In the last year and a half, the federal reserve has printed more money than at any comparable time period in our entire history. Some of that was intended to go to buy the mortgage-backed securities that were considered "toxic" on the balance sheets of banks; but a lot more was used simply to buy stock in banks, or in other companies, like General Motors.  

Further, the "stimulus" money was intended to support government projects to get people working again, but, instead, the greater part of it went to pay more for health care and unemployment compensation.  In no case can we be sure that the money we printed was used more productively for the economy than if it had not been printed, and the deficit kept lower as a result. The danger from printing money is that, sooner or later, every increase in the money supply not matched by a growth in real GDP causes inflation.  

With the TARP money being returned, we should pay down the debt, dollar for dollar. President Obama wants to spend it on more projects. Only by taking it out of the system, however, can we escape the inflationary c onsequence. 

When will inflation come? 

We've increased the money supply more than one third in a little over one year. Never before have we seen so large an increase in so short a time. We don't see inflation yet, because the economy has not revived: we don't see prices going up because we don't see consumers buying. We don't see employers making permanent new hires. Everyone is cautious, afraid that the short term boost from a government check will not last. As long as that degree of caution prevails, we won't have inflation, but we also won't have economic recovery. 

Once hiring steps up, however, and people begin to consume again, then the extra money the Federal Reserve printed will have its inflationary impact. When the crisis hit, the Federal Reserve intervened to prevent collapse of major financial institutions. It is impossible to second-guess all those decisions; we don't know what would have happened had the Federal Reserve not intevened. But we can say, with certainty, that the size of the deficit, of spending more than we took in, had grown out of sight for too long. 

We can say, also, that it was a huge mistake to try to make Freddie Mac and Fannie Mae underwrite mortgages that were risky. Indeed, it was a mistake to treat those two institutions as subject to political pressure of any kind; they should have been allowed to make commercially reasonable decisions, but had no implicit bail-out promise from the government for bad decisions. 

Also, we should not have torn down the wall that separated investment and commercial banking.   I was one of only six Republicans who voted against that bill--which reversed the Glass Steagal Act. My concern was that allowing the merger of investment and commercial banking would create financial behemoths, which, when they got into trouble, would call on the US government to bail them out, because they were too big to fail. Sadly, my prediction has come true.

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