Money supply

There has been a new addition to Economics 101. When I was in school we were taught that there were three ways that the Federal Reserve Bank could deal with monetary policy. Before I go forward I will explain monetary policy. It is another name for the money supply which is generally the total amount of cash plus checking accounts and savings accounts and that is currently about 8 trillion. So what are the three ways that The Fed can change the money supply? The first and most common is buy or selling government bonds. Several times each month there is an auction where government bonds are sold. When the government sells a bond it takes money out of circulation and the money supply decreases. If it buys government bonds it put money into the system and increases the money supply. If they want to take more drastic steps they can raise or lower the discount rate. This is the rate that the Fed charges banks for short term loans. Recall that a bank can loan out ten times the amount is has so if the bank borrows a million dollars from The Fed it can then loan out 10 million. If The Fed lowers the discount rate the banks are encouraged to borrow more and then have more to loan which increases the money supply. The third and most drastic way is to change the reserve requirements. That is the requirement that banks keep at least 10% in the bank to back up loans. If The Fed would change that to 20% the banks would have to call in loans since they would only be able to loan out five times their reserve instead of ten.
So what is the new forth way the banks can increase the money supply. Simple, they just print more. Since Obama took office the money supply has increased about 1.5 trillion to a total of 9.5 trillion. It used this newly printed money to buy up toxic assets like mortgage bundles.