tag:blogger.com,1999:blog-582368152716771238.post2448414433400257852..comments2024-03-28T02:34:12.891-05:00Comments on The Grumpy Economist: Monetary Policy PuzzleJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger59125tag:blogger.com,1999:blog-582368152716771238.post-41557331788249492542013-06-17T19:13:08.003-05:002013-06-17T19:13:08.003-05:00I'm coming late to this debate, but there is a...I'm coming late to this debate, but there is a model that suggests that raising rates can be expansionary.<br /><br />Admittedly, it's an IS-LM model (definitely published by Smyth and Holmes, in the late 1970's, I believe it was in De Economist). <br /><br />Anyway, they develop a model in which the IS can be modestly upward sloping. If memory serves, this was because private saving was more elastic with respect to income than in the typical IS-LM model.<br /><br />The end result was that monetary policy that would typically be thought of as contractionary could be expansive.Dr. Tuftehttps://www.blogger.com/profile/17397586052171706438noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90855116361520751792013-06-11T13:28:52.863-05:002013-06-11T13:28:52.863-05:00In a closed economy that would be correct - all de...In a closed economy that would be correct - all debt in an economy is held as another person's asset. In an open economy that is not the case (external debt).<br /><br />Also, I was pointing to a specific sector in an economy (households). Even in a closed economy, there can be sector imbalances in asset / liability ratios.<br /><br />And so the question remains - what prevents the household asset / liability ratio from falling below 1?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-59490195857810527442013-06-11T12:08:20.713-05:002013-06-11T12:08:20.713-05:00I'm by no means a pro at this, and perhaps thi...I'm by no means a pro at this, and perhaps this point has been made, but aren't we leaving out risk premiums in all of this discussion? A few commenters asked the question "Why are banks demanding a large spread" but take a step back and remember that we have seen historically low interest rates. In my view, the risk sensitivity is extremely high coming off a time of crisis, and add on top of that the expectation that interest rates won't sit on the floor forever, and you can find a larger-than-normal risk premium. <br /><br />I think those on the borrowing side of the equation want close to prime rates regardless of the actual number. Borrowing at 6% when prime is 5.5% "feels" better than borrowing at 5% when prime is 3%. Couple borrowers feelings with an inflated risk premium and I think you see a massive slowdown. Maybe I'm naive, but aligning interest rates with expected future "normal" interest rates would drive down the risk premium and get things moving again?Anonymoushttps://www.blogger.com/profile/16359294013072626824noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60508845858393805302013-06-11T11:37:23.819-05:002013-06-11T11:37:23.819-05:00"What is to stop it from falling below 1?&quo..."What is to stop it from falling below 1?"<br /><br />For one thing, every debt liability is someone else's debt asset. If the ratio is calculated as (all non debt assets plus all debt assets) / (all debt liabilities) where by definition debt assets equals debt liabilities then the ratio cannot fall below one. <br /><br />The Federal Reserve chart you refer to just counts financial assets. Banks can have non-financial assets. Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-48291540958739669182013-06-10T15:19:46.820-05:002013-06-10T15:19:46.820-05:00http://www.federalreserve.gov/releases/z1/Current/...http://www.federalreserve.gov/releases/z1/Current/z1.pdf<br /><br />See page 73 - L.109 - Private Depository Institutions<br /><br />Assets: $15.244 Trillion<br />Liabilities: $15.519 Trillion<br /><br />If it can happen to depository institutions then why can't it happen to the entire household sector?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-10230575898318027682013-06-10T12:50:44.849-05:002013-06-10T12:50:44.849-05:00Absalon,
"Just because the asset / liability...Absalon,<br /><br />"Just because the asset / liability ratio declines does not mean that it must fall below 1."<br /><br />What is to stop it from falling below 1?<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4602879977351010972013-06-10T12:07:55.020-05:002013-06-10T12:07:55.020-05:00This comment has been removed by the author.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-48393782017405920412013-06-09T13:43:36.863-05:002013-06-09T13:43:36.863-05:00Just because the asset / liability ratio declines ...Just because the asset / liability ratio declines does not mean that it must fall below 1.<br /><br />I would expect that as financial markets mature, and the economy becomes more capital intensive, GDP/market debt would decline without it being a sign of any problem. Changes in the structure of capital markets, and in particular the introduction of additional layers of financial intermediaries (for example, hedge funds), can cause the GDP/total market debt ratio to decline and the only problem is the systemic risks created by the existence of the additional intermediaries (more links in the chain which are capable of breaking).<br /><br />The change in household asset/liability ratios from 1950 to 2012 may be entirely the result of more efficient and effective capital markets for financing cars and home ownership. Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-71357349629183835472013-06-07T10:32:50.749-05:002013-06-07T10:32:50.749-05:00Banks don't lend reserves they lend ratios and...Banks don't lend reserves they lend ratios and regulations, as long as the ratios or the regulations prevent substantial increase in lending then banks will continue to be cautious and pretend that it's a lack of demand. I do believe that banks think the relative level of rates is too low for them to consider the risks associated with lending, while there is always an ability to swap out into a floater, woohoo let me go put that trade on and make ZERO money for carrying this counterparty risk that i underwrote, while i'm getting continually beaten by the regulators to make my balance sheet less risky!! With that in mind, consider what happens if the Fed were to raise rates and not raise IOER, my argument would be... absolutely nothing! their 'rate raise' would be effectively impotent as the reserves sloshing around the system would eventually drive interest rates right back down to zero. So the IOER mechanism is just a tool to make sure that their rate statement is effective and respected. This will create the 'floor' in the new channel mechanism that the Fed would like to employ going forward, i think**. I am somewhat sympathetic to the destruction of the interest income channel, if you just do some back of the napkin math from the NIPA tables, you can clearly see that the interest income that has been taken from the economy has HAD AN IMPACT, there is a balance that needs to be taken into consideration in my mind that if fiscally the government won't spend/function effectively the benefits of negative real rates are significantly reduced...<br />think thats a long enough rant. cidielhttps://www.blogger.com/profile/16087543940772252902noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60330464250366707642013-06-06T10:06:15.977-05:002013-06-06T10:06:15.977-05:00I found this post a bit obscure. I thought interes...I found this post a bit obscure. I thought interest on excess reserves is set by fiat, i.e. changing IOER doesn't require open market operations. In contrast, the Fed Funds Rate is targeted using open market operations. <br /><br />Is the argument above basically thus: if the Fed keeps interest on reserves low while simultaneously conducting open market operations to raise interest rates on marketable securities, then banks will transform their excess reserves into marketable securities? This is just portfolio rebalancing argument isn't it? <br /><br />We would also expect the same thing if IOER went negative today, wouldn't we?<br /><br /><br /><br />Theo Enoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38835360593971424172013-06-06T09:28:14.507-05:002013-06-06T09:28:14.507-05:00I think the answer is simple: money is too tight, ...I think the answer is simple: money is too tight, and will probably remain tight until the Fed gets their act together and pulls us out of ZLB territory.<br /><br />As Friedman pointed out, low interest rates are often a sign money has been tight. Expectations uber alles.Davehttps://www.blogger.com/profile/11877699517690934530noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-44646257659242067762013-06-06T09:27:57.287-05:002013-06-06T09:27:57.287-05:00A agree with your analysis. But a hike in the poli...A agree with your analysis. But a hike in the policy rate, i.e. the interest rate on reserves, might be inflationary. <br /> <br />Suppose inflation expectations and the price level are flexible and that the natural real rate of interest is constant. According to the Fisher equation an increase in the nominal interest rate will the raise inflation expectations. Also, with a higher interest rate on reserves, the rate of growth of the public debt increases for a given fiscal policy stance. Actual inflation then increases in order to keep the real value of the consolidated public debt in line with the present value of the present value of expected real primary public surpluses.<br /> <br />Am I mistaken in thinking that these are implications from your papers on the fiscal theory of the price level and the Taylor principle? <br />Torgeir Hoienhttp://www.skagenfunds.comnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81145293924102400492013-06-06T09:02:00.950-05:002013-06-06T09:02:00.950-05:00That is a gold bug's wet dream. I can easily s...That is a gold bug's wet dream. I can easily see the resulting panic taking the COMEX and bullion banks down as people stand for physical delivery. MF Global on steroids.<br /><br />I think we might see that experiment run in the EU in the near future. <br /><br />But I don't understand why you think adding printed money to the private sector means it is wealthier. The people closest to the newly printed money will buy assets with it before the inflationary impact hits and they'll get wealthier, but by the time it trickles down to Main Street it will just be diluted down.<br /><br />New money needs to get directly into the hands of consumers, not large financial institutions. I'd say either do Bernanke's helicopter drop directly on the common folk or better yet, decrease taxes. If you're going to run a deficit at least run one that puts money into people's hands to spend into circulation and rev up velocity, eliminating the banking middleman who is driven by his own agenda. That spending would increase tax revenues in a good way.<br /><br />So if you're going to do something daring and different, cut taxes instead of Abenomics, or as Grant Williams recently called it, "more cowbell". Cultural meme found here: http://vimeo.com/39387904<br /><br />And get rid of the abomination called ObamaCare which has had the unique effect of distorting the economy before it's even been implemented. Let the folks at Olive Garden work 40 hours per week.<br />JB McMunnhttps://www.blogger.com/profile/15468282698533043544noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-55937608513885611572013-06-06T08:44:54.816-05:002013-06-06T08:44:54.816-05:00Gara Afonso and Ricardo Lagos have the best model ...Gara Afonso and Ricardo Lagos have the best model I've seen to address the issue of how interest on reserves works. I'm not sure which paper, but probably one of these: <br />https://sites.google.com/site/rl561a/research/work-in-progressDave Backushttps://www.blogger.com/profile/11472846910681816429noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69605385261473933842013-06-06T07:06:07.653-05:002013-06-06T07:06:07.653-05:00Is it not more likely that raising the interest ra...Is it not more likely that raising the interest rate on existing reserves and not changing the fed funds would create the desired effect?<br /><br />An extreme example makes this clear. Let’s say the Fed announces that it will pay 20% IOR on existing reserves and keep the Fed funds rate at 0.25% on new reserves. What would happen?<br /><br />QE doesn't work because a higher yielding bond is being replaced with a lower yielding cash deposit (reserves). A 20% IOR would be a $400bn annual transfer from the Fed to the banks! Bank equity prices would go to the moon, increasing private sector net wealth.<br /><br />What this mental exercise makes very clear is that paying interest on reserves at a level below that of the assets the fed purchases is a tax on the private sector (how else can the Fed be so "profitable"?), paying a higher interest rate is a transfer.<br /><br />Increasing reserves only raises economic activity if liquidity is a constraint on growth. That is what differentiates reserves from all other assets. Liquidity is not a constraint on growth any more. So what matters is the impact on the private sector's net wealth, or net income (the same thing really). At the moment, QE is reducing the private sector's net income. One way to make it "work" would be to reverse this.<br />Anonymoushttps://www.blogger.com/profile/13473661280678620614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-90631553002076534222013-06-06T05:20:54.481-05:002013-06-06T05:20:54.481-05:00The reason the banks do not lend as much as we wou...The reason the banks do not lend as much as we would like is because they are scared that weak aggregate demand will destroy the borrowers' ability to make loan payments. Banks don't want to take much credit risk, not until they see a stronger economy - that includes doing swaps. That's why QE works not just through inflating bond prices/lowering yields, but also through inflating stock prices and subsequent wealth effect.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82809584926276802842013-06-06T03:21:42.216-05:002013-06-06T03:21:42.216-05:00Its also possible that scrutiny by all parties con...Its also possible that scrutiny by all parties concerned are curtailing these options. Hard to know without being privy to the board meetings, but I suspect the murkiness of the future has played a game of wait and see with most financial institutions, TBTF notwithstanding. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41603952520660816162013-06-06T03:18:40.729-05:002013-06-06T03:18:40.729-05:00To echo above: Steve Hanke addressed this on Econ ...To echo above: Steve Hanke addressed this on Econ talk - namely that because of regulation and basal, the equity requirements on banks have risen considerably, thus discouraging lending at the moment. He noted a story about a friend of his trying to secure a loan for a house and despite his incredible wealth, the bank still was hesitant to make any kind of loan. Whether its regulation alone thats busted the channels is more of a debate, but it sure doesn't seem like its purely a money demand issue. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88842228568490531662013-06-06T02:30:08.075-05:002013-06-06T02:30:08.075-05:00While it seems clear that QE is having a limited i...While it seems clear that QE is having a limited impact on demand, this cannot be because reserves do not matter. Reserves are money, in the unambiguously defined sense: an electronic version of notes and coins. Money held by the private sector is an asset, adding to the stock of assets in the private sector boosts the private sector's stock of wealth - and therefore creates demand (park Ricardian equivalence for the time being!).<br /><br />The problem must therefore be the way reserves are being created. Prof Cochrane is right: why would substituting an interest bearing asset held by the private sector with a lower interest-bearing asset (money) increase private sector demand? It has no impact on private sector net wealth, but reduces the private sector's net income.<br /><br />The conclusion is obvious: create reserves without buying assets. If the fed adds to the stock of money held by the private sector without removing an asset held by the private sector the net wealth of the private sector rises.<br /><br />So the only question is can the Fed increase reserves without swapping them for treasuries or MBS etc. Of course it can. Lets get on with!Anonymoushttps://www.blogger.com/profile/13473661280678620614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-54962706801748837592013-06-06T01:45:55.544-05:002013-06-06T01:45:55.544-05:00Naturally a bank with a hedged interest rate posit...Naturally a bank with a hedged interest rate position like Wells is eager for rates to rise, because less prudent banks are making more money, which makes the prudent CEO look dumb.<br /><br />(As an aside, why do we even allow banks to speculate on interest rates? The idea that banks "borrow short and lend long" is so old fashioned. Banks don't know anything about interest rates that you and I don't know. There is no problem of asymmetric information).<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67830556097337443492013-06-05T22:55:56.578-05:002013-06-05T22:55:56.578-05:00"I don't put that much stock in the banks..."I don't put that much stock in the banks lend out the money channel of monetary transmission in the first place."<br /><br />Not really that perplexing when you think about it. Banks are both borrowers and lenders. They can also borrow without lending - see investment banking. FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39450392259951228552013-06-05T21:44:02.166-05:002013-06-05T21:44:02.166-05:00Reserves, monetary theory do nothing about this
h...Reserves, monetary theory do nothing about this<br /><br />https://twitter.com/DavidCayJ/status/342464897013141506/photo/1<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58219036384802308202013-06-05T21:39:20.482-05:002013-06-05T21:39:20.482-05:00Ashwin,
Of note:
"Less documented but equal...Ashwin,<br /><br />Of note:<br /><br />"Less documented but equally important are the attempts to improve the supply and safety of the credit economy via collateral. The idea is simple – assets can be used as security to back the credit, thus improving the supply as well as the safety of credit."<br /><br />But the credit and the collateral must have some similar traits. For instance a mortgage bond can be sliced and diced and sold to 20 different investors. But if the borrower defaults, can the underlying collateral (the house) be divided among those investors?<br /><br />Ultimately, collateral that is borrowed against must be as liquid and divisible as loan that is created. In addition to avoid cascading defaults, the collateral must always have a value greater than the loan. With market pricing of collateral (houses for instance) that is impossible.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56133934640348354082013-06-05T21:34:38.902-05:002013-06-05T21:34:38.902-05:00Dear Professor Cochrane
Of course, the correct an...Dear Professor Cochrane<br /><br />Of course, the correct answer is that you and and everyone above is wrong.<br /><br />June 22, 2013 will be the 6th anniversary of when Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail out" one of its funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund.<br /><br />Yes, this Depression is now 6 year old, proving that in the last 75 years monetary theory has developed nothing, really, to offer. <br /><br />Reserves are not a motive to lend; at best, they are a condition to lending. If no one wants to borrow, reserves to the moon will not matter nor will the lack of reserves matter.<br /><br />People will not borrow because of two five letter words: China and Robot<br />Anonymoushttps://www.blogger.com/profile/07904132869021579763noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-35715186520581390702013-06-05T21:23:41.679-05:002013-06-05T21:23:41.679-05:00"If the problem is no demand for borrowing, i..."If the problem is no demand for borrowing, it is difficult to understand how raising the Federal funds rate would increase the demand to borrow funds."<br /><br />The problem is not demand for borrowing. The problem is what this country has gotten for its borrowing. Consider:<br /><br />Real GDP / Total Credit Market Debt Owed - Basically a measure of the efficiency of the U. S. economy:<br /><br />http://research.stlouisfed.org/fred2/graph/fredgraph.pdf?&chart_type=line&graph_id=&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23b3cde7&graph_bgcolor=%23ffffff&txtcolor=%23000000&ts=8&preserve_ratio=true&fo=ve&id=TCMDO_GDPC1&transformation=lin_lin&scale=Left&range=Custom&cosd=1950-01-01&coed=2013-01-01&line_color=%230000ff&link_values=&mark_type=NONE&mw=4&line_style=Solid&lw=1&vintage_date=2013-06-05_2013-06-05&revision_date=2013-06-05_2013-06-05&mma=0&nd=_&ost=&oet=&fml=b%2Fa&fq=Quarterly&fam=avg&fgst=lin<br /><br />Or how about household asset / liability ratio:<br /><br />2012 4th quarter<br />http://www.federalreserve.gov/releases/z1/Current/z1.pdf<br />See page 113<br />Assets - $79.5 trillion<br />Liabilities - $13.45 trillion<br />Asset / Liability Ratio - 5.91 to 1<br /><br />Contrast that with 1950<br />http://www.federalreserve.gov/releases/z1/Current/annuals/a1945-1954.pdf<br />See page 104<br />Assets - $1.1 trillion<br />Liabilities - $76.8 billion<br />Asset / Liability Ratio - 14.32 to 1<br /><br />A declining asset / liability ratio will eventually go below 1 and render the borrower insolvent.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.com