DEMYSTIFYING QUANTITATIVE EASING Comments

L_Randall_Wray

Thu, 15 Nov 2012 13:02:55 +0000

ken: we are studying exactly what they bought and will be reporting it. I believe the Fed has bought a lot of private label securities altho as you say MOST of the purchases are trashy but insured. There are rumors the Fed is moving trashy stuff to Fannie/Freddie. So again the problem is not economic (Treasury is on the hook for all the insured ones no matter where they are) but rather political. Think about the Congressional outcry that is just down the road a bit when they find out there's tons of trash at the Fed and the GSEs.

EconoMonitors

Wed, 14 Nov 2012 22:15:27 +0000

Pete: Yes, I'm sure; and he was the one who used the term (possibly invented it, I don't know): euthanize the rentier, defined as reducing risk free rates to zero so that there would be NO RETURN (zip, nada) to holding highly liquid assets. I might be responsible but I can assure you my IOUs are NOT risk-free! Anyway, you (and all other readers) should read Chapter 24 of Keynes's General Theory. It is fun reading, not highly technical, a masterpiece. (L. Randall Wray)

L_Randall_Wray

Wed, 14 Nov 2012 12:36:06 +0000

Yes I know that pension funds and our elderly persons rely on interest income and prefer low risk Treasuries. We have to decide whether that is good social policy. I think not. Much better to ramp up SocSec retirement and phase out Money Manager Capitalism that relies on money managers beating the average by speculating in our food supply, etc. As Keynes argued, the return on risk-free assets ought to be Zip. So, ZIRP. Big topic; see my co-authored paper (with Yeva Nersisyan), "The trouble with pensions" at www.levy.org.

L_Randall_Wray

Tue, 13 Nov 2012 20:20:22 +0000

Sorry, Ed, reading my comment I can see the last sentence could be read the wrong way. Zirp might actually "take demand out of the economy" by lowering government interest payments, thus, reducing nongovt income. I realize low rates are helping homeowners who refinanced, but I've done modeling with my colleague Linwood Tauheed to show that the net impact can very well be negative.

L_Randall_Wray

Tue, 13 Nov 2012 20:17:28 +0000

Ed: Yes I think most of us support Keynes's call to euthanize the rentier class thru ZIRP. This is permanent policy, not anti-cyclical. So, yes we have no problem with Zirp now, we just want it all the time. So the critique here is with the belief the Fed is doing something to stimulate the economy. No. They are helping to euthanize rentiers (a good thing!) but if anything they could be taking demand out of the economy.

L_Randall_Wray

Tue, 13 Nov 2012 19:16:18 +0000

Since there were a couple of comments on the same theme, let me explain: "How do the banks get rid of the excess reserves?" 1. You run to your ATM and take out cash. While cash holding has gone up a bit in the aftermath of the crisis (you can see it in the chart), that's not nearly enuf to reduce excess reserves significantly. 2. Banks pay back loans of reserves from Fed. They haven't borrowed much, so that too will not reduce XR much. 3. Fed sells its treasure trove of assets (MBSs and Treasuries) back to banks. This will be the main avenue; it will be done smoothly. The only question is over how much of the MBS trash is too trashy to sell back. 4. FedGovt runs budget surpluses, like Clinton did (the "excess taxes" are paid for taxpayers by banks that use their reserves).

James Dollinger

Tue, 13 Nov 2012 13:21:12 +0000

I think bernanke is deliberately trying to manipulate the natural rate of interest to address what he correctly perceives as a shortage in private sector aggregate demand. I'm pretty sure h's building on the work of Krugman that states that liquidity traps are a result of individual's expectations of lower prices in the future. The problem with rational expectations is that it mis-states the individuals optimization function when you have debts. While in general it is true that people try to optimize their expected utility of consumption over time, if they have a debt repayement constraint the ability to service this debt will take priority given the large negative utility of declaring bankruptcy (e.g. not having a home any more, social stigma etc). The reason that households aren't spending is not that they think they can buy the next car or toaster oven cheaper three months in the future but rather they need to save money to pay off the mortgage on their house which is now 10/20% under water. In this framework Bernanke's QE operations are actually more pernicious that discussed above. Manipulation of the interest rate has two effects. First it promotes sub optimal allocation of capital and resources as well as acting as a tax on savers. Second, and perhaps more importantly individuals unfounded hyper inflation fears have caused massive capital flow into hard assets particularly commodities which has pushed up the price of key commodities. This has resulted in very sluggish if not negative real wage growth which further burdens a consumer trying to increase his or her savings rate. The biggest macro economic problem facing the global economy is that there is too much private sector debt for the current level of global economic activity. The only way to solve this problem is to either restructure obligations (which is unlikely to happen as the elites don't want to lose their foolishly lent wealth) or to increase the income/financial assets of the private sector. The only way that the entire world can increase its private sector assets at the same time, as is correctly pointed out above, is for massive deficit spending from the public sector. With artifiicially low interest rates there is a possibility of fairly severe inflation but inflation fears can be dealt with easily by reducing QE/raising interest rates as well as putting in actually kenysian policy i.e. rules based reductions in assistance / tax increases as economic activity recovers to full potential.

EugenR

Tue, 13 Nov 2012 08:53:39 +0000

The government deficit, except of the taxation, is the only source the government can use to allocate resources. While most of the taxes are used to cover current government expenses, the deficit, if used for investment with positive future economic outcome, is as good tool to resource allocation as any other. The crucial question remains how to cover the deficit, by issuing treasury securities with payable interest, (as it is done now) or by printing directly money, that is also kind of debt, just without the need to pay interest on it. The two ways create difference in the government budget flexibility, in the future. If the government in the future will be burdened by need to pay interest on its securities,if needed fiscal stimulus at times of deflation, it will have reduced capacity to increase its expenses. This is what happens right now, due to the opposition from the legislative representation. If the government stimulus will effect finally the economy and it would turn from deflated to inflated, the best way for the government to make monetary squeeze will be reducing the credit given by the banks. And the banks don't like it. Who knows, if not the bankers lobby-ism is behind this opposition to the federal stimulus.

jonf34

Tue, 13 Nov 2012 02:39:12 +0000

Another dumb question. If I read the chart right the fed has 2.8 trillion or so of assets and the banks have that as reserves at the fed. How do those reserves ever get cleared? and how long will it take?

jonf34

Tue, 13 Nov 2012 02:30:02 +0000

Great post and very informative. So what will be the fall out , political or otherwise, when the trash at the fed is written off. Can they keep it hidden? Who will do the foreclosures for non payment? Does the fed now own these properties?

jerry

Tue, 13 Nov 2012 01:51:34 +0000

I'm a bit cloudy as to how reserves work as an asset class. How do the banks get rid of these reserves, only by lending? I guess the banks can't just go out and buy more treasuries with the reserves because no one takes reserves as payment?

pete

Mon, 12 Nov 2012 23:25:54 +0000

Thanks for stopping the troll from bothering Mr. Wray. I don't want this put out but I am glad you are screening his comments, the troll was really annoying

Bob

Mon, 12 Nov 2012 23:21:05 +0000

This is the best explanation of the short comings of QE3 I have seen. However your last statement says this will not stimulate the economy. But I would like you to discuss the two possible effects it will have. First it is pushing interest rates for houses down which allows people to refinance and it stimulates housing purchases. It also helps corporations by allowing them to sell bonds cheaply. Unfortunately it takes money out of the hands of savers so they cannot spend which is drag on the economy. Secondly if the Fed is buying bad securities one could imagine that someday inflation will pick up and thus one should buy assets to protect oneself. That and the other advantages that corporations see drives the price of stocks up. Then those with money in stocks and those who just watch the news feel much happier(wealth effect) and consumer confidence goes up and buying goes up. I think we did see some of this. So better rates on debt for those that don't really need it which helps housing and the stock market which raises consumer confidence which raises spending. How significant this effect is , is the question I would like to see discussed

Chak

Mon, 12 Nov 2012 22:55:45 +0000

Where from did FED credited the Bank's Account? Created it afresh by buying the security at face value. Money can be withdrawn from the accounts to transfer to bank's clients using third party transfers from FED. The thing is Banks don't have credit worthy avenues to lend and they are getting a risk free 25BP interest on the excess reserves with FED in return for bad assets they sold to FED.

olly100

Mon, 12 Nov 2012 22:24:58 +0000

I think the main 'transmission mechanism' was supposed to be through "portfolio rebalancing". The Fed hasn't only bought Treasuries and MBS from banks - it's bought them from loads of non-bank people too. For example, if you previously had some Treasury bonds, after QE you just have a big deposit sitting in your bank account. Because it's paying F-all interest, you use it to buy corporate bonds or equities. Everyone doing this at the same time as the result of QE drives up all sorts of asset prices and lowers yields, especially on corporate bonds. This makes borrowing cheaper for corps and makes asset holders nominally wealthier. The idea is that this is supposed to translate into both higher spending and investment. But it doesn't much. Another point of QE is to try and weaken the currency to stimulate exports. Something I'm not so sure about is what effect QE had/has on commodity prices, and whether QE was responsible for higher commidity prices, inc. oil prices. What do you think?

EugenR

Mon, 12 Nov 2012 21:52:35 +0000

http://rodeneugen.wordpress.com/2012/07/15/the-re... 1. The legal reserve requirements in US is 10%, but since the banks have no more “AAA” clients like, Greece, Spain, sub-prime mortgages, AIG, General Motors, Enron, et.c., the banks have no one to whom to borrow. So they keep it in the Fed reserve. 2. In my sketch article; https://rodeneugen.wordpress.com/2012/07/10/after... I collected some interesting data as to 12.2011, (Most of it published in CIA world book). The total US national debt is 15 trillion, out of it the public debt (Government securities) 10 trillion, the difference is between non-marketable and marketable securities. The non marketable are liabilities, but have only marginal impact on the current economy, so we can leave them where they are. Out of the marketable about 5 trillion are hold by foreigners amazingly as reserves. Most of the remaining is probably hold by long term funds, like pension funds etc. It is after all not surprising at all, that so little Government securities are held by general public, since their saving rate is already years close to zero. At the end of the day, the public debt seems surprisingly healthy, until the foreigners are ready to hold their reserves in US dollars. http://www.texasenterprise.utexas.edu/article/us-... 110 http://www.texasenterprise.utexas.edu/sites/defau... http://www.treasurydirect.gov/govt/reports/pd/msp... The MB is the reserve of commercial banks deposited in the Federal bank, and it grew roughly between 2008-2012 from 1 trillion to 2.5 trillion, and the M2 in the same period from about 8 to 10 trillion. http://m5.paperblog.com/i/19/192724/the-changing-... http://m5.paperblog.com/i/19/192724/the-changing-... http://m5.paperblog.com/i/19/192724/the-changing-... http://m5.paperblog.com/i/19/192724/the-changing-... The M1 did not change much during this time. The monetary ease obviously doesn’t work. Why is it so? Because of luck of business opportunities. Real estate shrinks. Wall street is not what it used to be, nobody trusts anymore nicely warped mortgage packages. Is any exit from here? Only to roll up the sleeves and start to compete the Asians.

Ronald L.

Mon, 12 Nov 2012 21:02:03 +0000

Excellent article! I've always struggled to understand how the FED is trying to overcome the crisis by rewarding banks' bad lending and investing decisions, with the ultimate goal to get them to lend more money again and return to the pre-crisis era of reckless lending to credit-unworthy borrowers.

interested reader

Mon, 12 Nov 2012 20:14:10 +0000

regarding fiscal stimulus: Japan ran an average deficit of over 5% since the early 1990s with peaks at 10% or so (same in primary/structural deficit terms) and has accordingly run up a scary public debt ratio. What is an adequate fiscal stimulus?

Charley Clark

Mon, 12 Nov 2012 19:25:58 +0000

Randy: I know this iuggestion is the result of past drug use, but can the Fed start forgiving or writing down the various mortgages in the vast MBS they own? This could help reduce debt levels. And is the Fed is paying full value? Charley Clark

WalidM

Mon, 12 Nov 2012 18:48:53 +0000

timely comment thanks