Money creation and the Federal Reserve

For those who missed the money & banking course in third year econ, James Hamilton explains the money creation mechanism in plain English and shows readers how to account for and reconcile the activities of the Federal Reserve from August 8, 2007 to now:

And how about discount window borrowing, which as of last week was still supplying a few billion in reserves in the system? This was more than offset by a $4 billion increase in reverse repos and some other factors, which drained considerably more in reserves than discount borrowing has added. The combined result of all these effects is that reserve balances are now right back where they were on August 8, and currency in circulation is in fact $3 billion lower than it was. The Fed has done its job, and the kvetchers have done theirs.

The truth is really quite boring compared to the conspiracy theories, eh?