No easy exit for nationalization

By Henry C K Liu

Part 1: The zero interest rate trap

The notion that nationalization is only an emergency measure that can be undone as soon as the economy recovers appears to be wishful thinking. Discussing the US Federal Reserve's market exit strategy problem, Fed chairman Ben Bernanke said in his London School of Economics Stamp Lecture: "The Crisis and the Policy Response":

Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve is effectively printing money, an action that will ultimately be inflationary. The Fed's lending activities have indeed resulted in a large increase in the excess reserves held by banks. Bank reserves, together with currency, make up the narrowest definition of money, the monetary base; as you would expect, this measure of money has risen significantly as the Fed's balance sheet has expanded. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term; indeed, we expect inflation to continue to moderate.