the difference between what the Fed has been doing in 2009 and true quantitative easing is that under the latter strategy, the Fed would be funding the MBS purchases with zero-interest money, with the intent of the operations indeed being to get that cash into circulation rather than trying to construct a device to persuade banks to hoard it.
The problem with the Fed's preferred tactic-- borrowing short and lending long-- is the same as that facing anyone else who plays that game: are you sure you're going to be able to continue to roll over the short term debt (i.e., persuade banks to keep holding a trillion in excess reserves) or liquidate your long position (i.e., sell a trillion in MBS back to the market without loss) when the playing field changes?
But at the moment, borrowing short and lending long proved to be a very profitable trade for 2009.
The Fed is now the world's biggest carry trader. In Hamilton's view, the Fed's huge injection of bank reserves, on which it pays interest, amounts to borrowing from those banks at the short-term rate. It then lends long term in the mortgage securities market.
This is what the Savings and Loans did back in the good old days. They borrowed money short term at 3 percent and made mortgage loans at 6 percent. It worked really well until the mid-1970's, when interest rates moved up. Those 6 percent mortgages don't look so sweet when short-term money costs 10 percent.
Long-term mortgage rates are now lower than they were in the heyday of the S&Ls. Taxpayers bore some of the cost of the S&L blowup. We stand to bear all of the interest-rate risk that the Fed is taking.