tag:blogger.com,1999:blog-582368152716771238.post6236681387883702350..comments2024-03-28T11:50:52.581-05:00Comments on The Grumpy Economist: Balance sheet balanceJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-582368152716771238.post-5564254166203525162016-12-13T16:56:10.347-06:002016-12-13T16:56:10.347-06:00the saving grace is much simplier than this, they ...the saving grace is much simplier than this, they can print money If they find themselves undercapitalized. Of course that will mean varying degrees of inflation will follow (poosibly too high).Anonymoushttps://www.blogger.com/profile/08683407827964491321noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-22087628791440433102016-12-11T19:34:12.227-06:002016-12-11T19:34:12.227-06:00Meh. The Fed should just go to helicopter drops. E...Meh. The Fed should just go to helicopter drops. Enough theomonetarism. Let's go with what works.Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77909201283446183422016-12-09T09:35:34.557-06:002016-12-09T09:35:34.557-06:00Banks do not lend reserves except to other banks. ...Banks do not lend reserves except to other banks. No one can use reserves, except cash notes, that do not have a reserve account at the Fed. snowball1205https://www.blogger.com/profile/14732718037718057300noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-25185796803252525492016-12-09T00:59:39.946-06:002016-12-09T00:59:39.946-06:00I think we agree on the inflation-targeting mandat...I think we agree on the inflation-targeting mandate for the Fed, and I'm trying to insert concerns about efficiency into the discussion. That $2T of credit needs to be allocated in some way, and I think many observers would prefer that it be done by profit-maximizing institutions, than through large-scale and indiscriminate asset purchases by the central bank, or through fiscal policy. So yes, let's shrink the Fed's balance sheet and let banks pick up the slack. But if that isn't happening, we need a diagnosis of the problems with bank lending.<br /><br />I do agree that the total amount of credit will need adjustments now-and-then, as part of monetary policy, using tools like the required reserve ratio that you suggest. But we are currently operating in a regime of unconventional tools like LSAP, partly due to the economics profession's disagreement about the use of IOR.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-79034942334940560492016-12-08T23:15:10.120-06:002016-12-08T23:15:10.120-06:00Good discussion. The Fed should stay out of fisca...Good discussion. The Fed should stay out of fiscal affairs/policy; but, its monetary role has expanded as a result of the Crisis of 2008 -- and allocation of credit throughout the yield curve is the norm when the Fed is in the role of lender of last resort, or as Perry Mehrling points out the dealer of last resort (keeping market liquidity when it freezes up). That is going to involve picking winners and losers in a crisis, but that is the way it goes -- I know of no hard fast rules whether it is J.P. Morgan (the person, private sector), Jesse Jones (with the RFC during the Depression, Fed Govt), or Uncle Ben in 2008.<br /><br />Ben Bernanke gave a four part lecture (I think at Geo Washington U) on the role of the Fed -- history, the Depression, the Crisis 2008, post Crisis -- its on YouTube. He goes through all the actions they had to take to stabilize the markets so they could operate as a market making enterprise. Remember all the actions the Fed was taking earlier in late 2007, 2008; and, the minutes the month before the Lehman failure show no indication of foreseeing the Crisis coming up.Vic Volpehttps://www.blogger.com/profile/05011603728944612747noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39821182817597957142016-12-08T19:30:20.842-06:002016-12-08T19:30:20.842-06:00Anwer,
I think you misunderstood my suggestion. I...Anwer,<br />I think you misunderstood my suggestion. In response to the financial crisis, the FED massively expanded the monetary base. The money supply did not explode because banks were not lending -- they were holding excess reserves. According to the FRED database, banks are currently holding about $2 TRILLION in excess reserves. I do not think the FED *wants* banks to rapidly lend out all $2T in excess reserves -- that would explode the money supply and could create a very real inflationary problem for the FED.<br /><br />By paying IOR, the FED can manage how aggressively banks lend out their excess reserves. I think Plosser's concern is that if the FED must keep paying increasingly higher interest rates to prevent banks from lending out too many of their excess reserves, it becomes a prohibitively costly tool for the FED to use. If paying IOR becomes too costly, the FED could bump up the Required Reserve ratio (and only pay interest on excess reserves). This would reduce the cost to the FED. Presumably, if the FED raised the Required Reserve ratio, they would set it at a level that is still below the excess reserve levels to prevent the change from having a large contractionary impact on the economy. -- Rich F.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29431178965992779652016-12-08T15:49:47.749-06:002016-12-08T15:49:47.749-06:00I'm not sure what the costs are of paying IOR ...I'm not sure what the costs are of paying IOR when the Fed is able to create that money at will, but I'm glad you brought up the required reserve ratio. We *want* banks to lend, and keep only the minimum required reserves at the central bank. The current large balance sheet of the Fed indicates that the banking system is not functioning properly. Banks cannot lend sufficiently, and thus deposit with the central bank which must then allocate credit via unconventional monetary policy. And this is inefficient because the central bank is not a profit-maximizing institution and is not equipped to make allocation decisions very well.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-20253527445293673662016-12-08T13:51:46.907-06:002016-12-08T13:51:46.907-06:00If I understand correctly, Plosser's concern i...If I understand correctly, Plosser's concern is that it may be too costly for the FED to pay increasingly higher interest rates on reserves to prevent banks from loaning out their huge excess reserves and exploding the money supply. <br /><br />But it seems that this particular problem may be relatively easy to solve -- albeit in an unorthodox manner. If the FED is worried about banks loaning out huge amounts of excess reserves, the FED could simply raise the required reserve ratio. Although this monetary policy tool is rarely used, it's still in the FED's toolbox. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39396841536094573822016-12-08T10:54:26.120-06:002016-12-08T10:54:26.120-06:00If the Fed were a Bank, the Fed would shut it down...If the Fed were a Bank, the Fed would shut it down as being catastrophically undercapitalized. <br /><br />Item 5 of the H.4.1 for 12/6/16 shows 4.6T$ of assets being carried on a balance sheet that shows capital of less than 1% of the total assets (40G$). <br /><br />The only thing that saves the situation from total catastrophe is that the balance sheet carries 8,000 metric tonnes of gold (current market price $1,173/oz) at $42.22/oz. If the gold were revalued at market price, it would add ~290G$ to the capital account, yielding a capital asset ratio of about 7%, which is not great, but not immediate shut down. <br /><br />A bank with such a low capital ratio would be required to either sell stock or to sell assets. <br /><br />Since most the Feds assets are short term treasuries, and most of its liabilities are demand deposits,an asset reduction would be easy to accomplish. Let the treasury bills run off, stop paying interest on reserve accounts, and mail the holders of excess reserves a check as they reduce account balances.Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-8903879609010570992016-12-08T07:41:40.922-06:002016-12-08T07:41:40.922-06:00It's interesting to see different viewpoints o...It's interesting to see different viewpoints on the balance sheet of the Fed. I learned a lot from this summary.Yancheng Qiunoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-33035733734446526362016-12-07T23:35:23.504-06:002016-12-07T23:35:23.504-06:00I don't understand Plosser's first objecti...I don't understand Plosser's first objection to a large balance sheet. The Fed has an inflation-targeting mandate. If it needs to pay 3% or 4% to meet its target, it should do that and would not face much difficulty explaining its policy actions. And such rates certainly are normal, historically speaking.<br /><br />But I do appreciate his second point that the central bank should not be deciding the allocation of credit. And if the balance sheet is not reduced during recovery, the problem gets worse with every economic cycle as the central bank owns an ever-increasing share of the economy.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.com