Sweden is suddenly in the news
Here’s Matt Yglesias and Brad DeLong touting the success of Sweden’s negative IOR program. Ryan Avent also links.
I published the idea back in early 2009. And I blogged on Sweden’s policy move back in mid-2009. At the time, I was frequently criticized for talking about IOR. “Surely it can’t matter that much, just a quarter point.”
If you want to read what other bloggers will be talking about in 2011, be sure to read my blog in 2009.
PS. I doubt that negative IOR played a significant role in Sweden’s success; although it’s hard to know for sure because so much of monetary policy is about signaling. But monetary stimulus did speed up Sweden’s recovery.
PPS. DeLong’s post is entitled “Matthew Yglesias Makes a Good Catch” Matthew knows where the fishing is good. 🙂
Tags: Sweden
3. March 2011 at 19:42
Generic skeptical commenter wrote:
“Surely it can’t matter that much, just a quarter point.”
To paraphrase DeLong, a quarter point surely matters a great deal, when the interest elasticity of money demand is, say, em, roughly infinity?
3. March 2011 at 20:31
@Scott:
Speaking of monetary policy, I suggest you read Reinhardt and Reinhardt’s new paper.
http://www.aei.org/docLib/assets-markets-monetary-policy.pdf
3. March 2011 at 20:47
It’s sort of frustrating that a guy like Brad DeLong would read your ideas on MY’s blog first, particularly since I’m willing to bet MY gets most of his ideas reading your blog. But you’re making your presence felt, one way or another!
3. March 2011 at 20:47
(Most of his macro ideas I mean)
4. March 2011 at 00:40
John,
That’s up there with my favorite observation of the week.
DeKrugman is a deeply defective human psychosis – there is much to be read into his slobbering over a non-economist referencing Sumner’s (and libertarian / Austrian) ball squeezing idea – that only those on the dole of Wall Street Banksters wouldn’t be able to adopt in 2009 when they were sucking Goldman off to buy cover for their boy wonder’s chances.
Just start with the premise that once the hard right started screaming NO to bailouts, the left had to compromise 100% of everything to do Wall Streets bidding.
You’ll find a solid 6-9 month period where they said then, “stimulus for the win!” and later their only excuse “we had to stave off another Great Depression.”
4. March 2011 at 00:46
Scott: Finland and Sweden are quite similar economies. The main difference between the countries in this recession has been that Finland is part of the euro zone and Sweden runs its own monetary policy. If you go and look at the data, Sweden did much better – and monetary policy is the likely culprit here.
4. March 2011 at 01:08
Scott, you have get off the dime, and go one sided:
“Former Federal Reserve Chairman Alan Greenspan said a surge in U.S. government “activism,” including fiscal stimulus, housing subsidies and new regulations, is holding back the economic recovery.”
http://www.bloomberg.com/news/2011-03-03/greenspan-says-surge-in-government-activism-is-hampering-u-s-recovery.html
Look, we remember Friedman, we remember Greenspan – because they were Republican economists.
It’s a well worn path – follow it.
4. March 2011 at 05:26
I’m merely speculating here but my sense is the Fed is acutely aware of what is going on in Sweden however the banks in Sweden are much better capitalized than US banks and the Fed is afraid to push US banks in to taking on additional risk.
Every policy action taken by the Fed on behalf of the banks has been simply to allow them to “buy time” to get their balance sheets in order. There are a lot of non-performing assets on their books that have yet to be recognized and the Fed is worried that a negative IOR policy would force the banks to take on additional risk their balance sheets can’t handle.
Sweden took a much different course of action when their banks were insolvent or on the verge of insolvency, they nationalized them. They fired the management teams, wiped out the shareholders, bond holders and all the bad debt then spun them back out with clean balance sheets. As a result their banking system was returned to health much faster than ours, at much less cost to the tax payers and can now handle the risk of lending in a weak economy. Contrast that approach with our extend and pretend.
4. March 2011 at 06:10
The only thing that strikes me as worrisome about people recognizing the importance of IOR is how they might use it as a policy tool. Consider the present:
You were skeptical when I observed it’s being used as a device to transfer money to banks. Well, at 1.3 trillion in excess reserves, that’s about 3.25 billion in transfers to large banks. Sure, it has a pernicious effect on the economy, but the Fed can fix that by repurchasing bonds 2 weeks after they were auctioned (or repurchasing equivalents) – and in the process transfer even more money to primary dealers who take transaction fees for buying and then reselling bonds to the Fed. (Why can’t the Fed just directly bid at treasury auctions? Oh, that just wouldn’t be proper, you know…) So the banks get the kickbacks coming and going.
Maybe the positive IOR and a portion of the QE2 cancel out? (Based on your theories, one might expect this.) In which case, the net effect of implementing both is to transfer roughly 5 billion+ a year to help re-capitalize banks.
But you must be thinking that the Fed can’t possibly be that small minded and short sighted! These are serious minded academic economists!
2008, my friend. Enough said.
But you don’t buy into conspiracy theories… How is this a conspiracy theory? Who’s hiding anything? The Fed’s own financial statements show the payments to banks. It’s in bright daylight.
So, dear professor, here is a cynical prediction: IF IT IS TRUE that the Fed is manipulating IOR to support banks, then around the time that inflation turns >2%, consider the possibility that the Fed will suddenly start publishing papers and making talks about how _increasing_ IOR is a valuable tool to reign in inflation.
4. March 2011 at 06:17
OMG Scott. I nearly shit myself when I read the “If you want to read what other bloggers will be talking about in 2011..” sentence. Quote of the year.
4. March 2011 at 14:32
StatsGuy
4. March 2011 at 06:10
“Why can’t the Fed just directly bid at treasury auctions? Oh, that just wouldn’t be proper, you know…) So the banks get the kickbacks coming and going.”
The Fed are not buying the same issue that the Treasury are selling.
When the BoE did their QE, they only announced to the market which gilts they would be buying about a week before a competitive reverse auction. The auctions were for a bundle ( 8-10 ) of different gilts not just a single stock. That way they only accepted competitive bids at market clearing prices. Moreover, they never bought any issue that the Debt Management Office had sold the previous week. Therefore, they reduced the possibility of buying from the DMO and selling to the Bank at a higher price. There was no guarantee that a bid would be accepted especially if the price diverged from market prices. The commercial banks only gained through acting as market-makers selling to the Bank on behalf of third parties as the Bank did not buy the short-dated gilts that the banks held.
4. March 2011 at 16:54
If you want to read what other bloggers will be talking about in 2011, be sure to read my blog in 2009.
4. March 2011 at 16:54
Just checking to see if that pushes Jon over the edge.
4. March 2011 at 17:02
Mark, That’s right.
Doc Merlin, They lost me in the abstract. They’re going to measure changes in the stance of monetary policy using the fed funds target? Monetary policy isn’t about interest rates, it’s about nominal aggregates.
John, It’s obvious he doesn’t read my blog much. Recently DeLong did a post headline noting that I had “plumped” for NGDP targeting. Hard to believe anyone who knew anything about me could only just be finding out that I favored NGDP targeting. I only announce the fact about 47 times a day.
Mikko, Thanks for that info.
Morgan, You said;
“Look, we remember Friedman, we remember Greenspan – because they were Republican economists.
It’s a well worn path – follow it.”
No.
Lancair360, You may be right, but I’d also observe that a robust recovery would help banks far more than a 1/4 percent interest on reserves.
Statsguy, If the Fed was a friend of the banks it wouldn’t have allowed NGDP to crash in late 2008–that devastated bank balance sheets.
You can’t consider the entire IOR to be a pure transfer to banks, as it in part is offset by the Treasury securities purchased by the Fed. The subsidy is probably closer to 2 billion, a tiny fraction of total bank profits in America. I just don’t see that as being the motive for the program, as the Fed’s been itching to do this for years.
4. March 2011 at 17:04
Jon, I missed your comment. Normally I don’t allow that sort of language, but since I used the term today in my newest post, I guess I’m in no position to complain.
5. March 2011 at 10:07
ssumner:
“I just don’t see that as being the motive for the program, as the Fed’s been itching to do this for years.”
These statements are self-contradictory. You are saying:
The Fed is smart and has always wanted to launch IOR because it knows IOR is a valuable tool to contain inflation, and so it decided to up IOR in a deflationary collapse even though it knew that the impact on bank balance sheets would swamp direct transfers…
5. March 2011 at 10:11
Richard:
“The Fed are not buying the same issue that the Treasury are selling.”
Hmm, I tried to post this last night, but:
http://www.zerohedge.com/article/blatant-treasury-churn-fed-entire-pomo-consists-just-auctioned-3-year-frbny-launches-flip-bo
5. March 2011 at 10:21
Richard:
Hopefully the previous zero hedge link did not hit a filter this time. Also, here’s the counter view:
http://pragcap.com/pomo-flip-matter
I both agree and disagree with pragmatic capitalism here. Essentially, he’s saying it’s congress, and deficit spending, that induce monetization. I disagree, in that if the Fed does not accommodate Congress with QE, this will spike interest rates, slow the economy, up unemployment, and punish congressmen during elections.
Moreover, to argue that QE has no monetization component is ridiculous. There’s both direct monetization (transfer payments to treasury, which ssumner observes is largely maturity shifting), and effective monetization of existing fixed rate debt by lowering the real rate (aka, increasing nominal price levels and hence tax revenues more than interest payments on existing debt).
ssumner has argued that it’s the Fed that actually constrains congress, while PragCap argues it’s all congress. Again, per Joe Gagnon, it’s BOTH in concert.
“Fear mongerers want you to believe that the Fed is the evil entity that “prints money”. The truth is that the Fed can do no such thing. Only Congress can print money and it’s clear that their actions in recent years have failed to generate significant inflation. This is a sign that the government’s spending has been ineffective and misguided. Although I acknowledge that the US Congress is never constrained in its ability to spend this by no means implies that the US Congress should spend beyond its means. To do so can possibly result in malinvestment or very high inflation.”
Also:
“Monetization is achieved by act of Congress via deficit spending and is independent of the Fed’s monetary policy. Anyone who uses the term in the context of the Fed’s contribution of government spending does not understand how the modern monetary system works. In a strict technical sense, monetization is always done by act of Congress and is voted on before funding is ever acquired for such expenditures – funding that will always be available regardless of tax receipts or bond sales….”
5. March 2011 at 12:55
Zero Hedge are just in their usual hysterical mode. They did not mention the most relevant thing in relation to how much the primary dealers made and that is what price the Fed paid. I agree that anything that makes it too easy for a primary dealer to buy an issue from the Treasury and sell at a higher price to the Fed is bad. That is just pure corporate welfare with no risk to the primary dealer. The Fed should mix up their buying across all maturities and not buy too many from one auction as that could lead to squeezes.
5. March 2011 at 23:34
Scott, I thought you’d want to know Tyler was talking about pee:
http://www.marginalrevolution.com/marginalrevolution/2011/03/how-to-make-better-decisions.html#comments
6. March 2011 at 09:03
Statsguy, You said;
“The Fed is smart and has always wanted to launch IOR because it knows IOR is a valuable tool to contain inflation, and so it decided to up IOR in a deflationary collapse even though it knew that the impact on bank balance sheets would swamp direct transfers…”
Two other people say the same as me . . . they are James Hamilton and the Federal Reserve itself. The Fed wanted to double the base, but was worried about hyperinflation (yes, a mistake) so they did IOR to assure that doubling the base didn’t reduce the fed funds rate below their 2% target.
Morgan, You keep giving me a hard time when I was just trying to be chivalrous. It’s women who benefit the most from indoor plumbing.
6. March 2011 at 11:25
ssumner:
“The Fed wanted to double the base, but was worried about hyperinflation (yes, a mistake) so they did IOR to assure that doubling the base didn’t reduce the fed funds rate below their 2% target.”
This makes no sense, and seems to contradict what you said in the past. I’m going to try to reconcile your arguments.
First, why should I believe the Fed made a simple mistake, when you are arguing that the Fed knew the effects of IOR but did it anyway just to try it out? The Fed had every incentive to transfer capital to banks given their obsession with the financial system nearly collapsing. Seriously, why?
Second, you are basically saying here that the Fed felt it could raise IOR (even though it knew the effect would be negative on inflation) because it could overcompensate by raising the base more?
I made _exactly_ this argument when I suggested the Fed is using IOR as a tool to help recapitalize banks… And you scoffed at it, saying the Fed would never do something so dumb if it knew the real impact of IOR (on bank asset prices), therefore it was just an honest mistake.
But now you are saying the Fed definitely knew the impact of IOR, and launched IOR at the same time as doubling the base because it had wanted to start up IOR for a while…
So, here are the possible stories I see. Either:
1) The Fed was dumb, and didn’t understand the impact of IOR and made a mistake
2) The Fed was smart, and understood IOR but figured it could compensate with a larger increase to the base – in which case, it’s motive was either 2a) “it had been wanting to try out IOR for a while and figured the depths of a financial crisis when banks were nearly insolvent was a perfect time” OR 2b) “it wanted to help recapitalize banks through any means because the financial system was imploding”.
So there’s 1, 2a, and 2b. At first I thought you were arguing 1, but now you seem to be arguing for 2a. Of the three, it seems the most implausible.
16. March 2011 at 15:43
Statsguy, You are putting words into my mouth. I do believe the Fed made a mistake, but also believe they knew the policy was contractionary. I don’t see any contradiction. If they had thought it was highly contractionary, they probably wouldn’t have done it, or would have set the IOR at a lower level. But the admitted to the fact that it was contractionary.