tag:blogger.com,1999:blog-582368152716771238.post6490785241766040537..comments2024-03-28T14:41:03.793-05:00Comments on The Grumpy Economist: Bair and Reserves for AllJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger27125tag:blogger.com,1999:blog-582368152716771238.post-53746483266778704382014-09-12T19:36:34.644-05:002014-09-12T19:36:34.644-05:00Tend to agree here. The Fed's concern, the mar...Tend to agree here. The Fed's concern, the market's concern, about a mushrooming Fed balance sheet feels long forgotten. The value of this balance sheet seems to have dawned on all parties, and its much more than its ability to make Treasuries more liquid. With RRP, ON RRP and a essentially bottomless balance sheet, the can set the rate, the can set the speed they want to get there and they can rein it in just as fast. Its a rudder quite unlike anything they have had before. Begs the questions:<br />1) What gives them the right to set the market? Is this a good thing.<br />2) How is this power anything but irresistible to the Fed? <br /><br />Of less urgency but curious:<br />3)What does the future hold for primary dealers?Adam Deanhttp://www.square1am.comnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87495683975360086552014-07-29T10:31:27.099-05:002014-07-29T10:31:27.099-05:00The problem, and why RRP can't be full allotme...The problem, and why RRP can't be full allotment (though it was initially conceived as such) is because of the corridor - this is the point that Blair misses spectacularly and Cochrane nearly hits - you can't issue liabilities to a sector against which you can not discount liabilities. In a crisis, if the non-bank sector puts all its cash to the fed in the RRP program, you rely on the banking sector to buy the assets and then put them to the discount window to balance the balance sheets...that would entail massive frictions and that's why the program can't be full allotment. <br /><br />And yes, Cochrane is correct, the purpose of the facility is to impose a hard floor on all market rates, where the ROR has proven to be soft because of the GSEs and FDIC fee. The supply of collateral comes through the SOMA sec lending program. In normal times, RRP and ROR is just shifting the liability structure of the Fed, not "supplying" collateral to meet some unsatiated demand.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-66911460026261621602014-07-29T09:16:00.671-05:002014-07-29T09:16:00.671-05:00Ralph,
The statement "the free market rate o...Ralph,<br /><br />The statement "the free market rate of interest" in terms of government debt rests on a fallacy. First, a government is under no obligation to sell marketable securities. Indeed, all of the government debt held by Social Security is of the nonmarketable variety.<br /><br /> Also, the government could just as easily set the rate of return on its securities and let the market set the duration.<br /><br />Treasury Department: We have 7% securities for sale, now accepting bids<br />Bidder #1: I bid 15 years<br />Bidder #2: I bid 26 years<br />Bidder #3: I bid 50 years<br />Treasury Department: Bidder #3's offer has been accepted<br /><br />In this instance, the rate of return is set by the government, the duration is set by the market.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82475512372594255222014-07-29T08:55:10.882-05:002014-07-29T08:55:10.882-05:00Ralph,
"Re your non-guaranteed rate of retur...Ralph,<br /><br />"Re your non-guaranteed rate of return bonds, any government would have problems selling those, wouldn’t it?"<br /><br />Is the rate of return on private stocks / equity guaranteed? And yet people are buying them in droves. Government would have problems selling them if they were priced too expensively.<br /><br />"Re your last sentence, I’m baffled as to how having government issue bonds that pay above the free market rate of interest improves the inflation / unemployment trade off."<br /><br />Because they would not be government bonds, they would be government equity.<br /><br />The only distinction between bonds and equity is the additional legal protections that are afforded bond holders. In the case of government debt, bond holders get first dibs on tax revenue that a government collects.<br /><br />Suppose instead government sells a security where the rate of return can only be realized against a tax liability - hence nonguaranteed. This would be "interest paying" currency (similar to what the Fed is trying to do with interest on reserves), but that "interest" could not be used to directly fund expenditures - hence it would have no immediate effect on the demand for goods / services.<br /><br />"Re your last sentence, I’m baffled as to how having government issue bonds that pay above the free market rate of interest improves the inflation / unemployment trade off."<br /><br />Because with government equity that has a potential rate of return equal to or higher than the real interest rate, you overcome the zero bound on nominal interest rates. Meaning you can have deflation (high real interest rates even at the zero bound) without the corresponding credit defaults.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-75108936885706072292014-07-29T06:49:46.866-05:002014-07-29T06:49:46.866-05:00The Overnight Reverse Repurchase Facility is a bol...The Overnight Reverse Repurchase Facility is a bold move. It seems to me that TBTF became irrelevant, why use them anyway? This will effectively make the system totally government run, without some large banks pretending to be some private venture ... let's abolish commercial banks altogether!! Just like Cochrane, "I'm not arguing yes or no here, but recognize the plan for its far-reaching audacity". Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-89347761356823978002014-07-29T06:38:54.141-05:002014-07-29T06:38:54.141-05:00Frank,
Re your “non-guaranteed rate of return bon...Frank,<br /><br />Re your “non-guaranteed rate of return bonds”, any government would have problems selling those, wouldn’t it? Would you like to lend me $10,000 with no guarantees from me as to what interest you’ll get?<br /><br />Next, when I said “US government should issue dollars in the quantity needed to bring full employment..” I meant “full employment” in the NAIRU sense: that’s the maximum feasible level of employment consistent with acceptable inflation (2% or whatever).<br /><br />Re your last sentence, I’m baffled as to how having government issue bonds that pay above the free market rate of interest improves the inflation / unemployment trade off.<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-61710475233670030802014-07-28T23:27:10.822-05:002014-07-28T23:27:10.822-05:00I'm glad to see someone else also proposing th...I'm glad to see someone else also proposing that the Fed start allowing direct deposits. It's time we got the welfare babies out of the government trough. The Fed needs a retail window to take deposits and make loans. That would allow individuals of modest means to stash their money and small businesses to obtain credit, two functions that our financial sector can no longer handle.<br /><br />Let's hear more about: Treasuries -> InvestorKaleberghttps://www.blogger.com/profile/05283840743310507878noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42427382777487024712014-07-28T22:37:33.633-05:002014-07-28T22:37:33.633-05:00Yes, for now they want to limit the quantity as th...Yes, for now they want to limit the quantity as they want to limit the quantity of reserves. When they try to control both a price (interest rate) and a quantity at the same time, we'll see what happens. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-20350880524095621092014-07-28T21:20:19.565-05:002014-07-28T21:20:19.565-05:00Fair point. The ultimate purpose of reverse repo i...Fair point. The ultimate purpose of reverse repo is indeed to put a floor under short rates when it comes time to raise rates. They're obviously not yet serving that purpose, though. At present they're supplying Treasurys. My understanding is that banks are actually the main users. Either way they're not planning unlimited reverse repos, which should be clear from the minutes. http://mobile.bloomberg.com/news/2014-04-22/demand-for-fed-reverse-repos-rises-as-treasury-cuts-bill-supply.htmlTomnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-20191756315303708962014-07-28T16:49:37.681-05:002014-07-28T16:49:37.681-05:00Ralph,
I agree that the U. S. government should b...Ralph,<br /><br />I agree that the U. S. government should be precluded from selling securities that offer a guaranteed rate of return (bonds). I disagree that the U. S. government should try to control both inflation and employment with a single tool (monetary aggregate).<br /><br />My own preference is that monetary policy (setting of interest rate) is separated from fiscal policy entirely. The only way to achieve that level of co-indepence is to preclude government from issuing bonds.<br /><br />A government could still sell securities that offer a rate of return, but that rate of return should not be guaranteed.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-92099578952097974442014-07-28T16:48:15.120-05:002014-07-28T16:48:15.120-05:00Tom: can you point to a speech or other document o...Tom: can you point to a speech or other document outlining this as the purpose of the reverse repo program? I read it as suspicion that banks will not pass on interest on reserves, and so a way to enforce tightening, when the time comes, in a less and less competitive big-banking system. If this liquidity bit is the primary motivation, I'd like to have some sources. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39047962707420398322014-07-28T16:40:04.058-05:002014-07-28T16:40:04.058-05:00John's criticisms would all be spot on if reve...John's criticisms would all be spot on if reverse repo worked the way she claims it does.<br /><br />But actually, reverse repo doesn't give non-banks the ability to park their money at will at the Fed. Reverse repo is issued in very limited quantities. There's nothing whatsoever in any Fed minutes or any governor's or any regional president's comments to date that would indicate any intention to ever make reverse repo available in unlimited volumes on demand.<br /><br />Sheila is warning about a danger that doesn't exist, and John is celebrating progress that hasn't happened. They're both assuming that reverse repo would be issued in huge volumes in a crisis, but there's no indication whatsoever of any such plan.<br /><br />The actual reason for reverse repo, which John dismisses as "silly", is to boost liquidity in shorter-dated Treasurys by lending out the Fed's supply of bonds that are approaching maturity. The collateral is the whole point.Tomnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-36355690560466171602014-07-28T16:31:52.402-05:002014-07-28T16:31:52.402-05:00Yes, but neither the First or Second Bank replaced...Yes, but neither the First or Second Bank replaced private bank notes that were run-prone. Indeed, the Second Bank faced a run of its own in the Panic of 1819. Only as a result of the Civil War were state bank notes taxed out of existence and the notes of nationally chartered banks given a full government guarantee. The Fed was designed to phase out national bank notes, but that wasn't completed until the Great Depression.Jeffrey Rogers Hummelnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42848134742637517552014-07-28T15:40:52.378-05:002014-07-28T15:40:52.378-05:00Canada had lots of independent banks issuing notes...Canada had lots of independent banks issuing notes with no central bank, and their system was still more stable than ours with the Fed.TGGPhttps://www.blogger.com/profile/11017651009634767649noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17386855397243182602014-07-28T15:21:55.660-05:002014-07-28T15:21:55.660-05:00I think John means "central bank" curren...I think John means "central bank" currency in this case - not federal reserve notes. Prior to the Fed being established in 1913, the U. S. had a central bank on two occasions:<br /><br />http://en.wikipedia.org/wiki/First_Bank_of_the_United_States<br />http://en.wikipedia.org/wiki/Second_Bank_of_the_United_StatesFRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-84710718050700632032014-07-28T15:04:23.256-05:002014-07-28T15:04:23.256-05:00"In the 1800s Congress also allowed non-banks..."In the 1800s Congress also allowed non-banks to hold Federal Reserve Notes"? The Fed didn't begin operation until 1914. Did you mean 1900s, or where you referring to Greenbacks and other Treasury currency?Jeffrey Rogers Hummelnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60145877556810123512014-07-28T14:49:06.639-05:002014-07-28T14:49:06.639-05:00Bill Woolsey likes to point out that if the public...Bill Woolsey likes to point out that if the public were not allowed to hold FRNs, then there would have been no impediment to interest rates on safe assets going below 0%.<br /><br />So there is something to be said for a Fed that does less, rather than more.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86787743286544215182014-07-28T12:34:10.163-05:002014-07-28T12:34:10.163-05:00Ralph,
And here is where I disagree with you. I ...Ralph,<br /><br />And here is where I disagree with you. I believe that the U. S. government should be permitted to sell a liability with a rate of return. I just don't believe that this rate of return should be guaranteed.<br /><br />Issuing a quantity of dollars may bring about full employment at the expense of higher inflation. Selling government liabilities with a non-guaranteed rate of return that exceeds the real private cost of financing gets you to full employment without inflation.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-42664945766721472142014-07-28T10:07:55.589-05:002014-07-28T10:07:55.589-05:00Frank,
I agree with you! I don't see the just...Frank,<br /><br />I agree with you! I don't see the justification for a totally safe way of getting interest. Milton Friedman and Warren Mosler thought/think the same. I.e. they argued that the state should only issue zero interest yielding liabilities. I.e. they argued that the US government should issue dollars in the quantity needed to bring full employment, but not not interest yielding debt.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-30405178906739935202014-07-28T08:28:50.890-05:002014-07-28T08:28:50.890-05:00Ralph,
"The existence of interest paying res...Ralph,<br /><br />"The existence of interest paying reserves does not make much difference because there’s a totally safe way of getting interest anyway: government debt."<br /><br />My question was, why should there be a totally safe way of getting interest - like a totally safe way to get a paycheck (unemployment insurance)?FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69594399174695671792014-07-28T07:40:46.480-05:002014-07-28T07:40:46.480-05:00The state would like nothing more than to be able ...The state would like nothing more than to be able to track every penny you have and where you spend it for several reasons, none of them healthy.<br /><br />I must disagree with Mr. Hume. Governments also incur debt to wage war. Historically thats probably the #1 reason for government borrowing and some bankers, like the Rothchilds, became very wealthy lending to both sides. The Viet Nam war was one of the reasons Nixon had to violate Bretton Woods. Actually it was the last straw; Triffin pointed out the flaw in the late 50s, and the London Gold Pool was the first admission that something was seriously amiss. DeGaulle pulled France out of the Gold Pool because of Viet Nam war spending and eventually we had the Nixon Shock, which was really just admitting the emperor had no clothes.<br /><br />Getting back on topic, I see the progression of increasingly unorthodox interventions (TARP, mark to make believe, QE, and now reverse repo) as being a similar progression of events as the rich and powerful desperstely cling to a doomed status quo. And like a drowning man they will not hesitate to take someone else down with them. In some cases, such as mark to make believe, they are borrowing from the Peso Crisis playbook except the deceit has been allowed to go on much longer.<br /><br />This is all just putting Band-Aids on a brain tumor.JB McMunnhttps://www.blogger.com/profile/15468282698533043544noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-20488318376299854262014-07-27T22:43:59.913-05:002014-07-27T22:43:59.913-05:00I've always viewed interest on reserves as a b...I've always viewed interest on reserves as a backdoor bailout. Imagine telling the American people "We're going to charge every man, woman and child X dollars per year to bail out the banks". Instead, you just pay interest on reserves instead of sending the money to the Treasury. How many people understand what's being done to them?<br /><br />The ON RRP is already showing cracks, and I'll bet the cracks run even deeper in the shadow banking sector. It adds another layer of complexity and vulnerability to unintended consequences. It's almost biblical in nature and scope: the dot-com collapse begat policies that caused a housing bubble that burst, which begat a liquidity crisis, which begat QE, which begat a collateral shortage, which begat reverse repo. As Gollum might say, Please stop the stupid - it burns us!<br /><br />Money under the mattress underperforms a deposit account by a trifling amount, and is completely immune to failures and bail-ins. It's actually not too bad of a deal right now.JB McMunnhttps://www.blogger.com/profile/15468282698533043544noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37361638261015225652014-07-27T22:38:14.253-05:002014-07-27T22:38:14.253-05:00Frank,
The existence of interest paying reserves ...Frank,<br /><br />The existence of interest paying reserves does not make much difference because there’s a totally safe way of getting interest anyway: government debt. But that’s not to say I approve of interest on reserves. The Fed only started paying interest on reserves in 2008. It should never have done so in my view. Come to that, I don’t even agree with governments incurring debt. Milton Friedman advocated a “zero debt” regime. And the real REAL REASON governments incurr debt was clearly set out by David Hume 200 years ago: it enables politicians to ingratiate themselves with voters.<br /><br />Re the rest of your comment, citizens shouldn’t have to store dollar bills under matresses: we’re living in an era where 99% of money transactions are done electronically, thus I agree with John: the state should provide an “electronic matress” for everyone. As to interest, as I said above, I agree with you: there’s no good reason to pay interest.<br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-63417410866702982342014-07-27T17:29:28.253-05:002014-07-27T17:29:28.253-05:00John,
"Banks can have accounts at the Fed, c...John,<br /><br />"Banks can have accounts at the Fed, called reserves, and these accounts pay interest. In essence, the new program allows other financial institutions, that aren't legally banks, to also have interest-paying accounts at the Fed."<br /><br />How is this any different than Congress extending unemployment benefits to 5 years, 10 years, 30 years? You pay people to not work and you pay banks / individuals not to lend. <br /><br />"I like the Fed's big balance sheet and interest-paying reserves, and I like opening up interest-paying reserves to everyone. I regard this as the first step to putting run-prone short-term financing out of business, by giving depositors a safe alternative."<br /><br />If depositors want a "safe" alternative, there is the mattress or a home safe. You seem to want depositors to have a safe rate of return - all reward, no risk. The way you put run-prone short term financing out of business is by making long term financing less expensive than short term financing, not by eliminating the need for either.<br /><br />Sorry, this idea is just more of the same B. S. coming out of Washington - all bailouts, all of the time.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26483313667350362412014-07-27T14:08:42.227-05:002014-07-27T14:08:42.227-05:00The comparison of Bair with Bagehot is very helpfu...The comparison of Bair with Bagehot is very helpful and illuminating. I think that the system is much more unstable than necessary because there are competing, slightly-differentiated providers of short-term dollar deposits, and small events can trigger a massive shift between them. Dollar deposits really should be handled as you advocate here and in other posts on floating rate treasuries. They should be backed by risk-free government debt, not by the lending activity of banks and prime MMFs.<br /><br />Bair worries about liquidity runs. I agree that deliberately introducing frictions is not a solution. I would rather *remove* frictions, by reforming the liabilities of private institutions so that they remain liquid in times of market stress - thereby preventing liquidity runs.Anwerhttps://www.blogger.com/profile/08277173974258559733noreply@blogger.com