Brief Note on the Fed Actions
I’ve been puzzling about the recent Fed actions, and I think there is less there than meets the eye. Don’t get me wrong, the Fed has acted. It is changing the composition of its balance sheet in the short run, absorbing MBS, and pushing out Treasuries. But it is not expanding its balance sheet. After several novel policy initiatives, it should be painfully obvious to Fed-watchers that the lack of increase in the monetary base is intentional.
The Fed is trying to influence financing in the residential mortgage market versus Treasuries, in the short run. It is not trying to stimulate the economy through expanding the monetary base.
The short-run aspect of the program hobbles it to some degree. The Fed can say that they will continue to finance in the short term indefinitely, but nothing says that louder than expanding the terms from 28 days to two years. If it’s in the agreement, the expanded length of financing will get a much bigger result than a rolling four week window. Think of it this way: the Fed might want to continue the short-term financing indefinitely, but there have been times in the past where the Fed has felt forced to abandon a plan because of global macroeconomic events (think 1986-7, when the dollar fell, then the bond market fell, then the stock market fell…). Promises are one thing, contractual terms are another.
I’m not a fan of central banking, but if we are going to have central banking, this is a time when the monetary base should be expanding, at least modestly. I think the Fed in this case is being “too clever” and needs to do a permanent injection of liquidity. If they don’t want to do that, well, let’s move back to the gold standard, and privatize monetary policy.
March 12th, 20085:29 pm at
David,
How can you explain the difference in the low level of growth in M1 and the high growth in M2 and M3 (estimated) ?
Is there anyone that looks at worldwide money supply as a whole ? Seems like we have a lot of money pumping in places like China and that ends up here and all that money pumping is leading to worldwide inflation as well as here in spite of m1 growth being very low here ?
March 12th, 20088:00 pm at
David:
Is a return to the gold standard really an option? How would you go from 30+ years of fiat money to a true reserve based system? I’ve heard Ron Paul espouse similar views, but you’re a financial geek…Is this really possible to achieve, and what would be the result nationally and globally. This may be a dub question. If so have patience with my ignorance. I’m a scientist, not an economist, and learn a little more from you and several other blogs each day.
March 12th, 20089:12 pm at
“I’m not a fan of central banking, but if we are going to have central banking,…..”
I’m in your camp, David. I thought it was run pretty responsibly during the Volcker years, but the problems started when Rubin got into the Treasury post and hoodwinked Greenspan right and left into constantly feeding the VC outfits and the stock market. For the last fourteen years it has been nothing but a tool of the rich to print themselves money at will. If a monetary gold standard were ever reestablished, I’ll bet we would see the yearly increase in the number of billionaires come to an immediate halt.
March 13th, 200811:01 am at
“The Fed is trying to influence financing in the residential mortgage market versus Treasuries, in the short run.”
I think the Fed’s immediate goal was much more limited than that, and that the problem they are trying to address is much more serious and immediate. In the past week or soA lot of hedge funds that invest in mortgage-backed securities have been forced by their lenders to shrink their leverage or to shut down, and the coming days and weeks, many more leveraged hedge funds will be forced to liquidate. This means that the lenders have foreclosed billions and billions of dollars of MBS, with many more foreclosures yet to come. These lenders are primarily brokers, including banks with significant prime brokerage divisions.
Until the Fed took action, the lenders were all simultaneously trying to sell these foreclosed MBS to get them off their books, while at the same time, hedge funds were trying to sell MBS to reduce their own leverage. This rush to the exits was crashing MBS prices, threatening to impair the lenders’ capital, which might in turn cause a major broker or bank to fail, with very serious ripple effects through the world financial system.
The Fed’s limited goal at present, I think, is to stabilize MBS prices so that the lenders can carry out a more orderly liquidation of their foreclosed MBS inventories. Although I didn’t see much (any?) commentary about the fact, the $200 billion program that the Fed announced on Tuesday is available only to government securities dealers, which is to say the major brokers and a few gigantic banks that have significant securities activities (Citibank, Deutsche Bank, JP Morgan, etc.) In this regard, it is significantly different from the previous programs announced by the Fed, which were available to depositary institutions (i.e., banks only) of all sizes. Those programs were aimed at easing liquidity in the interbank lending market.
My point is that the Fed is not trying to support house prices, or even to ease residential mortgage lending. Those are long-term goals and best and do not require emergency action between meetings. Rather, they are concerned to prevent the immediate collapse of major financial institutions, with potentially calamitous effects the world financial system.
March 13th, 20082:14 pm at
Why is no one mentioning that this $200B dollar “injection of liquidity” by the Fed is nothing less than the first steps in a full-scale tax-payer bailout of major financial institutions?
For those of you who actually pay taxes, how thrilled are you that the Fed is using your money to buy a bunch of worthless MBS paper? Wouldn’t you rather have the government spend your money on R&D programs, schools, roads, etc? Even money spent on Iraq is a better investment than rescuing a bunch of bankers that made incredibly risky bets on a housing market that was (and still is) ridiculously overpriced.
When are people going to call this for what it really is? We, the working tax paying citizens of this country, have in the past effectively nationalized several savings and loan institutions, and now we have to watch while the Fed shovels our money out to these moronic bankers, brokers, and hedge funds who have, once again, shot themselves in the foot because they were too drunk on greed to hold the rifle straight.
In Britain they have no problem calling it for what it is: nationalization. Read the stories surrounding the Northern Rock rescue. That’s what’s going on here in the good old US of A now. But here, we allow the institutions to stay “private” and maintain their myth of independent “free-market” existence, even after we spend hundreds of billions of dollars to keep them afloat. This might not be so bad if afterwards they showed some appreciation in the form of decent loan rates and good corporate citizenship (i.e. ending the common practices of tax evasion). But as we all know, they’ll just go back to their old ways of wringing every last penny of profit out of their customers while bellowing on about how the “free-market” system must not impeded by government regulation.
America is in real trouble. We are at the mercy of a class of ultra-wealthy corporate owners who care nothing for the common man and will do nothing to improve the lives of working citizens and who have completely taken over the government. We now have “Government of the corporations, for the Corporations, by the Corporations.” And when these corporations need help, they know they can always count on us, the people, to be passive as, once again, they raid the treasury for our tax money. Oh, I mean “as the Fed helps improve credit market liquidity.”