By Stephanie Kelton (h/t Matthew Berg)

Federal Reserve Chairman Ben Bernanke gave his fourth lecture at George Washington University yesterday. Buried in the lecture, beginning at about 19:18 in the video, Bernanke explained where the Fed got the money to “pay for” the assets it purchased as part of its Quantitative Easing (QE) policies.

I remember when the Fed announced the first round of QE. Those who don’t understand Fed operations – think most mainstream economists – went nuts. Many worried that the Fed would be unable to “unwind” its positions (i.e. divest itself of the assets – MBS, Treasuries, etc. – it had purchased) because banks would refuse to swap their nice safe cash for riskier instruments when the economy recovered. Others insisted that QE was “stuffing the market full” of too many dollars and that this, inevitably, would result in hyperinflation.

John Carney just wrote a very nice piece, showing that not only was the Fed able to find buyers for its assets but that markets actually bought them back at a premium. Bernanke addresses the second objection in his remarks below – idle balances don’t chase any goods – but it’s the financing of the asset purchases that I want readers to understand, because this is fundamental to understanding Modern Monetary Theory (MMT).

The Federal Reserve, like any bank, can acquire an asset simply by crediting a bank account. In other words, the bank pays by creating money. As Alan Greenspan explained, the Fed has an unlimited capacity to spend in US dollars. It can pay trillions of dollars with a single keystroke. Here is Chairman Bernanke (Readers can follow is presentation beginning on page 17):

“Now, you might ask the question, well, the Fed is going out and buying 2 trillion dollars of securities – how did we pay for that? And the answer is that we paid for those securities by crediting the bank accounts of the people who sold them to us, and those accounts, at the banks, showed up as reserves that the banks would hold with the Fed. So the Fed is a bank for the banks. Banks can hold deposit accounts with the Fed, essentially, and those are called reserve accounts. And so as the purchases of securities occurred, the way we paid for them was basically by increasing the amount of reserves that banks had in their accounts with the Fed. So you can see this, here, this is the liabilities side of the Fed’s balance sheet. Of course, assets and liabilities (including capital) have to be equal. So the liabilities side had also to rise near 3 trillion dollars, as you can see. Now, take a look first, as you look at this, take a look first at the light blue line at the bottom. The light blue line at the bottom is currency – Federal Reserve notes in circulation. Sometimes you hear that the Fed is printing money in order to pay for the securities we acquire. And I’ve talked about that in some, you know, in giving some conceptual examples. But as a literal fact, the Fed is not printing money to acquire these securities, and you can see it from the balance sheet here, the light blue line is basically flat. The amount of currency in circulation has not been affected by these activities. What has been affected is the purple area. Those are reserve balances. Those are that accounts that banks, commercial banks, hold with the Fed, and they are assets of the banking system and they are liabilities of the Fed, and that’s basically how we paid for those securities. And so, the banking system has a large quantity of these reserves, but they are electronic entries at the Fed. They basically just sit there. They’re not in circulation. They’re not part of any broad measure of the money supply. They’re part of what’s called the monetary base, but again, they’re not, they certainly aren’t cash. Then there are other liabilities including Treasury accounts and a variety of other things that the Fed does – we act as the fiscal agent of the Treasury. But the two main items, you can see, are the notes in circulation and the reserves held by the banks.”

So ask yourself this question: If the Federal Reserve can create trillions of dollars with a single keystroke, and the Fed is the government’s bank, then why does President Obama claim we’ve “run out” of money? Why have Democrats and so-called progressives supported job-killing budget cuts in the name of “shared sacrifice”? Why are we throwing away the equivalent of $9.8 billion in lost output every single day? Why don’t we do something about our $2.2 trillion infrastructure deficit, 25 million underemployed and unemployed Americans, 100 million Americans in or very near poverty, and so on?

The answer is simple. Most of us don’t understand the monetary system. Instead of deciding how the government should wield its power over the dollar, we live in fear of the ratings agencies, the Chinese, the bond market vigilantes and other imaginary evils. And this holds all of us back. Unused resources abound, human needs go unmet, and the vast majority of Americans believe that ‘There Is No Alternative’ (TINA). Or, as Warren Mosler says, “Because we fear becoming the next Greece, we’re turning ourselves into the next Japan.”

There is an alternative. And it begins with an understanding of the monetary system. The cat is already out of the bag. Chairman Bernanke confirms it. Money is no object.

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Proof platinum coin. http://my.firedoglake.com/wigwam/2011/08/09/greenspan-the-united-states-can-pay-any-debt-it-has-because-we-can-always-print-money-to-do-that/