed by officers earning very reasonable salaries and no securitization.

“CARSON: However, banks are still not lending to the public and vital small businesses. How, sir, do you plan on, firstly, encouraging banks to lend to our nation’s small businesses and the American public in

And, secondly, as you know, more banks have indeed tightened their lending standards than have eased them. Does the Fed plan to keep interest rates low for an extended period of time. Are the Fed’s actions meaningless unless banks are willing to lend?

CARSON: And, lastly, what are your thoughts on requiring a 20 percent down for a payment? And do you believe that this will impact homeowners significantly or — or not at all?

BERNANKE: Well, banks — first of all, they have stopped tightening their lending standards, according to our surveys, and have begun to ease them, particularly for commercial and industrial loans and some other types of loans.

Small-business lending is still constrained, both because of bank reluctance but also because of lack of demand because they don’t have customers or inventories to finance or because they’re in weakened financial condition, which means they’re harder to qualify for the loan.

WM: Right, sales drive most everything, including employment

“PETERS: Do you see some parallels between what happened in the late ’30s?

BERNANKE: Well, it’s true that most historians ascribe the ’37- ’38 recession to premature tightening of both fiscal and monetary policy, so that part is correct.

WM: Also, Social Security was initiated, and accounted for ‘off budget’, and, with benefit payments initially near 0, the fica taxes far outstripped the benefits adding a sudden negative fiscal shock.  The accountants realized their mistake and Social Security was put on budget where it remains and belongs.



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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Cullen,

    Is it true that if the Fed stopped paying interest on reserves the newly created reserves would rapidly leave the banks in the form of loans to the private sector?


  2. Warren needs to clarify this:

    “But he is adding net balances to private sector accounts, which, functionally, is what is creating new dollars which is generally referred to as ‘printing money’”

    which seems to go against a mantra that the MMT crew has repeated ad nauseum over the past 18 months or so.

    I THINK that the clarification lies in his comment slightly higher, when Warren wrote:

    “What doesn’t change is net financial assets, as QE debits securities accounts at the Fed and credits reserve accounts.”

  3. which seems to go against a mantra that the MMT crew has repeated ad nauseum over the past 18 months or so.

    How so? I don’t see how this contradicts anything MMTers have been saying. What you’re right about is that prior to payment of interest on reserves (IOR) any reserve-add to the system would put a downward pressure on the Fed Funds Rate (FFR) and force the Fed to soak up those reserves to defend the FFR. Now, with IOR and FFR being at IOR there is no need to do that, so reserve-adds can continue more or less indefinitely without affecting the FFR.

  4. …which is why Warren said in Soft Currency Economics that debt monetization cannot occur. But it can and does now. Where by “debt monetization” we define the Fed replacing outstanding Tsys with reserve balances.

  5. I still think Warren’s definition there is a bit off. As we discussed yesterday, tsys and reserve balance are both “money” according to the US govt. Monetization implies that you’re turning something into money. Bernanke isn’t turning water into wine. He’s switching money for money. No monetization. But it’s all semantics in the end….

  6. correct me if I’m wrong, but a resounding force out of the MMT voices has been: “the fed is NOT printing money”

    Warren just explained that they ARE printing money, even if you want to make the semantic argument that they are not printing physical bills.

    As I noted, however, Warren also explained that this money is exchanged for other assets, so that net assets are unchanged, which I think is the real point that MMT’ers are making when they say that the fed is not printing money.

  7. It just shows that you need clear definitions. What is exactly meant by “printing money”? What is “money”? Etc. Some of it is touched upon in the other thread, look for Scott’s comments:
    MMTers, if they are precise, would never say “the Fed is not printing money”. Try to see how many quotes like that you can find. They would say “the Fed does not add net financial assets to the economy” or “NFAs remain unchanged” or something like that.
    The problem is people have some abstract ideas about what “money” is, what “debt monetization” means without clearly defining the terms. Then they jump to conclusions. I say, either don’t use ambiguous terms or define them clearly every time.

  8. “MMTers, if they are precise, would never say “the Fed is not printing money”. Try to see how many quotes like that you can find”

    ok thanks. I hear you.

  9. PeterD,

    I really don’t want to beat a dead horse, but from these very pages:

    1) “The Fed is not “printing money”.”


    3) “Mr. Dudley nails the fact that we are not printing money.”


    now, again, it’s clear to me that Cullen’s point in each of those three pieces was that there are no net financial assets added, because the newly “printed” money (which is not in fact printed) is exchanged for financial assets (treasuries), as Warren noted.

    and cullen – seriously – don’t get all mad. please. Peter asked me for examples, so I provided them. My intention is not to argue with you.

  10. This is really beating the dead horse :)
    Yes, I know you, Cullen are speaking so that people can understand while other MMTers try to be more “technical”.

    The important message here is to fend off the idea that the Fed is creating new money that can be spent. That is simply not what they’re doing.

    Right, but by the same token, whenever the government spends, it does “print money” in that particular sense.
    By the way, the Fed can also create NFAs whenever it swaps reserve balances for financial assets that later decline in price, such as ABS. For if the Fed buys an ABS bond that becomes worthless, the effect is that the economy just added NFA (~money).

  11. What bothers me is WM- saying..”technically he is correct or operationally he is correct”
    I’m not bothered by WM per say just that Wizard of the Fed if I read into WM correctly sounds no different then the former Chairmans admission that he was acting under the wrong assumptions while chairman.

    Why do we all see it. Wether you agree with MMT or not. I’m more concerned with the chariman at this point and his agenda.

    When I was a kid I was Fat…not kind of fat but I was almost harpooned while boogie boarding in Central California. I had no clue I was fat. Bernanke’s problem isn’t his weight. But he doesn’t know what he is. Moreover he doesn’t know what his acttions are doing. He must be looking in the same mirror I was in 5th grade.

  12. WM: As above, bank lending is still a public/private partnership, presumably operating for public purpose.

    But why? The government has no need for banks since it can just spend and tax. As for the private sector, why should the so-called “credit worthy” be allowed to steal purchasing power from those who won’t or can’t borrow?

    Gee wiz. The government backed banking system caused the Great Depression which was a major cause of WW II which killed 50-86 million. And it looks like GD II might be in the works. Why do we tolerate such a dangerous system?

    As for government deposit insurance, people should be allowed to store their money safely. But since all loans involve risk then a 100% guarantee on funds that are lent out is a government subsidy for someone at the taxpayer’s expense.

  13. I’m having trouble getting around the semantics here. I’ll just let put this bit from a Forbes blog and maybe someone could refute it.

    “Easing” means having the 12 banks in the system buy Treasury bonds and Treasury-backed mortgage securities. Payment is with money created by the Federal Reserve.

    What’s going on here? Investing, as when JP Morgan buys a Treasury bond? Or something more like money printing?

    Defenders of big government and of expansionary money policies (they tend to be the same people) have a fit when you equate quantitative easing to the printing of dollar bills.

    But look closely at this merry-go-round. The government wants to spend $1,000 it doesn’t have. So it sells a bond. The buyer is the Federal Reserve. The Fed pays for the bond with some folding money. The Treasury spends the $1,000 on farm subsidies or whatever.

    The Fed makes a show of treating the $1,000 bond as an investment. It collects $40 in interest from the Treasury. But this is a charade. The Fed declares the $40 (after some overhead costs) as profit and sends the profit right back to Treasury. In reality, the interest payment never left the Treasury building.

    When the dust settles, this is what has happened. The farmer has $1,000 of cash. The government did not get this cash by collecting taxes. It got the cash by creating it.

    /end forbes

    I think the point is without the transfer of the bond to the Fed, some entity in the private sector would necessarily have to hold it just as they held reserves. For the government to spend continuously there must always be reserves in the system that can be replaced with treasuries since congress mandates that we do that. If the fed didn’t replenish the reserves (“print money” as some refer to it), then there would be a limit to the amount of money government could spend but only because of the congressional mandate requiring debt issuance. I guess a clear way to ask the question is this: if Congress theoretically passed a $500 trillion stimulus package tomorrow, what is the “financing” mechanism that would follow to make this work?

  14. what would you prefer? Dan Dell

    I would prefer that the government leave private money creation to the private sector. That would have the effect of forcing the banks to pay honest interest rates for deposits and would most likely force corporations to deal fairly with labour.

    Let’s face it. We have accepted that theft of purchasing power by the strong from the weak is a good thing. But look where it has gotten us.

  15. This is a great breakdown.

    Can we simply say to avoid all this confusion that the USD is the only official money AND currency?

    I think that would simplify things and is completely accurate.

  16. You sure are linking a lot of things… I may not be able to wrap my head around all of your comments. Thanks for responding though.

  17. I may not be able to wrap my head around all of your comments. Dan Dell

    No problem. Rome was not built or destroyed in a day. Plus, money is a mind-boggling topic. I don’t claim to have my head around it either.

  18. My understanding is that in QE FED is converting interest-bearing assets into non-interest bearing assets. Basically, it is letting banks have cash instead of bonds which allows banks to use those reserves for buying any other asset say equities, commodities, etc. Is that correct? Then why that is not equivalent to “printing money”?


  19. No, banks do not lend reserves (deposits) – banks are not reserve constrained in their lending. Banks create loans which create deposits at the same time. If the FED stopped paying interest and the Treasury stopped issuing bonds the FED would loose control of short term rates and they would likely plummet to zero as excess reserves piled up.

  20. except they do in the real world because its congressionally mandated. its a political constraint, but still a constraint that only the Fed allows them to get around. true? ipso facto the fed “prints money” or at least permits the government to do so without restraint

  21. While this isn’t exactly what happens it is the closest analogy I can think of.

    Congress passes a bill requesting the government Buy some tanks. To complete the transaction the TREASURY writes a check to the tank builder. The tank builder puts the check into his bank account. The bank now has excess deposit (reserves). To pay for that check when the bank goes to clear it the Treasury issues a bond. The bank with excess reserves wishes to turn that zero return paying reserve into an interest bearing asset – it buys the treasury bond.

    The government spent the money into existence and swapped it for a bond almost at the exact same time.

    If the FED then decides it wants to do “quantitative easing” it is just going to re-swap reserves for the bond.

  22. Please note… If congress wanted to it could allow the Treasury to overdraw its account. There is nothing in the operations of a fiat currency that require there to be a bond swap or any other deposit for the Treasury to spend.

  23. Because the asset already existed. If I swap you a bud lite for a miller lite you still have beer, right?

  24. what qe does is work to alter the term structure of rates, and, with the current yield curve, remove interest income from the economy.

    as always, with the Fed its about price (interest rates) and not quatity.

    and note I rarely use the word ‘money’ except when responding to someone else who used it, being careful to indicate the particular context.

    And when someone uses the word money when addressing me, i most often ask for their definition before responding. and more often than not that causes them to change their question.

    seen my interview on fox with stuart varney?

    good discussion here!!!

  25. I kinda meant that your arguments were terribly convoluted … Dan Dell

    That’s exactly how I feel about banking. My background is engineering so it was and is a terrible shock to learn how fundamentally crooked banking is.

    I don’t think my arguments are tangential either. Money creation should be fundamentally ethical. For it to be otherwise is to build on a foundation of sand.

  26. F Beard,

    Based upon your comments I find you to be a very intelligent persons. However I’d suggest you find some source to learn the actual operations of how banks work. Again, I think you’re very smart, but like MMT most people don’t have a clue as to how a bank operates. I work for one and I’m still learning.

    Of what I know and what I’ve learned… people think banks take deposits and make loans. False. There are three core components of a bank. Deposits, Payments and Loans. Banks make loans (create assets) to credit worthy customers. Loans become deposits in the banking system. Banks receive checks (or their modern day equivalent) and clear/pay them. Banks take deposits to buy/fund assets and to operate their payment system.

    So on a grand scale a bank is creating deposits (loans) to feed the funding of its assets (loans) and payments (you’re personal checks). A bank is required to hold reserves as insurance against the payment system. It wasn’t the FED tightening in the 1930’s that made the depression so bad, it was the FED’s failure to protect the payment system that blew it all up.

    This can all operate with or without government money. Private money doesn’t prevent banks from creating ponzi based loans in the Minsky sense. This is why regulation is so important. Unless you create a new banking system you need to prevent them from abusing the loan creation side of the house or you end up endangering the deposit and payment side of the house because the bank more easily becomes insolvent.

  27. Private money doesn’t prevent banks from creating ponzi based loans in the Minsky sense. Adam

    Agreed. But to have genuine private monies ALL government privileges for the banks must be eliminated. That would mean no lender of last resort, no capital gains tax, no legal tender laws for private debt, and ruthless enforcement of insolvency laws.

  28. WM says, “Reserve accounts are held by member banks as assets, and so these balances are as much ‘out into the public’ as any.”

    Banks don’t lend reserves and bank lending is not reserve constrained; it is capital constrained. I believe that Bernanke was correct when he said about QE2, “We create reserves in the banking system which are just held with the Fed. It does not go out into the public.” He’s been schooled by MMT, because he used to say that QE effectively printed money. The Fed crammed the banks full of reserves to address solvency concerns at the height of the crisis.

    The Fed clearly isn’t “printing money” via QE; it really is just an asset swap. It is the “wheelbarrow of currency rolling down the street” imagery created by the “printing money” meme about QE2 that has misled so many investors and given a hyper-boost to commodities and gold that is psychological rather than objective. It’s the power of the madness of crowds. Compared to the crash in asset values since 2008, QE has been smallish in volume.

    Where did I learn this? Here.

  29. Can’t the same be said for Treasuries? If they decrease in price post-Fed-purchase, then “money” has been added, no?