Goodfriend at the Fed?

I’ve consistently advocated the following positions:

1. The Fed should focus on monetary policy and not get into credit allocation.  They should focus on buying Treasuries, not other types of debt (unless they run out of Treasuries to purchase–which is not likely.)

2.  The Fed should rely on policy rules, not discretion.

3.  The Fed should do whatever it takes to hit its policy goals, including unlimited asset purchases and negative IOR, if necessary.

Here’s the FT on the newest pick for the Fed:

Mr Goodfriend was critical of aspects of the Fed’s quantitative easing policies, saying it should be wary of purchasing mortgage-backed securities, and has embraced the use of monetary policy rules to guide a central bank’s thinking.

But the economist, who is known as a free thinker, has not ruled out radical stimulus options. In 1999 he wrote that negative rates were a feasible option, years before central banks started experimenting with them. In 2015 he presented a paper on the subject of negative rates at the Fed’s Jackson Hole symposium in Wyoming.




20 Responses to “Goodfriend at the Fed?”

  1. Gravatar of H_WASSHOI H_WASSHOI
    30. November 2017 at 01:51

    Good news?

  2. Gravatar of flow5 flow5
    30. November 2017 at 05:28

    “not get into credit allocation”

    No, that’s exactly what the Fed should be charged with doing (getting more bang for their buck).

    The significant economic purposes for which a debt is contracted, or the manner in which it was financed, is of inestimable value in evaluating its impact.

    QE encouraged FINANCIAL investment as opposed to REAL investment.

    For example if the debt was acquired to finance the acquisition of a (1) (new-security), the proceeds of which are used to finance plant and equipment expansion, or the construction of a new house, rather than the purchase of an (2) (existing-security) or to finance the purchase of an existing house (read bailout), or to finance (1) (inventory-expansion), rather than refinance (2) (existing-inventories).

    The former types of investment are designated as (1) *real* as contrasted to the latter (2), which constitute *financial* investment (existing homes).

    Financial investment provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy (e.g., 1929’s stock speculation)

    Compared to real investment, it is rather inconsequential as a contributor to employment and production. Only debt growing out of real investment or consumption makes an actual direct demand for labor and materials.

    The U.S. Golden Era in economics (despite the Korean and Viet Nam wars, and the 4 recessions – which were Fed errors), was driven by putting savings back to work and backstopped by insuring non-bank pooled deposits.

  3. Gravatar of flow5 flow5
    30. November 2017 at 05:50

    Maybe economists should study deposit insurance and it’s relationship to economic growth.

    Commercial banks do not loan out savings. They always create new money whenever they invest/lend to the non-bank public. Any incentive to hold savings within the framework of the payment’s system is deflationary.

  4. Gravatar of B Cole B Cole
    30. November 2017 at 05:58

    Good enough.

    But why tweetybird around?

    Send in the choppers.

  5. Gravatar of rtd rtd
    30. November 2017 at 06:38

    He’s a Taylor-Rule fan:
    “the Fed should include in the “Statement” its intention to improve legislative oversight by presenting the FOMC’s independently chosen monetary policy decisions against a familiar Taylor-type reference rule for monetary policy”

    He seems to think 2% should be symmetrical:
    “Given that the primary responsibility of a central bank is to preserve price stability and that only monetary policy can do that, the Fed should give priority to moving inflation back to the 2% target. The Fed should wait before tightening monetary policy very much, if at all in the near term until it has direct evidence that core PCE on a monthly year over year basis has consistently moved back toward 2%.”

  6. Gravatar of flow5 flow5
    30. November 2017 at 06:51

    QE, when remunerating IBDDs, and providing unlimited deposit insurance is deflationary. The FED should be charged with getting more bang for its buck:

    See FRB of Richmond President Jeffrey Lacker: noted that the purchase of MBS represented an inappropriate effort on the part of the Fed to channel “the flow of credit to particular economic sectors.”

    “Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve. As stated in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009, ‘Government decisions to influence the allocation of credit are the province of the fiscal authorities.’”

    See also Charles I. Plosser, President & Chief Executive Officer, FRB of Philadelphia: Plosser said the same thing:

    “Finally, I also opposed September’s decision to purchase additional mortgage-backed securities. In general, central banks should refrain from preferential support for one sector or industry over another. Those types of credit-allocation decisions rightfully belong to the fiscal authorities, not the central bank. Engaging in such actions endangers our independence and the effectiveness of monetary policy

  7. Gravatar of Alec Fahrin Alec Fahrin
    30. November 2017 at 07:52

    Why was purchasing MBS a bad idea? Didn’t that sector begin to recover almost immediately after those purchases stabilized the market?

  8. Gravatar of ssumner ssumner
    30. November 2017 at 08:18

    Alec, Better than purchasing nothing, but the purchase of Treasuries would have been even better.

  9. Gravatar of LK Beland LK Beland
    30. November 2017 at 08:21

    The SNB holds a diversified portfolio of foreign government bonds, equities, gold, and other bonds.

    Serious question: should it modify its investment policy? (BTW, I get that the USA is not Switzerland; what works for the SNB might not work for the Fed.)

  10. Gravatar of flow5 flow5
    30. November 2017 at 09:55

    “but the purchase of Treasuries would have been even better”

    There became a shortage of safe assets (wholesale funding), leading to “the complete evaporation of liquidity”, i.e., creating a credit crunch. The Fed initially injected $24B, then $38B (not understanding what was happening). This decimated the E-$ market (whose prudential reserves included gov’t securities), and drove the U.S. $ artificially higher (destabilizing world trade).

    It induced non-bank disintermediation (because Bernanke still doesn’t know a credit from a debit). It made conversion of the investment banks to bank holding companies via Section 23A of the Federal Reserve Act necessary (invoking nonrecourse 13-3 loans).

    And Bankrupt-u-Bernanke bragged that the Fed had never lost any money out of discount window borrowing. Bad Ben quoted Bagehot’s dictum (lending at a penalty rate during deflation, just as bad as Volcker lending at a discount during inflation). It necessitated the Supplementary Financing Program, SPF, etc.

  11. Gravatar of Doug M Doug M
    30. November 2017 at 09:55

    I had Marvin Goodfiend and John Gutfreund confused had a momentary panic.

  12. Gravatar of flow5 flow5
    30. November 2017 at 10:00

    Commercial bank-held savings never exchanges counter-parties. This is simply because the commercial banks are carrying on their balance sheet a liability that is owned by the nonbank public that cannot be used unless the nonbank public decides to use it, and by definition it is not being used. The banks cannot use it, the public is not using it, and so it is not being used.

    From the system’s belvedere, the monetary savings practices of the public are reflected in the velocity of their deposits, and not in their volume. Whether the public saves, dis-saves, chooses to hold their savings in the commercial banks, or to transfer them to non-banks will not, per se, alter the total assets or liabilities of the commercial banks, nor alter the forms of these assets and liabilities.

    Because the payment’s velocity of commercial bank-held savings is zero, these funds obviously are not being made available by their owners — for either direct or indirect investment. And the growth of time “savings” deposits is almost exclusively at the expense of other demand drafts. If the public would shift into other types of earning assets outside of the payment’s system, then savings would have an income velocity. If a transfer in the ownership of commercial bank deposits takes place, this becomes a velocity of one when the funds are spent/invested.

    Demand deposits are created when the payment’s system expands its earning assets: loans + investments = deposits. Deposits are the result of lending and not the other way around. The commercial banks could continue to lend even if the non-bank public ceased to save altogether.

    So economists should study deposit insurance and its relationship to economic growth:

    Philip George shows the impact, but has cause and effect wrong:

  13. Gravatar of Doug M Doug M
    30. November 2017 at 10:02

    Alec Farhrin,

    The Fed didn’t buy MBS to prop-up the MBS market. The MBS that the Fed bought were only the highest rated (AAA) government guaranteed mortgages. This market was not under stress at the time.

    The reason the Fed bought MBS is that this market is the only market of comparable size to the Treasury market where the Fed could purchase in size without significantly disrupting the market in doing so.

  14. Gravatar of ssumner ssumner
    30. November 2017 at 10:10

    LK, Elsewhere I’ve argued that central banks like the SNB need to choose between “inflation or socialism”. Neither are appealing choices, but I’d prefer inflation.

  15. Gravatar of Goodfriend_agnostic Goodfriend_agnostic
    30. November 2017 at 13:52

    Any response to Sam Bell’s tweets? They seem to cast some doubt on whether he really thinks 2% is symmetric. Also he thought the Fed’s response to the crisis was to dovish as late as October 2015, said higher inflation to avoid ZLB was “financial anarchy” Oct. 2016?!?

    Not sure if I can post a link here, but I will try:

    Many quotes in the thread. Via Sam and comments are Sam’s:
    “Incredibly, the FOMC appears to be walking away from its explicit 2% inflation goal only months after first adopting it in January 2012”
    [He’s saying the Fed is risking inflation that’s too high not too low]

    Nov 2011
    “Inflationists inside and outside the Fed would have the Fed use this leeway to take risks with easier monetary policy to bring unemployment down. In other words, they want to push the Fed’s credibility to the limit”

  16. Gravatar of ssumner ssumner
    30. November 2017 at 14:48

    Thanks agnostic. There’s lots there that he should be asked about before being confirmed.

  17. Gravatar of Michael Tubbs Michael Tubbs
    30. November 2017 at 16:38


    I think Goodfriend would be an excellent candidate to fill one of the empty spots.

    The purchase of only treasuries was also pointed out by Peter Ireland in a SOMC statement about Meltzer. I’d be interested on your opinion of the Brunner-Meltzer model/transmission mechanism. Ireland does a good job highlighting the differences between this mechanism and the one present in the NK models.


  18. Gravatar of SG SG
    1. December 2017 at 03:23


    I’m sure Congress will ask him those important questions.

    Hahahahahahahahaha just kidding.

  19. Gravatar of Ricardo Ricardo
    1. December 2017 at 17:21

    Here’s a link to a paper by Marvin Goodfriend:

    AT THE ZERO BOUND, Marvin Goodfriend

    Some notable quotes from that paper:

    “One could argue based on the evidence that the zero interest bound has not been much of
    an impediment to monetary policy in practice.”

    “In any case, the effectiveness of more balance sheet stimulus is questionable.”

    “Central banks will be tempted to rely even more heavily on
    balance sheet policy in lieu of interest rate policy, in effect exerting stimulus by fiscal policy
    means via distortionary credit allocation, the assumption of credit risk, and maturity
    transformation, all taking risks on behalf of taxpayers, and all moving central banks ever closer
    to destructive inflationary finance.
    Interest rate policy is far superior to these alternatives” …

  20. Gravatar of ssumner ssumner
    2. December 2017 at 08:59

    Thanks Ricardo.

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