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this question about quantitative easing: (question below)

: A central bank does this by first crediting its own account with money it has created ex nihilo ("out of nothing") It then purchases financial assets, including government bonds and corporate bonds, from banks and other financial institutions in a process referred to as open market operations. The purchases, by way of account deposits, give banks the excess reserves required for them to create new money by the process of deposit multiplication from increased lending in the fractional reserve banking system. The increase in the money supply thus stimulates the economy.
My question is : do banks have to pay money back to central bank ?
(money that central bank purchases financial assets from banks and other financial)

Be very careful, as many of the assumptions you are using are incorrect.

First, the federal reserve bank does not create money.  The treasury makes money, and the fed must purchase the currency from the treasury.  They accept currency from the treasury and pay a fee to them, which is funded by charging banks who are members of the fed interest on disbursements; that interbank interest rate is called the federal funds rate.  Also, money is not created "out of nothing".  The US dollar, like all fiat currencies, are supported by the nation's production potential.  Money is basically an I.O.U. for resources, and the domestic value of that money (it's purchasing power) is determined, in part, by production value.  When economic growth outpaces monetary expansion, it will contribute to deflation.  When monetary expansion outpaces economic growth, it contributes to inflation.  Of course, there are other factors that influence purchasing power of a currency, which is why I say relative monetary expansion rates "contribute to", rather than "determine" inflationary and deflationary pressures.

So, the answer to your question is both "yes" and "no".

Yes: Banks pay money to the federal reserve bank in terms of interest payments on money borrowed from the fed, and, of course, fees.

No: Banks will not pay back money for any government debt that the fed purchases from them.  This is actually a very common process.
Remember that the fed is NOT a government agency, but it is quasi-governmental in that it controls monetary policy; it influences interest rates and money supply.  Also remember that taxation and government spending are controlled by congress, not the fed.
Let's see how this works:
1) The government spends more money than it collects in fees and taxes
2) The government issues debt in the form of T-bills, T-notes, and T-bonds
3) Investors purchase these debt instruments because they accrue interest income, and US government debt is considered, for the most part, "risk free".  Among these investors buying government debt are banks (for more information on the nature of risk-free investments, go here:
4) These banks who have invested in government debt now have future value.  In other words, they are owed money by the government, but do not have that money on-hand.
5) In order to increase bank liquidity, the fed purchased these investments from the banks at a discounted rate
6) The banks increase the amount of money they have on-hand, making them more able to withstand loan losses, currency demand, or other issues that may result in a depletion of reserve currency.  It also makes them able to increase lending to people and businesses, while maintaining high reserve requirements, which is meant to stimulate the economy.
7) The government now pays the federal reserve bank instead of the purchasing banks for ownership of the debt investments.

This method of buying and selling assets with future value is extremely common.  It's really no different than selling a machine used; where someone has already derived a little bit of value from the machine, but then someone buys it used for a discounted price and derives the remaining value from it.

When all is said and done, the reality is that this will have a minimal influence.  As the result of political infighting in the US government, our fiscal policy (taxation and spending) is nearly completely frozen; we have been incapable of accomplishing anything.  So, the federal reserve has been alone to try and use exclusively monetary policy to pull us out of one of the deepest and longest recessions in history - which is one of the reasons it has been so long.  Think of it like throwing a bucket of water on a house fire; it might help a little bit but its a last-ditch effort.  Thankfully, our economy is recovering on its own to an extent as well, although not in an ideal manner.


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Michael Taillard


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Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

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PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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