Friday, January 15, 2016

MacDonell on QE

Gerard MacDonell has a lovely noahpinion guest post "So Much for the QE Stimulus" (HT Marginal Revolution). Some good bits here, with my bold on noteworthy zingers.

The post is unusual, because practitioners tend to regard the Fed and QE as very powerful. But here he expresses nicely the skeptical view of many academics such as myself.
the Fed leadership has now abandoned its original story about how QE affects the economy and has conceded that the tool is weak
It has long been obvious that QE operated mainly through signaling and confidence channels, which wore off on their own without any adjustment in the size or composition of the Fed’s balance sheet....
Obvious to us skeptics, not to the Fed or to the many academic papers written trying to explain the supposed powers of QE
The story initially told by the Fed leadership starts with the claim that large scale asset purchases (LSAPs) [lower interest rates]... by removing default-free interest rate duration from the capital markets. ...
Translation: buying bonds to drive up bond prices
That story does not hold much water.
The theoretical foundations supporting QE were invented – or really revived from the 1950s [Preferred habitat theory]– in an effort to justify a program that had been resolved upon for other reasons. 
LSAPs did not actually succeed in reducing the stock of government rates duration because they were fully offset by the fiscal deficit and the Treasury’s program of extending the maturity of the federal debt. 
Translation: The Treasury sold as much as the Fed bought.
 And while the estimated term premium and bond yields did go down during the QE era of late 2008 through late 2014, they had a disconcerting tendency to rise while LSAPs were ongoing.
 Translation: When the Fed actually bought securities, yields went up.
Peak QE gullibility seems to have been reached in the late summer of 2012, with Ben Bernanke’s presentation to the Kansas City Fed’s monetary policy conference at Jackson Hole. ...
Evidence that the Fed doesn't believe it any more
...the Fed has abandoned the flock it once led. If the leadership still believed the official story, it could not promise both to maintain the size of the balance sheet and raise rates at an historically slow pace. That would deliver far too much stimulus, particularly with the economy now near full employment. The obvious way to square this circle to recognize that the Fed does not believe the story, which is an advance.
... according to the original story, little of this presumed stimulus would unwind without asset sales or a passive shortening of maturities, both of which have largely been excluded for now.
...Readers of this comment may recall those charts circulated by Wall Street showing the fed funds equivalent going deeply and shockingly negative after 2009. In retrospect, those charts are cringe-inducing and best forgotten. It is a mercy that the Fed has participated in the forgetting
This is consistent with my view. The large balance sheet is a great thing. Narrow banking has arrived. We live the optimal quantity of money. Interest-paying reserves generate zero stimulus, but great liquidity. Alas, the Fed, having touted the world-saving stimulus of QE, without qualifying that effects might be temporary, now is in a tough spot to turn around and say "never mind." All it can do is be silent and wait.
...This raises the question of why the Fed initially promoted a story that so obviously would not stand the test of time. We can imagine three possibilities...
The first possibility relates to the first round of event studies, which measured the immediate effects on the term premium and bond yields of QE-related news....
Announcement effects are a poor measure of fundamental effects that will endure long enough to affect the economy... markets typically act more segmented in the short run than over time,.... But smart and credentialed people argued otherwise and the FOMC may have been comforted by that.
I have puzzled at this as well. Many studies find price impacts of large unannounced trades. But price impact melts away. Why would we treat announcement effects as permanent -- as many Fed speeches did?
The second possibility is that the Fed wanted to raise confidence in the markets and real economy and thus chose to communicate that it was wielding a new and fundamentally powerful tool, even if Fed officials had their own doubts. ...
This is the "signaling" channel.
It is best to lift confidence with tools that have a mechanical force and do not rely purely on confidence effects. But if such tools are not readily available, then it probably does not hurt to try magic tricks and pyrotechnics.
Nice phrases. But..
The problem looking forward is that people may not be so responsive to the symbolism of QE next time around. ... Moreover, the Bank of Japan has got hold of QE, which raises the odds it will be properly discredited, if history guides.
OK, not very nice, but a good snark prize, as much to the B of J as to its many critics. But far more interesting..
The third possibility ..[is] that Bernanke and his colleagues in Fed circles were durably confused by Bernanke’s early and mistaken relation of the Quantity Theory to the efficacy of LSAPs...:
"The general argument that the monetary authorities can increase aggregate demand and prices, even if the nominal interest rate is zero, is as follows:..The monetary authorities can issue as much money as they like. Hence, if the price level were truly independent of money issuance, then the monetary authorities could use the money they create to acquire indefinite quantities of goods and assets. This is manifestly impossible in equilibrium. Therefore, money issuance must ultimately raise the price level, even if nominal interest rates are bounded at zero. .."
This is indeed the crucial point. In simple quantity theory thought, MV=PY, so you can raise M even at zero rates, and eventually PY must rise. But that's wrong, alas. V becomes undefined when the interest rate is zero, or money pays interest.  As Gerard explains,
... one must wonder if this misapplication of the Quantity Theory to LSAPs created in Bernanke and associates an excessive confidence in the efficacy of the program...
...Bernanke would later argue this point himself, and demonstrate it by paying interest on excess reserves, thereby by converting them from money to debt. Bernanke’s money injection actually had ZERO maturity. Or more to the point, it did not even happen.
Stop and savor just a moment. When the government pays interest on reserves, reserves become the same thing as overnight government debt. They are held as a saving vehicle, and have no "stimulus."

To be fair, I think Bernanke's point might hold if there were a huge QE, a clear promise to leave reserves outstanding when interest rates rise above zero, and then possibly future inflation might work its way back to current inflation. But exit principles that clearly state the large reserves will pay interest so as not to give future inflation undo the possibility.

Gerard leaves out, I think, the most telling mistake in the Bernanke quote,  "monetary authorities could use the money they create to acquire indefinite quantities of goods..." Monetary policy does not buy goods; it does not drop money from helicopters. Monetary policy only gives one kind of debt in return for another kind; roughly speaking making change, giving you two 5s and a 10 for each 20. Buying goods is fiscal policy, and fiscal policy can cause inflation.

Bottom line
...The Fed leadership has come a long way from believing that QE had something to do with the power of the printing press to a recognition that the program is a combination of an indirect and transitory rates signal, a confidence game, and a duration take out that probably achieved much less than was advertised. But at least the journey has been made....
I share this view.

To be clear, both my post and Gerard's are not really critical of the Fed. If "pyrotechnics'' helped, good. If QE is not "mechanically" that powerful, great, we all learn from experience. A large interest-paying balance sheet and silence is probably the best thing for the Fed to do right now.  This question is most important to academic and historical analysis, to learn  what causal mechanisms really did play out, and what will work in the future.


  1. Thank you for your comments Pr Cochrane. I found it difficult to follow MacDonell.

    I find it interesting that you did not comment on his criticisms of the shadow rate (Wu-Xia?). Do you have the same critique about the shadow rate's approximation of the effect of QE?

    1. I wanted to keep the post a reasonable length, and I'm not a big fan of shadow rate calculations.

  2. "Translation: The Treasury sold as much as the Fed bought."

    Translation - "I can't do basic counter-factual analysis".

  3. "This question is most important to academic and historical analysis, to learn what causal mechanisms really did play out, and what will work in the future."

    The "what will work in the future" part seems like a tough one. In Noah's subsequent post, he writes:

    "Telling just-so stories about past events - what some people cynically call "explanation without prediction" - is useless unless it gives us some insight into the future."

    How do we prevent that from happening?

    So which models best forecast (in 2009) the trajectory up till today? Should we pay more attention to those models than their competition? What of the models that predicted hyperinflation or hyperdeflation? Can we discard those at this point with confidence?

  4. Thx for refreshing comments on QE after listening to others
    for years hyperventilating about the inflationary consequences of all the "money printing". You were one of the few explaining what was actually occurring - a swap of Treauries for reserves - changing the duration but not the amount of private sector financial assets. Indeed, I would add that QE reduced private sector interest income by about $80B annually in recent years (the Fed's "profit"). Thus, while the indirect effects were uncertain, as you discuss, the direct and measureable impact was modestly deflationary - an uncomfortable detail we never heard about.

    1. Charles DuBois--

      Okay, but you seem to be missing half of the transaction (as does John Cochrane).

      Okay, $80 billion annually in interest is flowing into the Fed (and then to the US Treasury), as a result of the Fed's QE hoard. Granted. (One could argue this offsets additional taxes or borrowing, but let that go).

      But no one had their bonds stolen from from them in QE. People or institutions sold bonds and received freshly digitized cash for their bonds, the $4.2 trillion of Fed QE.

      You can say the private sector is missing $80 billion a year in interest payments, but then you must also concede that the private sector received an additional $4.2 trillion in freshly (digitized) cash for its bonds.

      What did the bondsellers do with their $4.2 trillion in cash? One of the oddities is that no one seems to know. We know that they must have--

      1. Boughs securities
      2. Bought property
      3. Deposited in commercial banks
      4. Spent it
      5. Converted to cash.

      Those are the five options.

      You should not conflate the increase in bank reserves with the money bondsellers into QE received. QE was not only a "swap of reserves for bonds."

      Wen the Fed buys bonds, it buys from the 22 primary dealers (brokerage houses, ala Nomura, Merrill Lynch). When the Fed buys, say $1 billion in bonds from a Merrill Lynch, it then credits the commercial bank of account of ML by $1 billion, and that is the increase in reserves.

      But don't forget! The bond seller still has his $1 billion.

      Th stimulus of QE came from placing $4.2 trillion in fresh cash into the hands of the bondsellers. The following boost to the economy came from bondsellers spending the money or investing in other assets.

      There may have been some loss in traction when bond sellers merely banked the money, or converted to cash and sat on it.

    2. Ben,

      6. Paid back loans from the central bank

      The part you are missing is where did the bond sellers get the $4.2 trillion in cash to buy the bonds in the first place? It's not like the profits of the 22 primary dealers rose by $4.2 trillion over night.

      In all likelihood the primary dealers that could borrowed short term from a central bank to buy the bonds from the federal government at auction. The Fed then bought the bonds from the primary dealers. The primary dealers then paid back the short term loans to the Fed.

      And so what the federal government do with the money that it received when it sold bonds at auction? Simple, it paid off creditors for the various financial intermediaries (banks, insurance companies, etc.) that had significant outstanding debts.

      The question then becomes who were the creditors for the various financial intermediaries that were bailed out by the federal government?

      If you know that answer, then you are the Internet king for the day.

    3. As a side note there are primary dealer banks that submit bids on U. S. government bond auctions and there are banks that have direct access to the Fed's discount window. There is not complete overlap between the two.

    4. Benjamin Thx for the comments. Yes you are right that the bondsellers could have done several thngs with the cash from QE. But, remember, they lost the bonds. They are no wealthier. If they purchased stocks or property they just changed the composition, but not the amount, of their portfolio (perhaps stimulative from a wealth effect). If they spent on goods and services, their savings rate changed but this would not be typical. You don't change your spending habits because the composition of your savings has changed. And bonds represent savings for most people.
      There can be many indirect stimulative effects from QE e.g. higher loan demand from lower interest rates, wealth effect, etc.- that was the Fed's intention. My only point was that the direct effect actually reduced the amount of financial assets in the private sector - an inconvenient fact for the Fed to consider.

  5. I thought Daniel Thornton, who sat at those Fed meetings, and now sits at CATO, had a very good, and to my untrained eye, similar view.
    Are you familiar with it, Dr. Cochrane?

  6. Valter Buffo, Recce'd, MilanoJanuary 17, 2016 at 4:33 AM

    Please clarify the following, I do not get what it means:

    And while the estimated term premium and bond yields did go down during the QE era of late 2008 through late 2014, they had a disconcerting tendency to rise while LSAPs were ongoing.

    As a general comment: I already contributed to this Blog observing that the "2 fives and 1 ten for a twenty" argument disregards the quantity of financial assets in existence, as if there is no intertemporal budget constraint linking current prices of financial assets and future real-economy levels of production, income, prices and all the other hard data. Reducing the stock of government rates duration leads to a misallocation of capital. In my opinion, overlooking this point is dangerous: and it might be that we will observe how the intertemporal budget constraint works in the next few months.

  7. One thing that we've seen is that QE announcements seem to have precisely the effects we would expect consistent with QE working. In particular, QE announcements repeatedly have had significant impacts on LT bond yields, exchange rates, and inflation expectations. MacDonnell suggests that the market was "fooled" each time. Given the market reaction, I'm guessing you must believe at least one of the following (1) prices don't matter, (2) markets aren't even close to being efficient, or (3) agents aren't rationale or profit-maximizing. Alternatively, I guess you could also argue (4) that QE announcements (and tapering announcements), didn't really have the effect that it appears they did. If (4), why not just show us some evidence? (I.e., show us the taper tantrums never happened...) Otherwise, I think your readers want to know which of 1-3 you subscribe to.

    1. Right on. This self satisfied snark belongs to a college seminar, where clever professors try to one up each other. However, if you want to argue that a market is massively inefficient, the way to do it is not to come up with a story it's the case ex post, you just need to show us the money.

    2. Ouch. I wrote it straight but then a friend in Boston who is a doctor told me I needed more snark to get people to read it. I think he was right. But so are you.

      I remember cringing through a taper tantrum because, to your point, it was against my thesis. But for the main one, it was impossible to disentangle the rates implication of the Fed's commentary (which I would emphasize) from the effect of the portfolio balance channel. One thing we do know, it was not a steepener. Another thing we do know is that when the Fed replaced QE with a more explicit rates signal, the bond market was cool. That tantrum did not last.

      On the more general point of offering evidence, I am not convinced by event studies. I think Woodford is insightful when he says that event studies are valid only if markets are sufficiently segmented to exclude the portfolio balance channel on logical grounds. The point of QE was presumably to depress yields for more than a day or week. On balance the term premium and yields tended to rise while QE, including ME, were ongoing. There is a cool chart in the Summers presentation to Brookings showing that, but it is me drawing the inference, not him. He and colleagues also get into the question of why QE announcements seemed to have a larger impact effect than Treasury supply announcements. I found that discussion telling, but again it is me reading in, rather than Summers making the point that people were "fooled" or -- equally plausibly -- read in a rates signal.

      Maybe I am too dismissive of event studies. If you have access to MAGPI, the BoA measure of prospective excess returns in conventional mortgages, take a look at their occasional round tripping around QE announcements. Observing that in real time really affected my view here. But that is an anecdotal rather than formal point, I concede.

      To me the bigger issue is just that QE was sold as a monetary operation when in fact it was entirely fiscal. On that, I am much more adamant.I dare say I am right. And the effects, whatever they were, were incremental rather than scene changing. This has important implications for policy going forward, which I think are practically relevant.

      Also, I think a fair reading of the history of the Fed's own commentary is that they have become more humble about the efficacy of this.

    3. Re: "I am not convinced by event studies. I think Woodford is insightful when he says that event studies are valid only if markets are sufficiently segmented to exclude the portfolio balance channel on logical grounds."

      I didn't know he said this, but I don't agree. Event studies of announcements in Macro are super well identified. And the evidence is strongly that QE episodes had large effects on exchange rates that lasted more than a week -- see Japan. Once they started their QE program, the Yen depreciated and stayed depreciated vs. the dollar. As I understand, however, after their initial QE, they haven't added much too it even though inflation continue to undershoot their target -- an admission that the BoJ itself wasn't so serious about hitting their target.

      "Maybe I am too dismissive of event studies." Yes.

      When push comes to shove, there really aren't credible theories which say that QE can't work. And the Fed could and could have also lowered the Fed Funds rate, at least an additional 100 basis points. I wouldn't expect Treasury supply announcements to have the same effect as QE, so I don't see this as evidents of the markets being "fooled" each and every time as you suggest.

      "If you have access to MAGPI, the BoA measure of prospective excess returns in conventional mortgages, take a look at their occasional round tripping around QE announcements."

      I'll admit I don't understand what "round tripping" is... Given that I'm an economist and never heard of round tripping, color me skeptical the Fed should value this and ignore inflation and unemployment, which are of obvious importance for the economy, as you suggest.

      "To me the bigger issue is just that QE was sold as a monetary operation when in fact it was entirely fiscal."

      Total nonsense.

      "Also, I think a fair reading of the history of the Fed's own commentary is that they have become more humble about the efficacy of this."

      The movement among young, smart, academic economists has gone the other way. Many people were skeptical at first, but the event studies have repeatedly confirmed QE having an impact. And now we even know that central banks can go below zero.

  8. I agree with everything but the last point which you did not develop is probably the most important. You said that FED cannot buy goods, but it can be done with fiscal policy and this can turn in a higher inflation. Therefore, a Central Bank could buy bonds issued by the governments, which could use the money to Finance fiscal policies that may increase inflation. However, nowadays Budget constraints for the governments are tighter respect to the past, particularly in Europe where severe austerity measures were applied. Therefore we cannot know if the QE would work better with larger Budget constraints.

  9. Oh, great John Cochrane likes my post, except the spending miss, which is a fair thing to exclude. I concede Cochrane has 40 IQ points on me and a physics background, but I share zero of his politics. Why could I not have convinced Brad Delong? Liberals are right, obviously, but not very nice. I get along better with right wingers, which causes cognitive dissonance.

    To the guy who slagged me for not getting counterfactual, fair point. But not every paragraph can cover every point. Efforts to isolate the effects of QE are unconvincing and it is true -- and to me interesting -- that bond yields went down despite an acceleration of the net supply of pure rates duration from the pubic sector taken collectively. Whatever the cause of the rally, it does not seem to have been mostly public sector supply manipulation. Besides, Larry Summers made the same point in his presentation to Brookings so it must be relevant. He is the smartest man in the world.

    1. You're always welcome to join us conservatives on the dark side. We're generally pretty nice, and never lacking for fun. : )

  10. Dr. Cochrane, on a more serious note, may I call on your numeracy and comfort with models to consider a question that has long bothered me?

    Your point that I may have been unfair to Bernanke 99 because he was considering a situation of deflation – as opposed to just sluggish recovery – is a very good criticism. He was mooting a large monetary expansion, not just what ended up being tried in the US. And I see that is an important distinction, in principle. But it brings me to my question.

    In the United States, the demand for currency is in equilibrium a very small ratio to the GDP. Required reserves are too small to care about and excess reserves pay interest, which makes them irrelevant to relaxing the federal government budget constraint. If you do the math, as I am sure you can, does it not follow from this that a decision to finance either a fiscal expansion or a large scale purchase program -- of sufficient size to matter economically -- with infinite maturity money and thus an inflation tax has to involve committing to a LOT of inflation? Indeed, with the demand for currency being itself a function of inflation, does it not involve surrendering even the idea of hitting ANY inflation objective except HIGHER?

    To be clear, my point is not that QE as practiced is inflationary. I don’t believe that at all and I don’t want the comments section to get all riled up. But as a point of speculative analysis, isn’t this whole idea just implausible practically speaking. For the inflation (or infinite maturity monetary) financing to be even relevant, doesn’t the central bank have to commit to tolerating a lot of inflation, which as a practical matter would never happen, which means that practically speaking my point on Bernanke 99 is robust to your valid technical criticism?

    My intuition here is all about the demand for currency being low relative to aggregate demand, i.e. taken in level terms as just a simple ratio of the nominal values. I know that is a key issue, but I have not done the math or seen it done.

  11. I think the Fed didn't get the "bang for the buck" on QE's because the sellers of the securities didn't (couldn't) do with the cash that which was forecasted. Why? Was it low demand for loans? Was it slow economic activity? Isn't that common in a recession?

    Off topic: How much risk have the QE's added to the Fed's balance sheet. Default risk isn't the only risk. Other risks include basis risk, interest rate risk, legal risk, market risk, reputational risk, etc.

    1. QE involved the Fed buying long dated bonds - Treasuries and MBS - and financing the purchase with short term money from the excess reserves that were on deposit. The Fed has taken on duration risk. A classic risk for any bank or investor who borrows short and lends or invests long.

    2. Absalon,

      The central bank dictates how big those excess reserves should be. It's not like a private bank can call up the Fed and tell them to sell those longer dated bonds because it wants the reserves back. The Fed has said as much.

      Private banks that borrow short and lend long can get stuck if the central bank pushes short term rates above the rates being paid on the longer term debt that they hold. The central bank doesn't have that problem because the central bank decides how long those reserves are held.

    3. "The central bank dictates how big those excess reserves should be"

      No it does not. The EXCESS reserves are just that - excess to the required reserves.

      "The Fed has said as much."

      I would be interested in the cite for that because I don't believe it.

    4. "No it does not. The EXCESS reserves are just that - excess to the required reserves."

      In as much as the Fed determines how many $ worth of bonds to buy, it determines how much money to create to buy those bonds.

      I think I understand where you are coming from. Yes, any money that the central bank uses to buy bonds from a private bank can be then used to create new loans. The "excess" reserves exist only because private banks don't have enough viable lending opportunities to put the money to work.

    5. Absalon,

      This question reveals the reason the Fed needs to be audited by Congress.

      The Fed isn't a bank. In a bank a customer deposits/gives cash or cash equivalents and receives a credit (bank owes the depositor) balance due from the bank.

      In QE, the member banks presented T's, agencies, or MBS and were given credit in their reserve accounts. N.B. T's, agencies MBS are not cash or cash equivalents. So, if a member bank withdraw QE-related excess reserves to lend, where does the Fed get the cash or equivalents? It creates them.

      The fact that the Fed's B/S grew from $850 billion to $2.25 trillion, mostly excess reserves, explains why QE didn't cause rapid loan or economic growth. The QE's accomplished: very low interest rates; reduced volumes of T's, agencies and MBS from large bank B/S's; reduced banks' risks; and little else.

    6. Anonymous

      The call for an audit of the Fed is pure political theater and has nothing to do with an audit in any conventional sense. The Fed is already audited.

      What has happened is that some banks have decided to invest spare cash in interest bearing excess reserves rather than treasuries etc. If the banks start with-drawing the excess reserves, I expect that the Fed would have two options: (1) increase the IoR rate to pull in more reserves; or (2) sell some of their portfolio.

      I agree that QE generally had limited effects - which is the flip side of why un-winding it will have limited effects. You cannot say that a dollar more of QE has small effects but a dollar less of QE has much bigger effects. I believe that the world is essentially differentiable and continuous as you move from small positive perturbations to small negative perturbations.

  12. I'm just a poor little investor trying to make sense of all this. Of course that means this is not an intellectual exercise for me - I have skin in the game.

    The debt ceiling crisis in 2011 convinced me that the Republicans were trying to deliberately sabotage the American economy. The Republicans will deny it. Professor Cochrane will deny it. But that is what it looked like to me.

    One day, I sold most of my American equities. In the short term I was right and the American stock market went down.

    Then along came the Fed with QE3. Part of QE3 was not really monetary policy at all. They started pushing $40 Billion a month into the housing market by buying MBS. Buying long dated Treasuries might not have had much effect on the real economy but $40 Billion of MBS per month almost certainly did. QE generally does seem to have had a significant impact on the overall financial markets.

    I watched the S&P 500 index that I sold at 1350 go to 2100.

    (It did not help my investment thesis the the Chinese authorities started a massive easing program of their own at about the same time.)

    1. Absalon,

      "The debt ceiling crisis in 2011 convinced me that the Republicans were trying to deliberately sabotage the American economy."

      The Republicans in Congress were trying to reduce government spending and using the debt ceiling as leverage toward reaching that goal.

      There are sufficient reasons to reduce the federal debt irrespective of the trajectory of government spending. Financing decisions made by the federal government ( taxation, debt, equity ) are just as important as spending decisions made by the federal government and should be evaluated independently.

    2. The debt is just the net accumulated consequence of the spending and taxing decisions made by government. (I have heard your theories about governments selling equity and I disagree with them so you don't need to repeat them.)

      If the Republicans wanted to cut spending they should have announced what programs they wanted to eliminate or cut back and built a political consensus around the cuts. The United States is a democracy and that is how things are supposed to be done. The people ultimately have the right to make decisions that "elites" disagree with. To use the debt ceiling and threats of national default as leverage amounted to a procedural coup d'etat by people who lacked democratic legitimacy for their position.

    3. Absalon,

      "To use the debt ceiling and threats of national default as leverage amounted to a procedural coup d'etat by people who lacked democratic legitimacy for their position."

      They were elected into office, and so where is this lack of legitimacy? They (Congress) are given the power to borrow / not borrow by the Constitution of the United States and so again where is this lack of legitimacy?

    4. "where is this lack of legitimacy?"

      Frank - I am afraid we are veering off topic but perhaps Professor Cochrane will indulge.

      I think there are three big problems with the political legitimacy of using the debt ceiling:
      1) the Republicans self imposed Hastert Rule had the effect that a sub-majority of the Republican majority was dictating policy but that group in the overall scheme of things was a minority.
      2) the Republicans were trying to cut spending without ever going to the public in an election and saying "we want to cut this program by x% and that program by y%".
      3)_ To make matters worse, they were using the debt ceiling to try to cut spending under programs that Congress had enacted. So on the one hand Congress had said "spend money on this and this, etc" and then they turn around and try to implicitly repeal a lot of that by refusing the borrowing authority to pay for programs that Congress itself had already authorized.

      "Clever" procedural tricks and maneuvers is no way to run a country. It is an approach taken by people who know they cannot go to the public and win an election if they are honest with the public about their policy intentions.

    5. Let me just say this. I think I know where you are coming from but the problem lies not with legitimacy but rather with the Constitution itself.

      There is no Constitutional requirement that 1 + 1 = 2.

      The Congress is permitted by the U. S. Constitution to spend X dollars, collect Y dollars in taxes, and borrow Z dollars. But there is nothing in the Constitution that says that X must equal Y + Z.

      And so Congressmen Jones is legally permitted to vote for $100 in spending, $50 in tax revenue, and $0 in borrowing.

      The solution put forth by the Democrats was for the U. S. Treasury to sell coins and presumably have the central bank purchase those coins. The problem with that solution is that Congress could decide that those coins do not represent an obligation of the United States. Meaning a coin sold the U. S. Treasury may face redemption refusal by the Congress. If Congress made such a decision, the central bank (courtesy of the Federal Reserve Act) would be legally precluded from buying them.

      Equity sold by the U. S. Treasury makes more sense because redemption through the IRS does not require Congressional expenditure approval.

      As a side note, there is no educational requirement (including basic math) for becoming a Senator / House Representative.

      Article I, Section 3 of the Constitution sets three qualifications for senators: 1) they must be at least 30 years old, 2) they must have been citizens of the United States for the past 9 years or longer, and 3) they must be inhabitants of the states they seek to represent at the time of their election.

      Article I, Section 2 of the Constitution sets three qualifications for representatives. Each representative must: (1) be at least twenty-five years old; (2) have been a citizen of the United States for the past seven years; and (3) be (at the time of the election) an inhabitant of the state they represent.

  13. " If QE is not "mechanically" that powerful, great, we all learn from experience...."

    But at what cost and paid by whom? Seems this also begs issues of governance & accountability. I get experiments and risk. I even get, "Hey, Captain, what's this button for?". In a corporate environment the costs,means of control or exit are explicit.

    What do we have with the Fed?

    1. Hunter,

      The Federal Reserve is a creature of Congress and is thus accountable to Congress.

      That accountability comes from the Humphrey Hawkins Act:–Hawkins_Full_Employment_Act

      Mandates the Board of Governors of the Federal Reserve to establish a monetary policy that maintains long-run growth, minimizes inflation, and promotes price stability.

    2. Also,

      Notice that it does not say "The Federal Open Market Committee" but instead "The Board of Governors".

      The FOMC consists of the 7 board members as well as a rotating panel of 4 regional Fed bank governors. On rare occasions these two separate governing bodies can disagree if there is minority dissent in the Board that is supported by the 4 non-board FOMC members.


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