Gretchen Morgenson NYT

“We are in unknown territory here,” he said. “Since the peak in October ’08, bank credit has dropped
by 8 percent. That is enormous and it is accelerating. The peak-to-trough drop in the early ’90s was just
1.3 percent and that was enough to scare the pants off the Fed.”
This credit cave-in is the driving force behind the Federal Reserve’s mortgage purchase program, Mr.
Shepherdson says. The last thing the central bank wants to see is a decline in the broad-based money
supply, because when that happens it usually means a depression is afoot. Money supply didn’t fall in the
early 1990s, but it fell by one-quarter during the 1930s.
The Fed’s asset purchase program is therefore not about driving down mortgage rates, Mr.
Shepherdson says, but about trying to prevent a collapse in the money supply. When the Fed buys assets it
creates deposits, which, in turn, helps offset the credit pullback. If the Fed wasn’t buying mortgages with
both hands, Mr. Shepherdson estimates, the money supply would be falling 1 percent a month.
http://www.nytimes.com/2009/11/29/business/economy/29gret.html?_r=1&ref=business