William Poole on printing money

Caroline Baum consults with former St. Louis Federal Reserve Bank President William Poole in today's commentary at Bloomberg, once again offering up a sobering assessment of how far outside of its normal purview the central bank has strayed.

“It was never envisioned as a lender to specific sectors. Traditionally that has all been done through Congress, subject to budgetary and political discipline,” to the extent they exist.
...
Poole says there’s very little difference between what the Fed is doing and what the federal government does in “providing loans through the Small Business Administration or Export-Import Banks.” These types of loans, directed at specific sectors of the economy, “need to be authorized through the federal budget process and financed by securities sales and tax revenue, not by printing money,” he says.

The Fed has expanded its balance sheet with assets no one wants. Short-term loans to companies (commercial paper) and banks can be rolled off quickly and easily. Not so with the $500 billion of mortgage-backed securities the Fed is buying and holding to maturity, Poole says.

It will be difficult enough for the Fed to contract its balance sheet in a timely fashion to head off future inflation. A bigger challenge will be unwinding the credit extended to various sectors of the economy because its actions “create a lot of vested interests,” Poole says. “Wouldn’t (House Financial Services Committee Chairman) Barney Frank be happy to see the Fed permanently involved in the housing market?”

The old firefighter analogy is looking shakier by the day. That is, maybe firemen should worry a little bit more about water damage when putting out a monstrous fire. More importantly, maybe they should also check to see exactly what kind of liquid they keep pouring onto the fire because it only seems to get bigger.