How dangerous was the Fed’s bond-buying program?

Beginning in November of 2008, the Federal Reserve expanded its balance sheet by purchasing hundreds of billions of dollars of mortgage-backed securities and U.S. Treasuries. Fed officials were careful to explain that this was an extraordinary measure necessitated by an especially deep and persistent economic slump. But privately they worried that buying mortgage bonds might be dangerous.

In 2013, New York Fed president William Dudley compared buying mortgage bonds to using the Ring of Power in J.R.R.’s Tolkein’s Lord of the Rings, according to the transcript released Friday.

Dudley explained the ring posed a danger to Biblo and Frodo, who are constantly tempted to use it and extremely reluctant to surrender it when needed.

“Like the hobbits in the ‘Lord of the Rings,’ we must overcome the temptation of the Ring of Power,” Dudley said.

In the Lord of the Rings, the Ring of Power was created by the dark lord Sauron to enslave the owners of other, lesser rings. “One ring to rule them all, one ring to find them, One ring to bring them all and in the darkness bind them,” as the familiar poem reads. Many characters in the novels seek the ring in hopes to use it for their own ends but this is said to be impossible. Anyone using the ring ultimately serves Sauron’s ends. It must be destroyed if it is not to enslave the world.

Despite this comparison, the Fed purchased a huge amount of bonds between 2008 and 2015, expanding its balance sheet from just under $900 billion to $4.5 trillion. And even now that the Fed is in the process of unwinding these holdings, it still does not sell any bonds. Instead, it allows the bonds it holds to mature and expire. Imagine Frodo standing on the ledge of Mount Doom and not actually releasing the ring but waiting for it to slowly melt off his finger.