Quote of the Day: Central Banking Crony Capitalism

The second point made in the classic video is that open market operations are a handout to the dealer banks. Suppose the government is going to spend an extra $100 that it does not have, and it will finance this by printing $100. In practice, it borrows $100 from "the Goldman Sachs" by issuing a bond, prints the $100, then pays "the Goldman Sachs" to get its bond back. This second method of funding the deficit is costlier to the government, but yields profits to "the Goldman Sachs." It also yields profits to the Fed, because the Fed is the agency printing the money, while the Treasury is the agency issuing the bonds. However, from a taxpayer's point of view, the Fed's profits are a wash (all of the Fed's gains come at the expense of the Treasury), and the only net impact is the income transfer to "the Goldman Sachs."

The Fed's response to the financial crisis was to massively increase the size of its balance sheet, thereby massively increasing the income transfer to private financial institutions. In addition, in order to keep this additional money from leaking to businesses or consumers in the form of loans*, the Fed introduced a policy of paying interest to banks on reserves. This increased the value of the transfer from taxpayers to financial institutions.

That’s from Professor Arnold Kling.