The Truth Behind the Fed’s $1.5 Trillion “Cash Injection”

To begin, I think it’s important to first distinguish the role the Federal Reserve (“the Fed”) plays. The Fed is an independent agency established by Congress in 1913. While Congress established goals that the Federal Reserve should aim to achieve, the Fed itself is not controlled by the United States government. The Federal Reserve’s decisions do not have to be approved by Congress or the executive branch and receive no funding from Congress. It would be misleading to say that Congress or the president had any say in the Federal Reserve’s decision. In fact, this decision has even angered some who think they know what’s right:

The second piece of information that led to apparent confusion is where all this money is going. While many think this money is going straight to Wall Street and the bourgeoisie, it’s more complicated than that. What’s really happening is normal, everyday monetary policy but at a much larger scale. Put simply, the Fed buys and sells investments such as US Treasury bonds (which are controlled by the government) in hopes of influencing the economy to increase employment and decrease inflation. These “open market operations” are commonplace across all central banking systems, from the United States to the European Union and India.

Worldwide, this often takes the form of buying or selling repurchase agreements, or “repos”. Repurchase agreements are essentially short-term loans with interest in which one party lends money to another counterparty with the expectation that the counterparty pays the money back plus some interest in the near-term, typically by the next business day. These transactions are backed by some form of collateral, such as a US Treasury bond. If the counterparty doesn’t pay back the money, the other party simply keeps the collateral. Typically, banks agree to these loans, using their US Treasury bonds as collateral in exchange for additional cash to reduce the risk of running out of cash (for example, when you go to the bank and withdraw money). The other side of this loan is normally parties that have excess cash and want a very low-risk way to earn some returns, such as investors and funds.

Source: The Brookings Institution

Many investors and funds are having their customers withdraw cash in fear of stock prices plummeting. As a result, these investors no longer have excess cash to enter into repurchase agreements with. What this means is that the Federal Reserve is taking the place of these investors. Instead, the Fed is giving banks cash as a part of these short-term loans in order to make sure that banks continue to have enough cash to operate.

No, Congress isn’t giving money to bail Wall Street (this time). Instead, the Federal Reserve is stepping in to make sure banks don’t fail because Wall Street (and other funds) are opting not to give cash to banks. While other forms of monetary policy exist, such as “helicopter money” (directly giving cash to households), this policy is much more common and its effects are documented to a greater extent. Should things worsen, the Fed is much more likely to take unorthodox approaches—something which was done during the Financial Crisis of 2007–2008.

Unfortunately, policies like this are a Catch 21—when they aren’t effective people complain they didn’t do enough. When they are effective at maintaining the status quo, people complain that it had no effect. One thing’s for certain though, this is way more effective than the government’s ideas:

[tl;dr the government is not giving free money to Wall Street]


What do you think?


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