Can the Fed’s helicopter drop money on Treasury?
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 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?