Bernanke may seek new ways to ease credit as Fed rate nears 1%
By Craig Torres
Oct. 23 (Bloomberg) — Federal Reserve officials are likely to bring interest rates down so aggressively over the next few months that they will have to search for fresh tactics to continue easing credit.
All that’s left is the Fed buying longer term treasury securities to attempt to flatten the curve, get mortgage rates down, and add reserves.
This will ‘flood the market’ with reserves that now pay interest, so they can do this without a zero interest rate policy.
Their theory is that with more reserves banks will lend more, which is not the case, both in theory and practice, as Japan proved not long ago.
Instead of the Fed buying long term securities the treasury should simply stop issuing them and issue more bills. The treasury not issuing longer term securities is functionally the same as the treasury issuing them and then the Fed buying them. But with a lot fewer transaction costs.
Where does the FED get its funding to buy securities? Is there any white papers on the how the treasury and fed interact?
“Their theory is that with more reserves banks will lend more, which is not the case, both in theory and practice, as Japan proved not long ago.”
I don’t believe this at all Warren, you are trying to paint these crooks as naive innocent children, when they are smart manipulative devils. Hoover zoomed up the printing presses and recapitalized the banks and they did not lend, we don’t have to look to Japan for empirical evidence of failed policy – we have our own history right here in the USA. Those smart treasury and fed boyz have studied US financial history – so they had to know it wouldn’t work – so what is their real motives for doing things everyone knows won’t work – that is the question you ask yourself.
Fed is monopoly supplier of net reserve balances. Changes to its balance sheet are what create reserve balances. They don’t need “funding” because they create the “funds” and are at the top of the hierarchy of money, along with the Treasury.
Lots of papers on how the Fed and Tsy interact. Warren’s “soft currency economics” is a good starting point. Wray’s book. Many more.
3 month OIS is at 80. I guess some rate cuts are coming?
STF, Read both of those; they give an overview.
JCM–here are some others, FYI.
Bell, Stephanie A. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œDo Taxes and Bonds Finance Government Spending?ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Journal of Economic Issues, vol. 34, no. 3 (September 2000): 603-620.
Bell, Stephanie A. and L. Randall Wray. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œFiscal Effects on Reserves and the Independence of the Fed.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Journal of Post Keynesian Economics, vol. 25, no. 2 (Winter 2002-3): 263-271.
DeCorleto, Donna A. and Theresa A. Trimble. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œFederal Reserve Banks as Fiscal Agents and Depositories of the United States in a Changing Financial Environment.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Federal Reserve Bulletin (Autumn 2004): 435-446.
Federal Reserve Bank of New York. Annual Report on Domestic Open Market Operations (available online for last several years).
Fullwiler, Scott T. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œInterest Rates and Fiscal Sustainability.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Journal of Economic Issues 41 (4) (December 2007): 1003-1042.
Fullwiler, Scott T. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œSetting Interest Rates in the Modern Money Era.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Journal of Post Keynesian Economics 28 (3) (Spring 2006): 495-525.
Garbade, Kenneth D., John C. Partlan, and Paul J. Santoro. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œRecent Innovations in Treasury Cash Management.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Federal Reserve Bank of New York Current Issues in Economics and Finance, vol. 10 (November 2004).
Hamilton, John. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œMeasuring the Liquidity Effect.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â American Economic Review, vol. 87, no. 1 (March 1997): 80-97.
Lavoie, Marc. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œMonetary Base Endogeneity and the New Procedures of the Asset-Based Canadian and American Systems.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Journal of Post Keynesian Economics, vol. 27, no. 4 (Summer 2005): 689-710.
Lovett, Joan E. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œTreasury Tax and Loan Accounts and Federal Reserve Open Market Operations.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Federal Reserve Bank of New York Quarterly Review, vol. 3, no. 2 (Summer 1978): 41-46.
Meulendyke, Ann-Marie. Financial Markets and Monetary Policy, 2nd Edition. New York: Federal Reserve Bank of New York, 1988. (see the chapter on the Fed’s daily operations.)
Mitchell, William and Warren Mosler. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œEssential Elements of a Modern Monetary Economy with Applications to the Social Security Privatisation and the Intergenerational Debate.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Centre of Full Employment and Equity Working Paper No. 05-01 (February 2005).
Mosler, Warren. ÃƒÂ¢Ã¢â€šÂ¬Ã…â€œFull Employment and Price Stability.ÃƒÂ¢Ã¢â€šÂ¬Ã‚Â Journal of Post Keynesian Economics, vol. 20, no. 2 (Winter 1997-8): 167-182.
Thornton, Daniel L. 2001. “Forecasting the Treasury’s Balance at the Fed.” Federal Reserve Bank of St. Louis Working Paper 2001-004D (Revised May 2003).
United States Treasury. Treasury Financial Manual, Volume IV (available online)