The idea is that buying government bonds from banks will increase the supply of money in the economy. Banks were holding bonds, now they are holding cash.

This was just the culmination of the biggest con in history. Banks haven’t loaned from reserves since ’34 when we ended convertibility of the currency to gold domestically. Even prior to that they were only obligated to hold a small percentage of the loan principal in reserves.

Banks create “credit accounts” for each borrower and match the loan principal with newly created reserves to balance their books and make possible interbank transfers of the loan proceeds. In this process the reserves created become “obligations” of the lender and the mortgage or payment contract becomes the “asset”. As the principal is paid down the reserves are reduced as well, meaning paying off bank debt decreases the money supply.

This system makes injections of liquidity useless except to remove risky bonds from the private sector and place that risk on the public sector. That would be great if it were approached honestly and the people’s government, the Constitutional monopoly creator of the US Dollar, made the decision. Risk is not an issue affecting the government’s ability to create dollars, so no harm could be done.

However, the Federal Reserve took it upon itself to do the asset swap that did create high power money and its member banks profit greatly from that by simply converting the new reserves to Treasury bonds. There should never be a crossover from reserves created without the normal order of Congressional appropriations and Treasury, or the banks can simply create their own income stream separate from the loans they create for the private sector.