Conspiracy? They’re not smart enough.
Every so often people tell me that Fed policy is some sort of conspiracy to favor this group or that group–usually the big financiers on Wall Street. Thus tight money policies favor Wall Street over the poor guy who can’t find a job. Then when the Fed adopts QE we are told that easy money favors Wall Street over the poor housewife who can’t pay her bills. Whatever happens, there’s a ready-made theory to explain it all in dark conspiratorial terms.
But life isn’t like that. The boring truth is that monetary policy has almost no impact on distributional issues. Inequality is a long run issue and money is roughly neutral in the long run.
Even in the short run QE has no significant impact on inequality. It helps all classes, but probably helps the rich (stocks) and the poor (jobs) more than the employed middle class. Sorry to disappoint the grassy knoll crowd.
It’s not that I think the government is too well meaning to engage in conspiracies against the public interest. I’m completely on board with both parties engaging in a conspiracy to turn the US into a giant Panopticon-like dystopia. Neither party seems willing to talk about the fact that it’s become a crime to merely talk about public policies on surveillance.
But monetary policy is different. To conspire, you must first understand. And almost no one in the government understands monetary policy (at least since Christy Romer left.) Obama appoints people to the Fed who he thinks will help him achieve his policy objectives. But they will actually work to undercut him. Not because they are secretly anti-Obama, but because they also fail to understand what sort of policy is in Obama’s interest.
I had to smile when I read this comment by Greg Ip:
One of the seven seats on the Fed’s board is vacant and another five could become vacant in the coming year, given expirations and the tug of other opportunities. To placate Republican opposition, Mr Obama may feel compelled to nominate candidates whose views are not too close to Ms Yellen’s.
That won’t be too hard to do, given that President Obama’s own views are far to the right of Ms. Yellen’s. Ip’s column is mostly good, but he’s too quick to assume Obama is less that completely clueless on monetary policy. Here’s Greg Ip’s colleague Ryan Avent:
. . . one can’t help but notice that two of the three governors leading the charge to taper were appointed by Barack Obama. Who also left seats on the Board of Governors unfilled for an extended period of time despite the rickety state of the economy. And who has also completely misplayed the process of nominating a successor to Ben Bernanke as chair of the Board of Governors.
One is tempted to conclude that Mr Obama simply doesn’t care much about monetary policy, and when he does turn his attention in that direction is mainly concerned with bubble prevention.
Now that his preferred choice to head the Fed has been taken away from him, I expect Obama to appoint some taper supporters to represent his own views, and counterbalance Yellen’s dangerous, bubble-inflating, money-printing views.
PS. Read the comment section; I guarantee at least one commenter will insist that Obama is actually an evil genius who has a secret plan to create a Great Depression with tight money, so that there will be more need for fiscal stimulus. And that he will do this without losing the Senate in 2014. Once you start thinking in terms of conspiracies, there is no end.
PPS. I predict that those people claiming Yellen is very different from Bernanke will look foolish in about 6 months. Expect more of the same.
PPPS. This post is not about Obama. Does anyone think Bush could explain the pros and cons of making forward guidance conditional on the state of the economy? How about Reagan?
Tags:
9. October 2013 at 17:25
“Neither party seems willing to talk about the fact that it’s become a crime to merely talk about public policies on surveillance.”
whirr whirr whirr
“Once you start thinking in terms of conspiracies, there is no end.”
WHIRR! WHIRR!!! WHIRRRRR!!!!!!!!!!!
9. October 2013 at 17:36
Conspiracy? Who in DC can keep a secret??
Krugman when interviewed in the New Yorker a few years back tried to square this circle by accusing the Republicans of engaging in a “conspiracy … albeit one whose organization and goals are pretty much out in the open”, but I didn’t find that very convincing.
Though maybe the conspiracy conducted out in full public view is the most dangerous kind. 🙂
9. October 2013 at 17:43
Reagan was an economics major and Bush (the younger) went to business school, so it’s quite possible they could explain it.
9. October 2013 at 17:49
Scott, did you mean to say (about Ip): “but he’s too quick to assume Obama is anything more that completely clueless on monetary policy.”? In other words, are you saying that Ip wrongly assumes Obama is smarter or dumber than you do?
9. October 2013 at 17:51
“The boring truth is that monetary policy has almost no impact on distributional issues. ”
Surely if most base is held by banks and not the public affecting the price and quantity of these assets will affect banks more than everyone else. Its like trickle down economics. Bring down their costs and they will pass it on to everyone else. Assuming their competent (you think they aren’t smart enough if I understand correctly) and also assuming they have good intentions.
“Even in the short run QE has no significant impact on inequality. It helps all classes, but probably helps the rich (stocks) and the poor (jobs) more than the employed middle class.”
It helps asset holders feel wealthier. If the wealthy feel richer they should need to employ more people. What about all the unemployed, students and people without many asset apart from their car maybe how do they get wealthier? Asset holders get wealthier for doing nothing and everyone else gets wealthier if they can find a job. Not very libertarian.
A balanced system where everybody’s wealth increases is if the fed deals directly with the broad public when expanding money or targeting rates.
9. October 2013 at 18:10
SS,
I am happy to oblige:
Obama is actually an evil genius who has a secret plan to create a Great Depression with tight money, so that there will be more need for fiscal stimulus.
If I may take the meme a step further, I will state that I think that Paul Krugman is secretly feeding Obama disinformation so that he will proceed with exactly that policy….
9. October 2013 at 18:29
Scott wrote:
The boring truth is that monetary policy has almost no impact on distributional issues. Inequality is a long run issue and money is roughly neutral in the long run.
Scott, is this another example of your slippery usage of “monetary policy” to mean a very circumscribed set of actions by the Fed? So for example, if tomorrow Bernanke said they would buy $85 billion of bonds from Consulting by RPM (my company), rather than from the Treasury and MBS, you are going to admit that that would have humongous distributional effects but then say, “This would be fiscal policy, not monetary policy at that point.”
If that’s the move you would make, then I think you need to somehow acknowledge that you are choosing your terms carefully to refute your opponents by definition, rather than with economics.
9. October 2013 at 18:31
Scott wrote:
Obama appoints people to the Fed who he thinks will help him achieve his policy objectives.
Right, Scott, which is why I think Fed officials are doing exactly what the people who put them there want them to do.
Your position rests on the belief that Obama couldn’t possibly be lying when he tells us in public speeches what his objectives are. Are you really saying it’s a nutjob conspiracy theory to believe that federal officials lie?
9. October 2013 at 18:32
Let me try it this way, Scott: You’re saying that Obama is so stupid that he reappointed Bernanke even though Bernanke wasn’t doing what Obama wanted him to do? That’s pretty stupid. You think he’s that stupid?
9. October 2013 at 19:38
Gawd I know it’s so frustrating! The mathematics of monetary policy seem to be so unintuitive that almost nobody that hasn’t analysed and understood complex mathematical models is able to get it. Even those who work with these models seem to make serious mistakes all the time.
How can governments get it right when almost no politicians in any parties understands it, very few leaders of the business world understands it and very few in positions of power know who to trust about it.
Yet monetary policy is so important, it has such a huge impact on the world’s economies that it is critical that we get it right. What can be done!?
9. October 2013 at 19:41
Scott,
So you think “President Obama’s own views are far to the right of Ms. Yellen’s.” Perhaps they are, but I don’t think President Obama favored Summers over Yellen primarily because Obama regarded Summers as the more conservative of the two. Obama isn’t an expert on monetary policy, and he seems to give some priority to people he’s worked closely with.
In addition, recall that the President nominated Peter Diamond for the Board, and I’d bet Diamond is to the left, not only of Yellen, but also of virtually every person now on the Board. (I assume the “left/right political shorthand” does have some meaning in the field of monetary policy. Whether you think monetary policy is a technocratic exercise or not depends on: 1] which monetary theory you hold; and 2] your degree of confidence in holding it, there being no scientific consensus on these matters).
In addition to Diamond’s recent work with economists interested in rising inequality, I think he’s still opposed to the privatization of Social Security, which, given Wall Street’s potential gains from privatization, may be one reason Peter Diamond wasn’t confirmed by the Senate. If you think monetary policy has no significant differential impacts on social and economic groups, then business organizations and others that lobby Senators on the matter of Fed appointments are pretty much wasting their money.
This isn’t entirely about Obama.
9. October 2013 at 19:41
“I’m completely on board with both parties engaging in a conspiracy to turn the US into a giant Panopticon-like dystopia”
*Thank you* for pointing out that the Emperor has no clothes. The situation does seem to be rapidly transitioning from ridiculous to outright dangerous.
9. October 2013 at 19:45
Great blogging…sadly, there is no cabal running monetary policy behind the scenes…they might do a better job of it…
Worth pondering is if the FOMC is sufficiently in tune with economic actors…that is to say, should some board seats be apportioned to industry and labor groups? One could make a case that the FOMC is a feeble policymaking body due to a narrow base of members and constituency…and, as I say, that could be worse than a cabal…
9. October 2013 at 21:22
Scott, O/T: just out of curiosity, what’s the closest approximation to a left wing MMist? Does such a person exist? Who would be to their immediate right and left on the spectrum?
9. October 2013 at 22:34
Scott’s claim that QE has little effect on equality is very debatable. QE boosts asset prices big time. As to his claim that QE helps the poor via job creation, it’s generally agreed that the effect of QE on aggregate demand is pretty feeble: the rich don’t change their weekly spending much when the value of their assets rise or fall.
But the more fundamental question is: what on Earth is the point of boosting AD just via investment (which is what QE and interest rate adjustments do) rather than via a much broader selection of types of spending. Boosting AD just via investment spending (and possibly the weekly spending of the rich) makes as much sense as boosting AD just via restaurants, massage parlors and car production.
10. October 2013 at 00:16
Mike,
The point you make at the end of your comment above is similar to the one I make just above here. The point being that it’s better to distribute stimulus widely than concentrate it on relatively few areas of the economy. And your suggestion as to how to do that is to have the Fed “deal directly with the broad public”.
Unfortunately that’s not possible under existing institutional arrangements. That is, the only way of feeding new money into the pockets of Mr & Mrs Average (which I’m all in favour of) is fiscal measures: e.g. cutting the payroll tax or other taxes, expanding unemployment benefits or raising public spending.
And that requires the say so of a bunch of economically illiterate buffoons and idiots known as “politicians”.
The solution to that problem (and it will take decades to get this implemented) is to have a clear distinction between decisions on STIMULUS, which should be in the hands of a committee of economists, and second, strictly political decisions, like what proportion of GDP is allocated to public spending. The latter decision should of course stay with the electorate and politicians. E.g. if the above committee decided a boost to fiscal spending was in order, they’d tell politicians who would in turn spend the money as they saw fit (bearing in mind that stimulus spending is best spread widely, as pointed out above). A system of that sort is actually set out here:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
10. October 2013 at 00:41
What would be the effect of a Fed nuclear weapon – an offer to buy unlimited quantities of treasuries at a ceiling price. Screw guidance, just tell them how it’s going to be.
Of course, there are legal objections concerning paying market prices, but given the offer, that would be the market price. The Fed has engaged in worse sophistry more than once.
With QE it looks like the Fed gets the same potentially bloated balance sheet without the strong effect.
I thought this idea was silly, but I’m having trouble finding a killing argument against it. I doubt any other central bank could get away with something like this, but the Fed isn’t like any other central bank.
10. October 2013 at 01:36
I agree with you – mostly. Obama is only slightly better than any other potential president, possibly with a theoretical exception of Romney winning the elections and feeling indebted to some of his constituents and thus feeling more strongly about monetary policy along the “hard money” line.
Which is also telling. The only political movement that really focuses on the FED and its role is the one endorsing conspiracy theories or some really wacky fringe economic ideas or some mix of both.
But the sad thing is that sometimes professional economists are even worse. We have ECB governor who has PhD from MIT under supervision of Solow and Modigliani with stellar career that includes positions like: general director at Italian Treasury, managing director at Goldman Sachs International, Bank of Italy governor, executive director at World Bank, board member of BOI and more. But any of this does not prevent him saying that low inflation is good because “With low inflation, you buy more stuff”. What the heck is this? If ECB governor and 8th most powerful person on earth (according to Forbes) says this and gets away with it why should we expect more from Obama?
And he is not the only one. If someone would undertake a project to gather all the nonsense that many famous economists in their field of expertise – like finance and whatnot – said about monetary policy it would for pretty long and sad reading.
So in the end I do not blame Obama. It could be good to have an enlightened monarch who would energetically implement his ideas despite opposition from stupid bureaucrats, but honestly this idea frightens me. People need to start focus more on how monetary policy is done, what are its goals, what person and with what skills be considered an authority on monetary policy and which of these authorities can hold such an important place such as FED board.
And above all – adopt NGDPLT and let markets be the FOMC. And get rid of all the nonsense like dreaming about acquiring the next “maestro” capable of steering trillion dollar economies with some kind of magical intuition. Because you can easily end up with Draghi and mess things up.
10. October 2013 at 01:44
Ralph
“Unfortunately that’s not possible under existing institutional arrangements. That is, the only way of feeding new money into the pockets of Mr & Mrs Average (which I’m all in favour of) is fiscal measures: e.g. cutting the payroll tax or other taxes, expanding unemployment benefits or raising public spending.”
Yeah I understand that. But with a relatively minor reform it can be realized. Either the fed can credit nominated deposit accounts of the public or directly credit fed reserve accounts the public could hold with the fed. If the fed credited deposits to the public at banks it would offset the liab to the bank by increasing a reserve asset.
I know about positive money. But Im not quite convinced its necessary to impose full reserve banking or concentrating money creation under the government. I like the idea of separating powers and recognizing the monetary arm as a separate arm of gov. I also like the idea of people directly interacting with the central bank because it will increase education of the public and faith in institutions.
10. October 2013 at 02:30
Mike,
Re your 2nd paragraph, that strikes me as bureaucratic: the central bank would need to have the bank account details of almost every citizen. However, I think William Hummell is on your side on that one – see:
http://wfhummel.cnchost.com/nationaldepository.html
Re full reserve banking, a country can easily implement “separation of powers” without adopting full reserve. In fact separation of powers already exists in that central bank interest rate committees have a big say on stimulus, as do the various fiscal responsibility committees that have sprung up round the world recently.
10. October 2013 at 03:28
Ralph
How do you mean bureaucratic? Anyone can have several accounts, one would have to be known by the cb in order to place funds into it. If people didnt like giving account details they could physically collect funds from the CB or have cheques sent to them.
10. October 2013 at 03:55
Mike,
Good point about “several accounts”. But there is another problem, as follows.
If the central bank disburses money to every citizen, we’d get bogged down in political arguments about whether the poor should get more than the rich etc, and it’s not the job of central banks to get involved in political arguments. I.e. it would be better to simply allocate the money to politicians and tell them: “This is the amount you can use to raise public spending or cut taxes. As to how that impinges in the rich, the poor or other groups, that’s a political question of the sort that you spend a lot of time discussing ANYWAY.”
Plus politicians and the bureaucracy ALREADY HAVE systems in place for disbursing money to or collecting money from the private sector. I think it’s an idea to avoid duplicating those systems in any way.
10. October 2013 at 04:03
Everyone should get equal money if new money is created. The rate of creation is with reference to inflation or NGDP.
10. October 2013 at 04:06
Scott writes:
“but because they also fail to understand what sort of policy is in Obama’s interest.”
Every president wants the same thing. Good real GDP growth, low inflation, an low unemployment. No President is different on these items. Now if you mean they don’t know what policy can get Obama there, well does anyone? If it were that simple then people would just implement and watch it happen.
We have had 33 years of a secular decline in the Fed Funds Rate. Multiple fiscal policy scenarios, and varying trade deficits with occasional bouts of financial instabilaties such as the S&L stuff, high tech valuations, and 2008.
The main policy problem I see is the policy makers adhere to their economic religious beliefs. Strict MM, MMT, Keynesian etc…. The truth lies somewhere in between.
There are also economic myths that people adhere to like religion such as the current canard – the US governmnet is broke or won’t be able to pay its bills someday. Serious polciy is crafted around this myth. The debt ceiling policy is a 100% uneccesary relic from gold standard times. Fiat cannot “default”. There is a risk (not a given – just a risk) of inflation, but not default.
So it is no surpise that policy to achive goals is so often off the mark.
It is not conspiracy, but closed mindedness.
10. October 2013 at 04:10
Ralph
Nothing is being duplicated. Just another entity (the cb) is being added to the payment system just like any other commercial bank being added.
10. October 2013 at 05:02
Remember, if the FED disburses money to every citizen when it wants to expand the monetary base, it will have to remove money from every bank account when it wants to decrease monetary base. How would that go over with the average citizen?
10. October 2013 at 05:02
It is no conspiracy to note that there’s a difference between supporting policies that would improve things for all and supporting policies that create and maintain winning political coalitions.
Sumner frequently talks as if the former is what motivates politicians, when it’s almost always the latter.
Yes, they can be the same, but they’re usually not.
10. October 2013 at 05:25
OT, but an interesting thought here by Svensson. By holding inflation lower than expected, the Fed inadvertently increases the relative leverage on households….(and I would add businesses and governments).
Debt deflation and the Riksbank’s policy
Lars E.O. Svensson, 10 October 2013
Leaning-against-the-wind monetary policy may lead to a Fisherian debt deflation, since it may lower prices below the anticipated level and therefore raise real debt above what was anticipated. This is what the Riksbank has done by keeping average inflation significantly below the inflation target for a long period. This has caused household real debt to be substantially higher than it would have been if inflation had been on target.
10. October 2013 at 06:15
This is the same sort of Sovietology that we saw before the breakup and under Mao: parsing which old man is up, which is down, what are their intentions for us?
All symptomatic of an overpowerful, mistrusted-and-mistrusting, corrupt, and decadent political system that is rotting from within and without.
Tight money has been established policy since 1979, and has created serial financial asset bubbles. Easier money would deflate financial assets in real terms, inflate the price of goods, and would largely end the debt- based surveillance-control-and-punishment economic panopticon now in place (but hopefully not replace with a new and improved surveillance state panopticon).
The only conspiracy is how the Fed arbitrarily inflates and deflates, strips the people of their wealth and autonomy, and leaves poverty and dependence in its wake. Yellen will not be a change.
10. October 2013 at 06:35
Bah, conspiracy this conspiracy that. The real conspiracy here is more a petty used-car salesman gauntlet of sorts. A bunch of people pretend like they know what is going on, and should be given the wheel of the most powerful vehicle in the institutional fleet, and the suckers believe them. Congrats to QEllen for her magician level bamboozling.
“It is no conspiracy to note that there’s a difference between supporting policies that would improve things for all and supporting policies that create and maintain winning political coalitions.
Sumner frequently talks as if the former is what motivates politicians, when it’s almost always the latter.”
Well sure; he is an academic. They tend to be a bit more high-minded about things.
10. October 2013 at 06:58
David, Given that most PhD economists cannot explain it, I think that’s a stretch.
Rajat, Grammar is not my forte. I was trying to say nothing less than COMPLETELY clueless, I.e not just mildly clueless.
Mike, Wealthy people have assets that are more sensitive to the cycle that school teachers. So when the Fed screws up the wealthy suffer more than school teachers (i.e. 2009), and when they start to fix the problem the wealthy gain more. That’s not a distributional issue, it’s a cyclical issue. Secular changes in distribution have nothing to do with monetary policy.
Bob, I’m talking about actual, real world monetary policy, not fantasy land monetary policy. And you misread my comments on Obama. He’s getting the people he wants, but he doesn’t know what he wants. He doesn’t understand what sort of monetary policy will help the special interest groups that he wants to help, which is the sine qua non of a successful conspiracy. Indeed he doesn’t even seem to know what monetary policy is.
Benoit, Exactly.
Greg, You misunderstood me. I was talking left-right in terms of expansionary monetary policy, not issues like income distribution. Both Obama and Summers favor a tighter policy than Yellen.
Tom, I’d guess that some MMs are more left wing than I am, there is no logical connection between MM and being right or left wing. I know that David Glasner loathes Milton Friedman.
Ralph, You said;
“Scott’s claim that QE has little effect on equality is very debatable. QE boosts asset prices big time. As to his claim that QE helps the poor via job creation, it’s generally agreed that the effect of QE on aggregate demand is pretty feeble: the rich don’t change their weekly spending much when the value of their assets rise or fall.”
You can’t have it both ways. It can’t have a huge impact on asset prices and a tiny impact on jobs, because the impact on asset prices reflects expected growth in the economy. Also see my response to Mike.
Peter, I’m not sure why the Fed would need to do that. Their ordinary tools are plenty powerful (especially forward guidance), they simply don’t want to use them.
Matt, I agree that it’s not a conspiracy and that the debt ceiling is not needed.
MikeDC, I’m saying he doesn’t even know what helps his own coalition.
Ben, Good Svensson quote.
jknarr, Everyone seems to think the Fed is inflating bubbles. Most blame easy money. You blame tight money. I say the Fed has nothing to do with “bubbles.” And also that bubbles don’t exist.
10. October 2013 at 07:31
I must have been too tired to think clearly. You can’t do anything with massive buying or selling the underlying without seriously unacceptable consequences, so a threat to do such a thing isn’t credible.
Instead, the Fed would have to issue warrants for given date and price. This isn’t a new idea. I have seen it before. It rather limits discretion, which is both the advantage and the disadvantage. Given how they like discretion, I can’t see them giving it up even for greater credibility.
It would be pretty strong guidance, though.
10. October 2013 at 07:49
SSumner
“You can’t have it both ways. It can’t have a huge impact on asset prices and a tiny impact on jobs, because the impact on asset prices reflects expected growth in the economy.”
QE is trying to move up asset prices of higher risk by making holding safer assets have a higher opportunity cost. But higher asset prices don’t transmit much higher levels of AD into economy or improve balance sheets or employment which spur credit. All QE does is force high asset prices becuase of lower relative returns on safe assets, but higher asset prices arent becuase of expected growth but mainly portfolio rebalancing.
10. October 2013 at 08:05
Scott re: bubbles.
Low interest rates increase the present value of all financial assets; low interest rates are produced by slow NGDP growth, which is in turn a result of tight money.
I accept that bubbles don’t exist, but this is mainly semantic. Excessively-above-or-below-the-mean prices for assets I recognize. Quantified as periods where equity prices are high and the monetary base is low:
http://research.stlouisfed.org/fred2/graph/?g=nfe
After periods of high indu/base, something needs to revert to the mean: either stocks or the monetary base. The great depression saw stocks decline, as the base was still tied to gold. After gold, the Fed has provided the base money to revert back to the indu/base mean.
This “monetization” of (tight-money) financial asset speculation then leads to (loose-money) inflation.
http://research.stlouisfed.org/fred2/graph/?g=nfh
Part of the reason that I’m a fan of NGDPLT, and a phenomenal selling point to the broad population (that you should embrace) is that it prevents the Fed from creating these (financial asset inflation/deflationary NGDP) booms and (financial asset deflationary/inflationary NGDP) busts.
And… given that the Fed 100% controls the monetary base, the Fed does create this boom and bust cycle.
10. October 2013 at 08:38
Ralph Musgrave,
If QE benefits the rich, does tight money benefit the poor?
Brian,
Great point and one that I’ve never heard answered by the “send everyone some base money” types, BUT “Fed” is an abbreviation of “Federal Reserve”, not an acronym or initialism, and thus does not need to be capitalised, except (as with any word) for emphasis.
10. October 2013 at 08:40
Brian,
Re removal of money from citizens Fed accounts, that would not be necessary all that often because governments run deficits 9 years out of 10 (if they don’t, then the real value of the national debt and base will shrink relative to GDP in the long term).
However, you have a good point about “removal”. That is, removing money from peoples’ Fed accounts would not be popular. And what if there was no money there? A problem. In contrast, a rise in tax is regarded by the average citizen as a much more normal event. That’s one reason why, unlike Mike, I favour doing the disbursal or collection of money via EXISTING mechanisms: e.g. unemployment benefit, payroll taxes, etc etc.
Scott,
You claim QE is effective because a rise in asset prices “reflects expected growth in the economy”. Same goes for fiscal measures: if government announces a fiscal boost, everyone expects nominal and/or real GDP to rise in consequence.
The difference between fiscal and monetary measures is that the latter are distortionary (e.g. asset prices go thru the roof), while a fiscal boost needn’t have any distortionary effect at all.
10. October 2013 at 08:42
W.Peden
“If QE benefits the rich, does tight money benefit the poor?”
Everyone loses with tight money. Easy money mostly helps the rich and the poor benefit a little.
10. October 2013 at 08:59
Mike,
Going on the “asset price change” effect basis, shouldn’t making non-cash assets cheaper make it easier for those without a lot of non-cash asset to buy them?
10. October 2013 at 09:18
Brian: how about this —
Instead of Treasurys or futures on the Fed’s balance sheet, swap the Fed’s notional assets 1:1 dollars for shares into the marketplace. That is, float the entire asset side of the Fed’s balance sheet into a special purpose vehicle, on the exchange, that pays holders weekly in (new monetary base) new currency or reserves per share. (Retire/annul the currently-held Treasury debt.) Think money market ETF.
The Fed operates the SPV to keep NAV steady “” issuing or redeeming new shares, and is essentially pay-in-kind “” with NEW (floating value asset side) shares accompanied by 1:1 NEW (liability side) base money — that accrue to existing share holders. Monetary base formation would be like a dividend. On average, long run new monetary base creation “yield” would be about 6%. (You buy the SPV shares to get base money issuance.)
Float 49% of the Fed’s capital on the liability side while we’re at it, with 51% held at the Treasury, to monitor and price their counterparty risk and arb (its only other liabilities being base money currency and reserves).
Require banks to hold some proportion of of assets % NGDP in the SPV. If they lend more “” or otherwise desperately need reserves “” they buy the SPV to gain more base money, the NAV goes up, and the Fed supplies the shares/reserves.
On the flip side, if NGDP is sluggish “” likely below 6% “” then buyers would boost the NAV premium of the SPV and lower its yield (just like you or I buy bonds). The Fed then enters and provides the new shares to bring 1:1 NAV back “” the economy grows, so most of the action will be on the positive NAV side.
But if NGDP overheats, then investors pass over the SPV return and buy higher-yields elsewhere, and Fed SPV NAV premium falls (just like you or I sell bonds “” yield rises). Think of a money market fund share value dropping below $1.
This (more rare) negative NAV scenario, where there is too much base money circulating “” here’s the ETF part “” banks and people can redeem reserves/currency back to the Fed SPV, which reduces shares outstanding, and brings NAV back into line. The key point: BASE MONEY REDEMPTION GETS YOU A ZERO-COUPON DISCOUNT NOTE ENABLING FUTURE SHARE (base money) BUYING AT THAT DISCOUNTED PRICE. It’s a beautiful market-monitored incentive system.
Think the Fed as money market pay-in-kind/base money ETF. To shrink the balance sheet (rare), the Fed writes debt-like notes to the pubic to redeem currency now, and hand it back at a future date. There are lots of ways to get the public to give back base money that do not involve coercion.
10. October 2013 at 09:32
“Everyone loses with tight money”
What about people who benefit from higher interest payments?
10. October 2013 at 09:37
It’s no conspiracy, the Federal Reserve exists to serve the banks. They do indeed want to make bankers rich.
But, is that so bad? A sick banking system will cause a sick economy.
It is debatable that if the economy is already sick that propping up the banking system will get the economy on its feet.
10. October 2013 at 09:42
Philipe
Default rates pick up. Higher interest from lending will carry higher risk.
W. Peden
Not really if income is declining or stagnant.
10. October 2013 at 09:44
: “but hopefully not replace with a new and improved surveillance state panopticon.”
You would be hoping for the Impossible.
10. October 2013 at 10:11
This is the problem I have with Yellen. We’ve basically got a Marxist running the Fed.
http://www.cnbc.com/id/101100015
10. October 2013 at 10:11
Scott is right…
“Whatever happens, there’s a ready-made theory to explain it all in dark conspiratorial terms.
But life isn’t like that. The boring truth is that monetary policy has almost no impact on distributional issues. ”
He is right in two ways… First, specifically monetary policy has little to do with distributional issues. And second, when it comes to “conspiracy theories” they are on the fiscal side, and they are not really conspiracies. They are out in the open– right in front of your face. And anyone can join in and most of us do in a rabble capacity.
It is on the fiscal side where tribal thinking clouds the best intentions and thinking, and where deliberate lies are told. In short it is the fiscal side where special interest and social power is constantly contested. This IS what life is like.
10. October 2013 at 14:46
Obama is actually a pawn of the evil genius Bill Ayres who has a secret plan to create a Great Depression with tight money, so that this great nation will succumb to the diabolical coup organized by the Unified Communist Party of Nepal, East Anglia University, the IRS Exempt Orgs office in Cincinnati, Sendero Luminoso remnants and Bernie Sanders.
10. October 2013 at 16:36
“The boring truth is that monetary policy has almost no impact on distributional issues.”
No, the truth is that monetary policy has a SIGNIFICANT impact on wealth inequality.
When the Fed prints $85 billion a month, that money goes to the bank owners. It is absurd to claim that this is not signficant, especially when it occurs month after month after month.
“Inequality is a long run issue and money is roughly neutral in the long run.”
We are never LIVING the long run, because monetary policy is ongoing, constantly, in the short run. We are living a series of short run redistributions, all the time, day after day, week after week, month after month, year after year.
The only time we could possibly be LIVING in an environment of the “long run effects” of monetary policy, would be if there was a one time inflation years and years ago, with no subsequent monetary policy. And even then it wouldn’t be purely neutral, because the long run is the outcome of a series of short run events. The butterfly effect.
“Even in the short run QE has no significant impact on inequality. It helps all classes, but probably helps the rich (stocks) and the poor (jobs) more than the employed middle class. Sorry to disappoint the grassy knoll crowd.”
You’re only disappointing by displaying ignorance about basic monetary mechanics.
This is a horrible blog post. Is it almost certainly a product of cognitive dissonance.
10. October 2013 at 16:43
Sumner:
Nobody has any intellectual right to make any claims about the politics behind the Fed until they have read “The Creature from Jekyll Island.”
You’re just spewing ignorance.
10. October 2013 at 17:07
And for anyone who wants to counter what I argued with the tired old “It’s a swap of treasuries for reserves, so it’s a wash!” rebuttal, please note that this answer is false on at least two levels:
1. Follow the money and treasuries and don’t just stop at the “swap” stage. Sure, the banks give the treasuries to the Fed, and the Fed gives money to the banks. But it doesn’t stop there. The Fed is paid interest and principal from the Treasury, but the Fed gives (most of) that interest and principal right back the Treasury. So the net result is that the Treasury has newly created money, from which it spends. $85 billion a month now and that’s just what we know about. What moron would claim that the Treasury spending money for its own sake isn’t an inequality generator? Are we supposed to ignore this, and focus only on the later receivers in the chain started by government largesse?
2. It is not even a “swap.” The fact that the banks want to give away Treasuries for money (reserves) is sufficient proof that there is an inequality of value. The money is more valuable than the treasuries. That’s why the banks sell bonds to the Fed in the first place. But the opposite cannot be said of the Fed. It is not the case that the Fedsters value the Treasuries more than a sum of money. The Fed can create any amount of money it wants. There is virtually no ranking of scarce goods for the Fed (limited only by hyperinflation). The Fed wants the Treasuries because it wants the banks to have money, and not because the Fed wants bonds. They buy the bonds only to give the appearance to market monetarists and others with an intellectual incentive not to truly question the existence of the Fed, that there is a “swap” going on. Most importantly, treasuries are not money. You can’t go into a store and buy goods with Treasury bills. Money has a higher purchasing power than treasuries. And so the notion that because treasuries are liquid and are hence “close to money” or “money substitutes”, doesn’t allow one to legitimately claim that the banks are not that better off by “swapping” treasuries for reserves. For the only reason the Treasuries have the high price they do, is because the Fed is a buyer in the “market.” If the Fed accounced tomorrow it will stop buying bonds for the indefinite future, treasury prices would collapse, and you would see in plain view what was more hidden before: that the Fed acting as buyer is giving the banks a free gift larger than market monetarists are able to grasp by observing historical data.
10. October 2013 at 17:55
Mike, I think you are wrong, but that’s another reason why we need a NGDP futures market, to settle these things once and for all.
In any case, easy and tight money are symmetrical–it’s not a distribution issue.
jknarr, Yes, low NGDP growth reduces interest rates, and low interest rates raise asset prices. But low NGDP reduces asset prices. One more example of never reason from a price change. NGDP plunged in 2009, and asset prices fell. So it’s complicated.
Ralph, Just the opposite, it’s fiscal policy that is distortionary. Asset prices simply move back to their appropriate levels.
Bababooey, Thanks for proving my point. 🙂
10. October 2013 at 18:40
On Our Panopticon Future…
It seems clear, that humanity is choosing a future where we will exist for a large part of our lives in an environment where our present notions and expectations of privacy will not be possible. It sounds like a dystopia to us, but someday people will not even be able to comprehend what we were so worried about.
It was not to long ago when people lived in close proximity to almost everyone they would ever know for their entire lives. Back then everyone knew about everyone else on a level that would be unfamiliar, perhaps not comprehendible to most of us.
11. October 2013 at 11:17
Bill, Yes, but . . . .
In earlier centuries people held slaves, and would have laughed at our moral reservations about slavery. Does that have implications for whether our current beliefs are correct? Maybe it does. But it certainly casts a different light on your statement (which I agree with.)
11. October 2013 at 20:37
Mike,
“Default rates pick up”
the government doesn’t default, nor do other low risk debtors. The interest they pay simply increases when rates rise. If the government debt or deficit is very large, then that results in a lot of interest paid to those who own a lot of bonds, who tend to be wealthy.
14. October 2013 at 14:08
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