[cs702]

As I mentioned in my comment, the Fed's primary dealers can and do act as intermediaries for the rest of the private sector. If you sell a treasury bond you own in your brokerage account, it could well be the Fed buying it on the other side, through one of its dealers -- and vice versa.

Otherwise, I agree with you that banks are capital constrained in their ability to make loans. But as I mentioned elsewhere on this thread, I left bank lending (and its impact on higher-level monetary aggregates) out of this mental model for simplicity.