1) If you are looking for an article that describes how the Fed’s new lending facilities work, look here.? It shows the effects on the Fed’s balance sheet of each program.
2) Well, I guess the Fed is willing to further risk its balance sheet in order to force LIBOR down.? Now, this may have knocked 10 basis points off of the TED spread in the short run, but I am not sure what it will do long term.? It may do nothing, because the LIBOR lending markets are so much larger than the Fed.? As is noted in this piece:
Still, RBS Greenwich Capital chief economist Stephen Stanley cautions that adding AAA-rated asset-backed debt may not do the trick. ?This is not likely to be a major change, as the highest quality ABS were getting financed without too much difficulty already,? he wrote in commentary.
3) As I have noted before, the Fed cannot, and should not solve every lending problem.? There is a tendency for the financial system to adjust to monetary laxity and ask for more.?? This is just another aspect of the way our government operates, absorbing many medium-sized crises at the risk of an eventual run on the Dollar.
4) Should the Fed pay interest on reserves?? At present, the Fed has banks lend to each other through the interbank market; if the Fed paid interest, the Fed funds market could become an explicit market where banks loan money to the Fed, rather than to each other.? Now for the Fed to issue debt would allow them more flexibility in their balance sheet, but at a price.? We would have a central bank with additional liabilities beyond the currency, and that would have an impact on their ability to do monetary policy.
5) Funny how the Republicans grab for something unusual — pointing a finger at the Fed for commodity price inflation.? The Fed does have a small role there, but the bigger factor is the development of China, India, Brazil, and many other placesthat need raw materials in a way they did not previously.
6) Though I disagree with this paper, it is worth a read.? I am not a monetarist, I am more of an Austrian economist.? I acknowledge that economic systems are not stable, and that is a good thing in the intermediate-to-long run.? In my opinion, the main weakness of monetarism is that it fails to recognize asset inflation.? When the money supply is growing too rapidly, the money goes somewhere.? If savers predominate, it goes to assets, if spenders, to goods and services.? We mismeasure savings in the US — it is higher than commonly believed.? As such, growth in the money supply boosted asset prices.? But as the Baby Boomers gray, that balance will tilt as they draw on assets to finance consumption.
What is needed is a willingness for central bankers to stand in the way of investment/lending booms, and raise rates to deflate investment/lending bubbles before they deflate themselves, with large consequences to the economy.? That’s not coming anytime soon.
David,
I take issue a little with point number 5. Republicans are jumping on one of the few themes catching on with the electorate. The most vocal critic of the Fed (there are far too few of them) has likely been Representative Ron Paul. He, like you is an Austrian, and he has pointed repeatedly to the rise in commodity prices as evidence of the Fed’s mismanagement of the dollar.
You point to increases in demand from emerging market countries. Gold is up more than 100% since 2005. Has demand really outpaced supply by that much in this time period? Very doubtful. The decline the dollar is the more likely answer. Ditto for other roaring commodities.
Following on your point 6 (asset/goods inflation vis savings/consumption), why consider this in binary terms? It seems to me that an asset is distinguished from a consumption good mainly in duration of utility. A consumption good has a presumed very short duration of utility (near zero). An asset has a duration of utility extending into the future.
A can of tuna is lunch (zero duration). A warehouse of canned tuna is inventory (shortish duration). A fleet of ships to catch tuna is a capital asset (longish duration). The stock of a company proposing to buy ships to catch tuna is a speculative asset (very long duration). It seems to me the binary distinction of price changes between my can of tuna (consumption good) and the case of tuna from which my can was purchased (inventory asset) is arbitrary and possibly misleading.
The point here is that there may be insight in looking at changes across the duration curve of asset prices. For example, it seems to me that while bubbles have been appearing in assets rather than consumption goods, these bubbles have been appearing at progressively shorter durations (i.e. stocks to housing to commodities).
Re: paying interest on reserves. The bankers have always had their hands in the cookie jar. If the New York Fed through its open market power adds a dollar of legal reserves to the system, cummulatively the bankers acquire c. $100 of earning assets. The return on $100 dwarfs the interest foregone on idle reserves [sic]. The conclusion is obvious. Legal reserevs are not a tax, they are like manna from Heaven. And it doesn’t stop there. The Fed turns over 90+ per cent of the earnings to the Treasury (from SOMA). These profits are obscene. And payment to the banks would come from tax payer dollars. What a racket.
If the banks want to increase their profitability then they should have zero interest rates (Reg Q in reverse but just for commercial banks), not zero reserves. The net result would be higher profits, an increase in the supply of loan-funds,
a more favorable capitalization on earnings, etc.
Galbraith: Monetarism has never been tried. The best Fed paper ever written:
There were 7 years of deliberation in which the the 1931 Fed. Res. Committee?s recommendation to change the method of computing reserve requirements was: (1) uniform percentage requirements against the volume of deposits of all classes at all banks, (2) requirements against debits to deposits. This significant and yet confidential document wasn?t de-classified (released to the public) until Mar 23, 1983.