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View Diary: China Cuts US Credit Rating. Obama Cuts Hawaii Vacation Short. (171 comments)

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  •  The fed never had control over the money supply (10+ / 0-)

    That is a myth. The only control the Fed has is over reserves. They can allow reserves to build and interest rates get driven down. They can absorb reserves and support interest rates above zero. They cannot control the amount of money outside of the monetary base - that because M1 (the transaction monetary pool) is mostly credit money issued by banks against loans. The banks are not constrained by their reserves - they can always make loans if they are sufficiently capitalized. Reserve ratios are made up later by the fed automatically when/if necessary.  Fractional reserve banking as explained in textbooks is just plain wrong. Reserve ratios are maintained after the fact, no as a prerequisite to lending. This is not true for non-bank lenders who must have investor cash to lend.

    •  Where then is QE cash coming from? (3+ / 0-)
      Recommended by:
      Pluto, ozsea1, ImpeachKingBushII

      An honest question, because I don't have a good grasp on MMT and related stuff.

      The Fed is now in its third round of easing that includes in least in part of purchases of longer term debt instruments. Now the first couple of rounds of this involved selling shorter term ones in an effective exchange, but as I understand it the Fed is running dry of those. Moreover its net holdings of Treasuries continues to rise and in the just completed and just started rounds that seem to be including a lot of agency debt.

      Does the Fed in fact have sufficient existing assets to sell so as to make QE neutral in regards to money supply? That is are the effects actually just limited to shifting the yield curve? And if so where is the 'quantitative' in the 'easing'?

      This isn't meant to be hostile. Not exactly accepting of your argument, perhaps because of lingering ignorance on my part, but maybe you can change that non-acceptance to real acceptene or conversely real rejection by explaining this a little more for the semi-educated layman. (I do know a little).

      bruceweb.blogspot.com

      by Bruce Webb on Wed Dec 26, 2012 at 12:22:50 PM PST

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      •  From the perspective of the Fed (3+ / 0-)
        Recommended by:
        Pluto, SherriG, ImpeachKingBushII

        Bank reserves are a checking account at the fed and treasuries and bonds are a savings account at the fed. Step back a moment and consider that all federal spending is done by crediting bank reserves, as the bank credits the payee's account. After spending the treasuries are swapped for excess reserves in the system. But all of the bonds were money first. Money coming back to the fed is simply cancelled. So back to QE, they are recreating the cash and flooding reserves while taking out the treasuries. In essence, they are moving the deposit from savings to checking, and they now pay 0.25% on checking. Remember that reserves do not get loaned out to the general economy. They remain in the reserve system modulated by the FRB and the federal open market operations to control short rates.

        The idea is that since they are not making enough on the excess cash being held in reserves following QE, banks will try to invest somewhere to make the reserves more productive. It's the somewhere part that ends up being problematical. Banks can make a lot of money investing in Brazil and Argentina and any other risky hot economy or hot sector. One of the dangers QE presents is the money players start speculating in commodities and drive up prices, as we have seen. There is really little or no incentive to invest in domestic industrial capital formation, so it is unlikely to do much for the rest of us.  Hope this helps. Here's a paper on QE and it's influence on commodity prices from an MMT perspective.

        •  May I make a suggestion?... (0+ / 0-)

          ...could you make a layman-friendly primer for all of us here? In the form of a diary, perhaps with some supporting links. Your explanation is very informative. I'm sure it would benefit everyone here to understand the function of the FED as it relates to the fiscal cliff problem. Thank you in advance for taking the time!

          "I wish to have no connection with any ship that does not sail fast, for I intend to go in harm's way." John Paul Jones

          by ImpeachKingBushII on Wed Dec 26, 2012 at 05:36:47 PM PST

          [ Parent ]

          •  Thanks, Impeach - I have posted a few diaries here (2+ / 0-)
            Recommended by:
            ImpeachKingBushII, Larsstephens

            on MMT. I think there are 7 diaries there that all relate to MMT in one way or another. Old Surgeons Blog. There are also a lot of good contributions at the Money and Public Purpose here. I think the best source on the web is the New Economics Perspectives blog (NEP) which is run by Dr. Stephanie Kelton, the chair of economics at University of Missouri Kansas City.

            I am working on a diary about how we do the Kabuki dance when we deficit spend, but there are still a couple of details that aren't quite clear to me yet. Two good sources to begin learning about how the monetary system functions are the MMT Primer at NEP and "Money" which contains an extensive set of brief topical descriptions building to proposals I have yet to come to - but very informative material so far.

            •  just curious... (0+ / 0-)

              ...Do you agree with Dr. Paul Krugman? If not, what would you do differently about the deficit? I read his articles. Just finished reading one a few mioments ago. He still opposes handling the deficit as long as the economy is depressed. Your thoughts, please.

              "I wish to have no connection with any ship that does not sail fast, for I intend to go in harm's way." John Paul Jones

              by ImpeachKingBushII on Wed Dec 26, 2012 at 06:48:27 PM PST

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              •  I think Krugman is beginning to come around (2+ / 0-)
                Recommended by:
                Larsstephens, ImpeachKingBushII

                to the MMT perspective. His most recent arguments against austerity are very much on point. I think many MMT'er would go a lot further with stimulus and most importantly a job guarantee program of some sort to eliminate voluntary unemployment. With the government as the employer of last resort providing what would form the economy-wide pay base for performing useful work instead of paying a stipend for being idled. This employment from the bottom up would be intensely stimulative since it will all be spent on consumption and basic needs. This is a buffer pool of labor maintained in a working state rather than an idle state, a factor that should facilitate a return to private sector employment as the economy improves. The Fed does a similar thing with reserves. When reserves build beyond requirements interest rate are pushed down. The Fed sells bonds to put those excess reserves to work. When reserves fall short the fed buys bonds sending money back for reserve duty. Fed is mandated to maximize employment and productive output while keeping prices and interest stable. A big mandate since all they really have solid control over is the interest rate. But the idea of maximum or full employment is enshrined in law - if only it were enshrined in fact. Problem is the neoliberal belief that inflation goes rampant as soon as unemployment dips below 6%. They have no evidence, but they ARE convinced of this and a number of other fallacies. They neglect to mention that at peak employment during the Clinton years there was only 1 job seeker per job opening. That was as close as you get to full employment. And wasn't that inflation in the late 90's and 2000 just awful? NOT! But that is another rant.

                •  we appear to think the same way... (1+ / 0-)
                  Recommended by:
                  Old Surgeon

                  ...I've always advocated for a work program similar to FDR's as a social safety net, not meant as a primary or permanent jobs source. I had hoped Obama would emulate him more in deeds not just in words. But  he's coming around. I'm a lot more comfortable knowing he's in the WH. Thanks for your input. It was was very informative and a real learning experience for me. Look forward to your next diary.

                  "I wish to have no connection with any ship that does not sail fast, for I intend to go in harm's way." John Paul Jones

                  by ImpeachKingBushII on Wed Dec 26, 2012 at 08:20:17 PM PST

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        •  This is even less clear than before (0+ / 0-)

          "Step back a moment and consider that all federal spending is done by crediting bank reserves, as the bank credits the payee's account."

          This may be true is some meta sense but it seems like nonsense on a day to day operational level. That is the Treasury is not legally or operationally the same as the Fed. Nor is the IRS the collection agency for the Fed. That is the federal government collects taxes on its own account and issues checks from its own accounts with Fed member banks only operating in a pass through clearinghouse function. As such to say that "all federal spending is done by crediting bank reserves" is meaningless in day to day context. Yes the ultimate recipient of that TREASURY check, whether that be federal employee or major defense contractor will negotiate that check either directly or indirectly with a Fed charted bank, and a certain amount of the total deposited could trigger an addition to actual reserve requirements. But to say that "all federal spending" immediately credits "bank reserves" does a certain violence to the agents in the process and the function of member bank reserves. Which are NOT the same as 'deposits'.

          And the confusion only gets deeper from there. As I understand the original QE the Fed was going into the public markets and buying long bonds FOR CASH, that is injecting dollars into the economy. This was offset in part (or perhaps for a while in whole) by selling off its portfolio of short bonds FOR CASH. But neither the long or the short bond is in fact an instrument of the Fed, from the perspective of the public bond market the Fed is simply another player, although one that is not effected by bond prices as such, since any profits get returned to Treasury.

          I plan to read up some on MMT but good parts of it seem to just be mirror images of the Austrians with infinitely soft money being substituted for the latter's hard. But both operating at the theoretical Cloud Cookoo Land level.

          Or maybe I just need that "layman-friendly primer" referred to later in the thread. Because to me the simple unqualified statement that "bonds are a savings account at the Fed" when something like 80% of total federal bonds are legally held by individuals, foreign sovereigns and federal Trust Funds not under control of the Fed seems like gibberish.

          At a minimum you need to slow it down for the rubes out here. Which apparently includes me. Despite my belief that I kind of know something about this stuff.

          socialsecuritydefender.blogspot.com - SocSec.Defender at gmail.com - founder DK Social Security Defenders group - (hmm is there a theme emerging here?)

          by Bruce Webb on Wed Dec 26, 2012 at 09:43:00 PM PST

          [ Parent ]

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