Comments on: When risk becomes uncertainty http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Sensei http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14871 Sat, 15 May 2010 18:49:50 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14871 Again, even if those amounts are correct and not just the Fed spinning a back-door bank bailout, it doesn’t inject money directly into the economy. If your mechanism requires credit creation to work – those added bank reserves turning into new loans – it is doomed to fail in this economy: the demand for credit just isn’t there. It’s credit demand that drives loan expansion – not reserves. Adding reserves by expanding the Fed’s balance sheet will strengthen banks (its real purpose) but it will not “bolster the economy.”

If $1 Trillion net was really injected into the economy we would see dramatic improvements in employment and capacity utilization. The Fed doesn’t have the ability to do that. Only the government can accomplish that through higher spending or lower taxes.

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By: HBC http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14870 Sat, 15 May 2010 18:34:36 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14870 Mass purchase of T-Bonds or – worse – fistfuls of MBS-BS from the sleazy shysters who fabricated them is no way to pump money into the economy. It’s tantamount to devaluing the currency itself by carcinogenic misappropriation of taxpayer wealth.

But that’s what the Federal Reserve does all the time. They need to give the name “Federal” back to the people and see how they fare doing business under a truer title, such as Stand-in Wall Street Fluffers-R-Us.

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By: DanHess http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14865 Sat, 15 May 2010 10:54:07 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14865 “Fed Plans to Inject Another $1 Trillion to Aid the Economy”
http://www.nytimes.com/2009/03/19/busine ss/economy/19fed.html?_r=1&hp

“WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.”

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By: Sensei http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14862 Sat, 15 May 2010 07:24:35 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14862 @MarshalN Goodness! No offense, but telling me to do some research and then pointing me to Mankiw is outrageously funny. His textbook view of money creation – fractional reserve banking and the magical money multiplier – has little relation to how our financial system really operates. Banks don’t lend reserves. The loan desk and the reserve desk don’t talk to each other – or need to. Banks first makes loans to credit-worthy borrowers, irrespective of reserves, and after making the loans, if they are short reserves bank-wide, they simply borrow them overnight from the interbank market or directly from the Fed. The money multiplier is a myth – it only works in Greg Mankiw’s textbook world.

I know you don’t believe me – and you’ll never get any closer to understanding what I’m saying by reading the likes of Mankiw – but I repeat it again: the Fed cannot inflate. Fiscal policy is the only monetary policy that matters.

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By: MarshalN http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14861 Sat, 15 May 2010 06:26:00 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14861 @Sensei: You have it backwards. The Fed is the one that deals with creating and destroying money. It just makes money out of thin air. If you don’t believe me or Dan, you should do some research on your own on the subject of who creates money in the US economy — I’m pretty sure an intro level economics textbook should do the job. I can tell you right now it’s not the US Treasury.

In fact, a quick google search led me to this, a summary of the chapter on the Fed from Greg Mankiw’s popular book

http://www.csun.edu/bus302/Lab/ReviewMat erial/macro6.pdf

Enjoy

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By: Sensei http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14859 Sat, 15 May 2010 05:26:51 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14859 @DanHess As a matter of law (or policy) we require the Treasury sell bonds to match a federal budget deficit $ for $. But the issue and purchase of these bonds comes AFTER the money has been created and spent. That mechanism isn’t funding or financing anything. It’s a fiction we maintain for political purposes, a piece of fiscal theater. If no one stepped up to buy these bonds – if an auction failed – it would make no difference. Having the Fed buy them is utterly pointless.

“The willingness of the market to finance government shortfalls” is irrelevant. The Treasury could stop issuing treasuries tomorrow and it wouldn’t affect our government’s capacity to spend in the least. The United States government can spend whatever amount of US dollars it wants without taxing or borrowing to fund those expenditures. That’s what it means to be a monetary sovereign.

“All those that sold treasuries to the fed during the past year got electronic cash in return. This is new cash that did not exist before.” – Not true. The cash they received is not new money, high-powered or otherwise. How did they acquire those treasuries in the first place? At some point they exchanged dollars for treasuries (interest-bearing dollars, in essence). These treasuries are so liquid and so secure that owning them instead of “cash” represents no compromise of private spending power. Treasuries are as good as cash. When the Fed or anyone else buys them from you it doesn’t give you new money (excepting interest) – it just gives you your money back in another form – all that changes is the composition and term structure of your dollar assets. You aren’t any richer. And it doesn’t boost private spending power the way a tax cut would. A tax cut, by the way, that doesn’t need to be funded or financed.

This all started because you suggested Quantitative Easing was needed on a massive scale. But most of the examples you’ve provided (aid to states, tax cuts) have nothing to do with monetary policy – they are purely fiscal. And these funding mechanisms you and MarshalN describe are not how we can achieve inflation or reflation or boost demand in the aggregate. I’m just trying to show how little the Fed (or any central bank) can do to accomplish your desires. All they really control is the rate paid on reserves. The way to combat deflationary forces is to run larger (unfunded) deficits. Something like a payroll tax holiday would be far more effective – that’s the kind of Quantitative Easing we all could handle.

Peace

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By: DanHess http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14858 Sat, 15 May 2010 04:05:27 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14858 MarshalN is right. If Congress spends more than they take in, Treasury needs to sell bonds to cover this shortfall. The willingness of the market to finance government shortfalls is finite.

The Fed can simply buy treasuries (and they did this to the tune of $1 trillion in the past year or so). This has been, in essence, new high-powered money that goes into the system. All those that sold treasuries to the fed during the past year got electronic cash in return. This is new cash that did not exist before.

Indeed, through the mechanism MarshalN talks about, there have been substantial new cash infusions into the economy. Aid to the states in 2009 and tax rebates, part of Obama’s stimulus plan, were funded when the treasury issued debt while the Federal Reserve bought up the debt.

Theoretically the Fed can sell these treasuries back into the market and drain that liquidity back out but there is no sign of that on the horizon.

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By: Sensei http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14855 Sat, 15 May 2010 03:23:20 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14855 @MarshaIN What’s the point of that? The federal government doesn’t need to issue bills and sell them to the Fed (or anyone else for that matter) to get money – if this is ever actually done as you describe it’s only done to maintain the “funding fiction” that we’ve codified into law for no good reason. The US Congress can cut taxes or spend money unilaterally without any real constraint or any real coordination with the Federal Reserve. The gov doesn’t need to have money in the bank to fund a tax cut or cut a check. In fact, the government doesn’t really have (or need) money the way private entities do.

The Federal Reserve cannot “print money” in the way you are describing – creating new financial assets. The federal government, in contrast, “prints money” every day of the week. They also destroy a fair amount of money each day through taxation. The question is this: will they create more and destroy less? The deficit must increase – that is the only way to “print money.” The central bank has nothing to do with this.

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By: MarshalN http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14846 Sat, 15 May 2010 00:15:54 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14846 @Sensei: What I meant was for the government to issue new T-bills that goes straight from the Treasury to the Fed, and in return, the Fed “buys” them from the Treasury. The government then in turn gives the money out via tax cut, free money, whatever you want to call it. You can do it through an intermediary to make it look legit, but the end result is the same.

I’m not saying that’s what they should or would do. I’m just saying that there is nothing stopping them from printing money.

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By: Sensei http://blogs.reuters.com/felix-salmon/2010/05/14/when-risk-becomes-uncertainty/comment-page-1/#comment-14844 Fri, 14 May 2010 23:25:31 +0000 http://blogs.reuters.com/felix-salmon/?p=3859#comment-14844 @MarshaIN “The Fed can print money to buy treasury bonds…”

They can only purchase bonds that already exist – bonds which are held by private parties and represent non-government financial assets. Exchanging bonds for cash just changes the composition of these assets and doesn’t create anything new.

The Fed can’t give people money through monetary operations. Only the fiscal authorities can do that – by taxing less or spending more.

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