In the New York Times piece, there is a quote from Vincent Reinhart, formerly at the Fed, who says
“The Fed can only play this game as long as the public is willing to hold its liabilities,” said Mr. Reinhart, now a scholar at the American Enterprise Institute, a conservative research organization. “If it tried to increase its balance sheet tenfold, say, the public would be unwilling to hold those reserves. You’d get dollar depreciation and inflation.”Wrong. As I discussed here, the Fed can successfully induce the banking system to hold large quantities of reserves by setting the interest rate on reserves appropriately, with no inflationary consequences. Indeed, if the Fed wanted to, it could fully exploit its monopoly power and take over most of the financial intermediation activity in the United States, set the interest rate on reserves appropriately to get the banks to hold the reserves and not generate any inflation, due to the fact that the price level can essentially be viewed as being determined by the supply and demand for currency. We would not like the result much, of course, as the Fed is not likely to be a very good banker, and it would be determining all the details of how credit is allocated in the US economy. Indeed, I don't like what we have already, which is a situation where the Fed is subsidizing the housing market for, I think, no good reason.