Comments on: How bad banks create money (Reply to Nick Rowe, pt 2.)

By: 123

123 — Wed, 23 Dec 2009 22:15:03 +0000

HKMA did nothing to prevent interbank rates skyrocketing.

I don’t think that Fed stock purchases are feasible. But QE works well with many other asset classes, HKMA example just shows the power of QE during high interest rate situation.

By: ssumner

ssumner — Wed, 23 Dec 2009 02:08:12 +0000

123, I don’t quite follow. Did the HKMA pay interest on reserves?

I didn’t talk about the option of the Fed buying stock, but I think Nick Rowe did. It is a way of reducing the time inconsistency problem, because now the central bank has an incentive to make sure the economy recovers.

I suppose I assumed that idea was not politically feasible here, which is why I didn’t mention it.

By: 123

123 — Mon, 21 Dec 2009 23:58:03 +0000

Purchase of index is almost no deviation from laissez faire compared to TARP, AIG etc…

By: 123

123 — Mon, 21 Dec 2009 23:56:59 +0000

Then why are you always mentioning interest on ERs instead of size of QE in your blog?

By: ssumner

ssumner — Mon, 21 Dec 2009 21:53:33 +0000

123, Yes, that’s a good example of what monetary policy can do under difficult circumstances. I was buying lots of HK stocks in 1998 as well. The HK central bank and I think alike.

BTW, I don’t see the purchase of stocks as a big deviation from laissez faire as long as they are done in a neutral way (like an index fund) and as long as they are sold when the crisis is over.

By: 123

123 — Sat, 19 Dec 2009 20:44:46 +0000

When banks are bad properly executed QE can work even when market rates are sky high. Best example here:
http://www.dallasfed.org/research/swe/2001/swe0103d.pdf

By: ssumner

ssumner — Sat, 19 Dec 2009 20:02:56 +0000

123, Yes, I’ve always admitted that negative rates on reserves don’t drive market rates significantly below zero. That’s not the purpose of QE. (And negative rates on reserves are a backdoor way of dioing QE.) The purpose of QE is to get the excess cash balance mechanism into operation. It is not to work through the nominal interest rate transmission mechanism. If risk free rates are near zero, I completely agree with Keynesians who say thet can’t go much lower. But if inflation expectations rise because of QE, then real rates can fall.

By: 123

123 — Sat, 19 Dec 2009 08:45:46 +0000

But only slightly negative. Net result of minus 3 percent rates on ERs is equivalent to the result of Fed funds rate of minus 0.1.

By: ssumner

ssumner — Fri, 18 Dec 2009 15:38:08 +0000

123, I don’t follow, safety deposit boxes are costly—cash yields a negative rate of return.

By: 123

123 — Thu, 17 Dec 2009 20:10:17 +0000

“I would not hoard currency”
If you have a deposit that yields zero percent and if your bank calls you and says “we have a new product – currency in our vault – if you switch to it we will not raise you credit card fees”, I think you will start hoarding currency.

The point that QE is more important than interest rates on ERs when banks are bad has significant practical importance.