The Federal Reserve acts boldly to ease credit conditions

THE Federal Reserve decision to pump another trillion dollars into the economy still has the capacity to raise eyebrows.

In economic circles, the decision by the Federal Open Market Committee stirred less excitement. Indeed, there was talk the move was overdue. Even among Federal Reserve policymakers, the vote to proceed was unanimous.

The Fed said it saw continuing job losses, declining equity and housing wealth and tighter credit conditions.

"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability," the nation's central bankers declared.

The term of art behind the purchase of vast sums of Treasury bonds and mortgage securities is quantitative easing. Money is pumped into the financial system, but the method is less printing currency than printing checking accounts for banks.

Banks have reserve requirements that define the amount of money they must keep on hand. Excess reserves are available for the business of banks: lending.

New money — out of thin air — eases pressures on the banks, lowers interests rates for interbank transactions, and creates an incentive to loan money.

The Fed is watching its balance sheets as it tries to use the sticks and carrots of a central bank to get lenders to put money into the economy.

For as frightfully big as the numbers appear, this practice does not have to be inflationary, according to economic experts. There is time for the monetary policy to work its magic, and the Fed can reverse its policy in the future. Or so it is hoped, because a move of this scale enters new territory.

The complexity of these decisions makes them more difficult to grasp, and not as much fun as the politics of AIG bonuses and other outrages. This latest Fed move comes in a long line of efforts by Congress and the Bush and Obama administrations to prop up pieces of the economy and stimulate other parts.

For a sobering and unexpected accounting of the expensive efforts to date, check out CNNMoney.com for an excellent report on "America's Money Crisis." A list of bailout elements goes back to December 2007, with an allocated total of $11.6 trillion. Those AIG bonuses represent $165 million.