Can the Fed’s helicopter drop money on Treasury?

By Felix Salmon
August 31, 2010
Ricardo Caballero has an interesting idea:

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Ricardo Caballero has an interesting idea:

The economy is barely muddling through. While some of this is unavoidable given the magnitude of the financial shock that is slowly working its way out of the system, macro-policy still has an important role to play in preventing a relapse. Unfortunately, the Federal Reserve has the resources but not the instruments, while the US Treasury has the policy instruments but not the resources. It stands to reason that what we need is a transfer from the Fed to the Treasury.

Caballero doesn’t give an indication of how big this transfer should be. But presumably he thinks the transfer should be substantially larger than the sums that the Fed is already remitting to Treasury.

And remittances are pretty large, and they’ve been growing sharply since the Fed started expanding its balance sheet. Remittances from the Fed to Treasury ranged from $19 billion to $34 billion between fiscal 2000 and fiscal 2008. In fiscal 2009, they were $34 billion — that’s the amount of money the Fed sent to Treasury between October 2008 and November 2009, about $2.8 billion a month. But if you look at calendar 2009, the Fed ended up remitting $46 billion to Treasury — that’s a rate of $3.8 billion a month. And in fiscal 2010, the CBO projects that total remittances will reach a whopping $77 billion — that’s $6.4 billion a month.

(The historical CBO data comes from this CBO report; the projections come from this one.)

The CBO, back in January, took the Fed at its word and projected that remittances would start falling after fiscal 2010, to $74 billion in fiscal 2011, $52 billion in fiscal 2012, and a low point of $41 billion in fiscal 2013 before they started rising again. But remittances are largely a function of the size of the Fed’s balance sheet, and given that the Fed is dipping back into its QE arsenal, the chances are they’ll be higher than that in actuality.

Put it all together, and the present value of the Fed’s remittances to Treasury is surely well over $1 trillion. I’m sure there’s some way that the Fed could front-load its remittances, paying out a few hundred billion dollars now, and paying less in future. That way Treasury wouldn’t need to “commit to transfer resources back to the Fed once the economy returns to full employment”, as Caballero suggests — it would just get lower remittances going forwards.

Treasury would still need to spend that money, though, and I do wonder whether it might need some kind of Congressional approval to do so. Anybody care to weigh in on the constitutional implications of this idea?


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I would think the point of monetary policy at this point would be to raise inflation expectations, but that requires an institutional desire to do that, and much of the fed (mostly regional bank presidents, I gather) deny that easier monetary policy is necessary. I think that if it were announced that, say, next year’s 3-year note auction had been entirely allocated to the Federal Reserve at a 0% interest rate, you might see private hoarding of low-interest government liabilities lose its attraction.

Posted by dWj | Report as abusive

Specific to what Caballero suggests – does something like this need Congrssional approval? Bernanke knows that the chances of success, eg economic recovery, are greater if monetary & fiscal policy can be institutued in tandam. But b/c the Republicans & Democrats refuse to work together, its unlikely he’ll get any fiscal help.

Posted by bmk2323 | Report as abusive

“Treasury would still need to spend that money, though, and I do wonder whether it might need some kind of Congressional approval to do so. Anybody care to weigh in on the constitutional implications of this idea?”

Therein lies the rub re: the helicopter drop.

Treasury needs enabling legislation from the Congress, because the Constitution doesnt give the executive branch the power of the purse. The minute the Fed transfers that money to Treasury, you need Congressional authorization to use it to buy paper clips. Let alone any kind of stimulative efforts.

Posted by corcoran310 | Report as abusive

That is of course, under the assumption that more government spending is going to benefit the economy.
But has it, so far?

Posted by yr2009 | Report as abusive

Ah, I see.. Caballero’s original idea is to fund a temporary tax cut, without raising the public debt, through this mechanism. Two problems with that; First, that action would have to be authorized by Congress, and second, the party in power has no interest in even maintaining the current tax structure (the “Bush tax cuts”).

It may well be that the end of those “Bush tax cuts”, as a substantive tax raise, would be the trigger for the much-anticipated double dip. That is Political Economy 101, if memory serves…

Posted by mutant_dog | Report as abusive

Remittances to the Treasury! That sounds swell. I’m only a high school graduate and you’ll forgive me if I confuse these ‘remittances’ with printing money without anything behind it. The only surprise I have is that the numbers are so small. Are the Chinese still dumb enough to be buying our debt and then kicking back a tiny percentage to the Clinton Global Initiative just in case Barry becomes unviable when the economy collapses? But these geniuses at the Fed would never give us a bum steer. God I wish I hadnt gotten that ‘D’ in PE that kept me out of Wharton; I’d be rubbing shoulders with the wise.

Posted by Skep41 | Report as abusive

I think you’re overcomplicating this issue. The “remittances” from the Fed to the Treasury are just the coupons on the US T-bills and bonds that the Fed is holding. If the Fed wants to finance deficit spending it can do that literally without limit, simply by buying all the bonds Treasury wishes to issue. No special approval or structure needed.

Posted by right | Report as abusive

I think ‘right’ is right. You are confusing Fed profits (increase in Net Worth, then transferred to the Treasury) with financing the Treasury with money printing (increase in Assets and Liabilities), this being Caballero’s proposal . But I also think that the Congress appoval of such an increase in deficit and T-bills issues IS a limit.

Posted by Mastropiero | Report as abusive

We need 1-2% inflation, so Big Ben needs to keep printing money

Posted by STORYBURNthere | Report as abusive

“This should show you again, that something is substantially different here from the way a household, US state or country in the EMU funds itself.”

How many times do I have to hear this ruse about the Treasury not being like a household. The difference is there is one more step. The Treasury has to go to the Fed to borrow and the Fed has to go to the Market. Whereas a household just has to go to their credit card (or house) to borrow money.

The end result is the same, if you borrow too much you go bankrupt. Households go bankrupt when the hire a lawyer to start bankruptcy proceedings. Countries like the U.S. will go bankrupt when the dollar tanks. There’s little difference. In order to borrow again after a bankruptcy you will have to pay more.

See, I’m not even an economist and I can figure that out.

Posted by DarkMath | Report as abusive

There are always problems when the capital is in one place and the income/expenditure thing in another. It raises the possibility of yet another ruse whereby jargon can be employed (and the poor citizen bamboozled) in order to rationalise emptying the bank – in order to afford a repair to the yacht.
In Spain at the moment, this process has alighted upon the State pension pot – which is busy buying the government’s bonds to keep the market buoyant. The next on their list is the Health budget. Once you start doing this, there’s no end to it: the family silver, the car, grandma…
The desire by Governments to get people consuming again is like a serious drug habit. Once you get hooked on that single, obsessive idea, all bets are off: you’ll steal from your wife, rob a store, get a gun, shoot a cop…and empty the Fed.
The insoluble problem with the growth model of capitalism is that without materialist hysteria and massive personal debt, it doesn’t work. People are more important than any system, and if people think the time has come to hunker down, then I go with the people – not some poxy trickle-down theory being peddled by a member of the super-rich.
There is no staving off Crash 2 – it’s too late now. We should use the time for reflection on what’s wrong and how to fix it. We should’ve done that in 2008; we MUST do it this time. king-gold-breakthrough-forecast-as.html

Posted by nbywardslog | Report as abusive

Is there any limit to how much U.S. treasury securities the fed can purchase?

Posted by wmnilly | Report as abusive