Long past time to re-evaluate Fed policy
After the Great Recession, the Fed should have rethought its entire approach to policy and come up with a more effective regime. It only began this sort of re-evaluation quite recently—too late to help in the current crisis. That was a major institutional failure, and yesterday we all saw the results.
The Cato Institute and the Mercatus Center are planning a seminar to consider alternative approaches for the next crisis. (Click link to register). I’ll be there (electronically).
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11. June 2020 at 12:01
Elga Bartsch is a fan of helicopter drops on Main Street. She works with Stanley Fischer.
Presently, the Federal Reserve prints up about $120 billion monthly and spends it on bonds in global capital markets.
What if the Fed instead printed up $140 billion monthly, and sent a check for $1,000 to every US personal income-tax payer?
Yes, under present law that policy would be illegal, but the Fed could buy US Treasuries and the Treasury could cut a check for $1,000 to every tax-paying household.
BTW, the average household pays $10,000 a year in federal taxes to finance the Department of Defense, Department of Homeland Security, the black budget, the VA, and prorated interest on national debt, to pay for National Security.
So what if one year we send that $10,000 back to every taxpaying household? That’s about $1.4 trillion.
The Fed has spent $3 trillion on Wall Street this year…but to what effect?
Elga Bartsch…keep an eye out for her presentation.
11. June 2020 at 13:24
I thought of a way for Forrest Gump to help explain Dr. Sumner’s sometimes non-intuitive tight money thoughts:
Tight money is as tight money does.
11. June 2020 at 13:38
Scott, That’s very good.
11. June 2020 at 14:06
Three ‘scenarios’
https://mobile.twitter.com/NGDPAdvisers/status/1271186609258598400
11. June 2020 at 16:34
really, it’s not that complicated. stop lsap thru dealer banks and ioer. end the fed. restore free banking. have the treasury, the institution with the proper constitutional authority, make the democraticlly informed and consequential credit allocation choices and lend freely on good collateral at a penalty rate; robust social safety net for disruptions with payments below market rate but above suffering and penury; no credit allocation to speculative markets; rid the banking system of wall street capture. but we’ve been having this debate since jackson, and unfortunately it always ends up with favoring the ny banks and now the entire global banking industry. with a non convertible currency, there should never be tight money, only credit allocation, properly the role of smaller banks supported by a treasury function of lend freely against good collateral.
11. June 2020 at 18:17
Isn’t it odd that these market analysts never look at what the Fed is actually doing day by day in the TIPS market? Thursday the 5 year tips fell back to .95%, having touched 1.00% on Wednesday. Was the Fed worried about “irrational exuberance” seen last March 6 when the rate was at 1.14?
11. June 2020 at 18:31
Isn’t the Fed’s announcement they intend to keep unemployment high through 2022 extraordinary?
12. June 2020 at 00:34
Besides the wise counsel of Ben Cole, who’s starve the beast strategy (in disguise) would not hurt given that money is neutral, and the even wiser counsel of agrippa postumus, to restore sound free banking (the polar opposite of Cole’s advice but I like deflation and steady prices), I find it curious that ssumner says: “That was a major institutional failure, and yesterday we all saw the results [US stock market down day]”. Sumner refused to give credit for the Fed arresting the US stock market decline in March, yet now he wants to give them credit for causing one down day? Strange. And US stock market futures are up for today (6/12/20). So if money is not neutral, then it probably has a real effect for about….24 hours. LOL, it’s trivial.
12. June 2020 at 01:11
agrippa postumus
You must be familiar with Prof. R. A. Werner’s ‘work’?
“Economies that manage to focus credit creation on productive and sustainable use – i.e. not for consumption and asset transactions – are likely to achieve superior economic performance (high nominal GDP growth and comparatively low inflation, without asset price cycles and with financial system stability). As the World Bank (1993) indicated, and others have also found (Patrick, 1962; Wade, 1990; Werner, 2000a, b; Werner, 2003), at the heart of the East Asian economic miracle has been a process of guiding credit towards productive use and suppressing unproductive and unsustainable (hence systemically risky) use of credit. . . . “
However, this tool was not employed in post-war Germany. Yet the economy avoided boom-bust cycles and asset bubbles and achieved relatively high, noninflationary growth. This raises the possibility that there is an alternative to the introduction of a system of ‘credit guidance’ by the central bank. It stands to reason that a similar result to direct intervention can be achieved by designing the structure of the banking sector such that a type of banks is dominant that generally takes little interest in lending for financial transactions. In Germany, banking is dominated by locally-headquartered, small banks that focus on lending to the household and productive SME sector (as opposed to financial speculators). There is much discussion about the lack of funding for SMEs in the UK. This should not surprise with a highly concentrated banking system where five banks account for over 90% of deposits. In Germany, about 70% of deposits are accounted for by over 1,000 locallyheadquartered, small savings and cooperative banks (Sparkassen and Volksbanken). . . .
Werner (1992, 1997, 2005, 2011b), using Japanese data, shows that credit for GDP transactions explains nominal GDP well over several decades, while alternative explanatory variables (including interest rates and money supply) are eliminated in a reduction from a general to the parsimonious specific model.” P23.
https://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf
Nothing to do with potatoes, hot or otherwise?
12. June 2020 at 01:50
“After the Great Recession, the Fed should have rethought its entire approach to policy and come up with a more effective regime.”
‘More effective’?
“This would explain why the trebling of the Fed balance sheet in late 2008, due to purchasing non-performing assets, did not result in a significant weakening of the US dollar or inflation: no money was injected into markets due to this banking sector accounting mop-up operation. It did, however, have the desired result of strengthening banks’ balance sheets enough to produce more than 5% bank credit growth in 2012 and a significant recovery.”
https://www.sciencedirect.com/science/article/pii/S0261560614001132#fd7
That is roughly what happened, and in fact in the USA and UK the QE exercises were beautifully calibrated to deliver money growth of a bit less than 5% a year…Both economies recovered and stabilised, etc.
. . .“
https://mailchi.mp/8f126f390556/which-economic-thoughtcomes-out-best-from-the-last-decade-1336071?e=260ed9002a
So no ‘significant recovery’ or ‘the QE exercises were beautifully calibrated’?
12. June 2020 at 02:22
Scott Sumner recently posited that “everyone hares us,” meaning the US.
From India:
Network18 Polls Reveal Indians Prefer Trump Over Xi Jinping, 91% Support Boycott of Chinese Goods
“72% of the respondents said they will not buy anything Chinese if they can; 23% are willing to cut down on purchases of Chinese goods. Only 4% say they would still want to buy Chinese products.”
https://www.news18.com/news/india/network18-polls-reveal-indians-prefer-trump-over-xi-91-support-boycott-of-chinese-goods-2655463.html
India has about 1.4 billion people.
This reads like the polls from Taiwan. What about Vietnam, Australia, Thailand and Hong Kong? Japan?
Trump is a carnival barker who made it into the White House. But even Trump cannot undermine the appeal that the US has to the world’s citizens—more people are taking a dim view of Xi and the CCP.
12. June 2020 at 07:06
New flash monthly estimate of RGDP for UK in May showed a 20% MoM fall following 5% in April.
https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/latest#gdp-fell-by-204-in-april-2020
I think this Covid “stop” could be a challenge for national income statisticians as final output may not have fallen as much as intermediate output challenging the UK’s predominantly “output” method of calculating GDP. Or perhaps final output did fall, but income was then supported by government furlough subsidies, that in turn supported expenditure.
The US only uses income and expenditure methods to calculate GDP with these mostly based on wages*employees and personal consumer expenditure respectively.
12. June 2020 at 09:04
Thomas, I agree.
Ray, You said:
“That was a major institutional failure, and yesterday we all saw the results [US stock market down day]”
LOL. No, I wasn’t talking about the stock market, I was talking about the Fed policy announcement.