tag:blogger.com,1999:blog-582368152716771238.post696554329103937854..comments2024-03-28T02:34:12.891-05:00Comments on The Grumpy Economist: The Fed and Shadow BankingJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger32125tag:blogger.com,1999:blog-582368152716771238.post-80340858819820410992013-05-28T04:59:01.736-05:002013-05-28T04:59:01.736-05:00Professor Cochrane, Consider the following line of...Professor Cochrane, Consider the following line of argument: money and government debt are not identical. In the abstract, money is the means of payment, the purest form of liquidity. Money is not a liability (think cigarettes in prison): the issuer of currency is a provider of the service "legal tender". Government debt is a liability, it usually pays interest, and it must be repaid. In the real world, the two ends of the spectrum are dollar bills - which in no meaningful sense are "debts" (there is no promise to repay) - and 30year treasuries, interest bearing and price-volatile liabilities of government. However, also in the real world, the distinction between the "means of payment" and "government liability" is a blurred continuum between these extremes. Just as cigarettes can become cash, high quality/liquid securities can become collateral, ie quasi-cash. And cash can pay interest (ie bank reserves), ie a quasi-liability. Now the really interesting conclusion is not that QE is ineffective (I think we all know it is!). Much more important is that if treasuries are not just debts, but also a means of payment, the federal government's NET debt is much lower than we think. If treasuries provide services (liquidity/collateral etc.), they are no longer simply liabilities - the monopoly issuer is actually creating value! It seems clear to me that "money" - as I have narrowly defined it, should not be considered a debt, it is a service, "the means of payment". It follows logically, that QE is reducing the stock of net government debt. But it also follows that if treasuries are not just liabilities, but also quasi-money, there is a lower stock of net debt, but a higher stock of money. Is this inflationary? I still think you need a multiplier ... Anonymoushttps://www.blogger.com/profile/13473661280678620614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38282604769357756432013-05-27T20:34:01.235-05:002013-05-27T20:34:01.235-05:00"My thesis here is that cooperation between t..."My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own."<br /><br />Given.<br /><br />"Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt–so that the tax cut is in effect financed by money creation."<br /><br />Consider a tax cut for households and businesses that is sold by the federal government. Similar to a government bond it would have a fixed duration and rate of return. In this case the tax cut sold by the government is the means of financing the government deficit while simultaneously reducing the federal debt.<br /><br />"Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent. …"<br /><br />Bernanke jumps to the conclusion here that there is a direct one for one correlation between the money stock and the price level. This is not necessarily the case.<br /><br />"Isn’t it irresponsible to recommend a tax cut, given the poor state of Japanese public finances? To the contrary, from a fiscal perspective, the policy would almost certainly be stabilizing, in the sense of reducing the debt-to-GDP ratio."<br /><br />Selling the tax break instead of giving it away would go further in reducing the debt to GDP ratio since it would not rely on changes in individual / business decisions. The debt would certainly go down even if there were no change in GDP. <br /><br />"The BOJ’s purchases would leave the nominal quantity of debt in the hands of the public unchanged, while nominal GDP would rise owing to increased nominal spending."<br /><br />Assuming the money in the public hands was spent instead of say - reducing private debt.<br /><br />"Indeed, nothing would help reduce Japan’s fiscal woes more than healthy growth in nominal GDP and hence in tax revenues."<br /><br />Ugh. A person / business has "fiscal woes" - not a sovereign.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-11103097731755829592013-05-27T01:23:23.404-05:002013-05-27T01:23:23.404-05:00I still don't see how re-hypothecating a t-bil...I still don't see how re-hypothecating a t-bill increases the money supply. <br /><br />1) Individual #1 borrows $1 million from individual #2 with a t-bill for collateral.<br /><br />2) Individual #2 borrows $1 million from individual #3 with the same t-bill for collateral. This just makes individual #2 whole. He obviously had $1 million before transaction 1), and now has $1 million again. <br /><br />3) repeat as many times as you want.<br /><br />At the end of the chain, ONE person has the collateral, at the front of the chain, ONE person has $1 million bucks, and every body in the middle of the chain has as much money as they started with, plus a small fee for the transaction. Person x in the middle of the chain HAD $1 million to start with, lent it out for the collateral, and then borrowed a replacement $1 million from person x+1, and passed on the collateral to person x+1. No matter how long the chain is, no money is created. All that happens is that the $1 million is passed along step by step from the person at the end of the chain to the person at the beginning of the chain.dlrhttps://www.blogger.com/profile/15427138049283211787noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-32160292233071956082013-05-25T11:59:41.759-05:002013-05-25T11:59:41.759-05:00Treasuries are riskier than reserves because while...Treasuries are riskier than reserves because while current inflation can nip at reserves, long term inflation expectations can take a big bite out of the long bond when marked to market.<br /><br />To maintain a risk profile, the financial sector can mop up the reserves with riskier stuff such as but not limited to : treasuries.Incubus and Succubusnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-54864859556809990042013-05-25T08:04:47.804-05:002013-05-25T08:04:47.804-05:00The main effect of QE is to reduce the net interes...The main effect of QE is to reduce the net interest income of the financial sector. The Fed is replacing higher-yielding treasuries with lower-yielding bank reserves. It is a very convoluted way for the Federal government to finance deficits at 25bps: issue treasuries yielding 2% to 3% and buy them back with reserves yielding .25%. How does this "stimulate" the economy? Intriguingly, this requires the assumption that if you depress the earnings of the banking sector (by reducing their net interest income) you will encourage banks to take more risk and lend more ... this might actually be true! Anonymoushttps://www.blogger.com/profile/13473661280678620614noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-61024633974216003762013-05-25T03:27:11.850-05:002013-05-25T03:27:11.850-05:00So far, despite peevish commentary from all quarte...So far, despite peevish commentary from all quarters, no one seems to come up with any complaints about QE that make me want to stop it. I wish the Fed would do a few trillion more in QE (though limit their buying to Treasuries). <br /><br />Sheesh! We are paying down federal debt, but the trillions, and giving people cash instead. And inflation is dropping. Dropping!<br /><br />What is not to like about this? Listen, I have as much Puritan- and morals-based baggage as the next guy, but the economy is not a person. There is no need to suffer for suffering sake. <br /><br />Any business operator in America, told he could eliminate debt without much in the way of negative effects, would leap at the opportunity.<br /><br />And inflation: We are at record lows. And going down. <br /><br />Repeat: We can pay down federal debt through QE, and inflation is dead. What should we do?<br /><br />BTW, here is what Bernanke told Japan to do in 2003. So, I am nit crazy, or if I am, then so is Bernanke. <br /><br />My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt–so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent. …<br /><br />Isn’t it irresponsible to recommend a tax cut, given the poor state of Japanese public finances? To the contrary, from a fiscal perspective, the policy would almost certainly be stabilizing, in the sense of reducing the debt-to-GDP ratio. The BOJ’s purchases would leave the nominal quantity of debt in the hands of the public unchanged, while nominal GDP would rise owing to increased nominal spending. Indeed, nothing would help reduce Japan’s fiscal woes more than healthy growth in nominal GDP and hence in tax revenues.<br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69547386001400018702013-05-24T21:09:02.701-05:002013-05-24T21:09:02.701-05:00repos and treasuries are not interchangeable becau...repos and treasuries are not interchangeable because they can have different accounting treatments, buying financed tbills increases your regulatory assets, providing the financing for the bills decreases your assets so it looks like you have less leverage (lehman did this). There may be no economic difference as you say but the regulatory difference is huge and in fact repo rates can be less than tbill rates for this reason.<br /><br />The bigger issue is that our system is so unbelievably complicated, nobody can divine exactly what's going on, meaning the odds of the Fed getting things right are essentially zeroAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31076633218385825432013-05-24T18:31:49.071-05:002013-05-24T18:31:49.071-05:00For what it's worth, I put in my response to S...For what it's worth, I put in my response to Sumner's post..<br /><br />http://www.themoneyillusion.com/?p=21263&cpage=1#comment-249740DOBhttp://catalystofgrowth.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4387201642669423982013-05-24T15:09:26.433-05:002013-05-24T15:09:26.433-05:00Professor Cochrane, I would be curious to hear you...Professor Cochrane, I would be curious to hear your thoughts on the reply that Scott Sumner has put on his blog (http://www.themoneyillusion.com/?p=21263#comments), this answer comes after quoting your paragraph 3 to 6 :<br /><br />"It makes me a bit dizzy seeing John Cochrane using the Keynesian “pushing on a string” metaphor that Milton Friedman discredited decades ago. More seriously, there are several fallacies in this argument. Let’s assume for the moment that reserves and T-bills are both non-interest-bearing; why would monetary policy have any impact? The answer is simple; markets don’t expect interest rates to be at zero forever.<br /><br />OK, but why does that make base money special now, when T-bills also pay no interest? Because base money is the medium of account, whereas T-bills are not. In the future a change in the supply of T-bills will not (significantly) change the price level, it will merely change the nominal price of T-bills. In contrast, a change in the supply of base money can never affect the nominal price of base money, which is always one. Instead, the price level and NGDP adjust to changes in the market for base money. None of this has anything to do with the lending channel.<br /><br />Some might argue that this will only work if the central bank has credibility, if investors believe that QE will raise the future level of the base, and hence future NGDP. But we know for a fact that investors do believe this, as markets react violently to even tiny hints of changes in QE. And they do so in a way that clearly indicates that QE is expansionary. That’s why we know for certain that Milton Friedman and the MMs are correct, and John Cochrane and Andy Kessler are wrong. As a fellow Chicagoan, I strongly urge Cochrane to dump the Keynesian pushing on a string metaphor, and go back to the Chicagoan monetarist tradition."Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60242016465070624092013-05-24T14:32:21.088-05:002013-05-24T14:32:21.088-05:00Anonymous,
And by paying interest on reserves, th...Anonymous,<br /><br />And by paying interest on reserves, the Fed gains control of the credit origination process. If credit expansion is fueling inflation AND putting downward pressure on interest rates through trade imbalance, the Fed can hit the breaks by paying a higher interest rate on reserves than the market is requiring for private credit.<br /><br />Hence, reserves are retained by banks rather than being lent out.FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-9678114863944546862013-05-24T14:13:37.621-05:002013-05-24T14:13:37.621-05:00That's right, it's a housekeeping issue wh...That's right, it's a housekeeping issue which can be fixed in half a second by moving IO(E)R well below the Funds target.DOBhttp://catalystofgrowth.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7089971401587208122013-05-24T13:45:31.741-05:002013-05-24T13:45:31.741-05:00Scott Sumner at the Money illusion.com
"Tyle...Scott Sumner at the Money illusion.com<br /><br />"Tyler Cowen links to a John Cochrane post, which discusses a WSJ piece by Andy Kessler:<br /><br />The usual thinking is that bank reserves are “special.” They are connected to GDP in a way that Treasuries are not. In the conventional monetary view, MV = PY. Bank reserves, through a multiplier, control M. The bank or credit channel view says that bank reserves control lending and lending affects PY. The red M&Ms, though superficially identical, have more calories.<br /><br />In Andy’s view (my interpretation), that is turned around now. Now, Treasuries supply more “liquidity” needs than bank reserves, and (more importantly) the supply of treasuries is more connected to nominal GDP than is the supply of bank reserves.<br /><br />Part of this inversion of roles is supply. In place of the usual $50 billion, we have $3 trillion or so bank reserves. Bank reserves can only be used by banks, so they don’t do much good for the rest of us. Now, they just sit as bank assets in place of mortgages or treasuries and don’t make a difference to anything. More treasuries, according to Andy, we can do something with.<br /><br />More deeply, constraints only go one way. Normally, the banking system is up against a constraint. Reserves pay less interest than other assets, so banks use as little as possible. Now, they are awash in liquidity. You can’t push on a string, as the saying goes.<br /><br />It makes me a bit dizzy seeing John Cochrane using the Keynesian “pushing on a string” metaphor that Milton Friedman discredited decades ago. More seriously, there are several fallacies in this argument. Let’s assume for the moment that reserves and T-bills are both non-interest-bearing; why would monetary policy have any impact? The answer is simple; markets don’t expect interest rates to be at zero forever.<br /><br />OK, but why does that make base money special now, when T-bills also pay no interest? Because base money is the medium of account, whereas T-bills are not. In the future a change in the supply of T-bills will not (significantly) change the price level, it will merely change the nominal price of T-bills. In contrast, a change in the supply of base money can never affect the nominal price of base money, which is always one. Instead, the price level and NGDP adjust to changes in the market for base money. None of this has anything to do with the lending channel.<br /><br />Some might argue that this will only work if the central bank has credibility, if investors believe that QE will raise the future level of the base, and hence future NGDP. But we know for a fact that investors do believe this, as markets react violently to even tiny hints of changes in QE. And they do so in a way that clearly indicates that QE is expansionary. That’s why we know for certain that Milton Friedman and the MMs are correct, and John Cochrane and Andy Kessler are wrong. As a fellow Chicagoan, I strongly urge Cochrane to dump the Keynesian pushing on a string metaphor, and go back to the Chicagoan monetarist tradition."Edwardnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5327712731257890232013-05-24T13:34:45.636-05:002013-05-24T13:34:45.636-05:00Bankers and shadow bankers are the very same peopl...Bankers and shadow bankers are the very same people.<br /><br />The banks create shadow banks when it becomes economically viable to do so.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52762330855483402432013-05-24T13:19:52.071-05:002013-05-24T13:19:52.071-05:00"Can't we fix things so they just buy the..."Can't we fix things so they just buy the MBS with their initial cash?"<br /><br />You don't actually need any cash to buy, MBS. Most MBS investors never pay for them. The settlement process for MBS is specialized, and expensive. <br /><br />The MBS investor calls his bank/broker and declares his interest in buying MBS. He sketches the characteristics of the MBS he wants to buy, and the Broker makes a commitment to deliver securities that meet the criteria of the trade at some agreed upon future date. On settlement day, the broker will deliver the MBS, and the buyer will deliver his cash. The broker works with his originators to source mortgages that meet the criteria of the trade.<br /><br />A few days before the settlement date, the buyer calls up the broker and says, rather than sending the those MBS next week, why don't we push off settlement for a month. I'll hold onto my cash, and you hold onto the securities. You can collect the first month’s payment, and you can pay me for the privilege. Usually, the broker is thrilled to do this, because he has committed to sell more MBS than he was actually able to source by that delivery date. <br /><br />Technically, the buyer sells the bonds back to the bank, and opens a new buy for the future settlement date. Functionally, this, too, is a REPO.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83749713900159254752013-05-24T12:57:27.025-05:002013-05-24T12:57:27.025-05:00Typically, the Repo peroid is 1 day. This is why ...Typically, the Repo peroid is 1 day. This is why Lehman had a liquidity crisis turn into a solvency crisis. Not only was it levered 40-1 at the peak, but most of that 40 was refinanced every single day.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52024276207217877552013-05-24T12:54:14.312-05:002013-05-24T12:54:14.312-05:00Prior to 2008, the theory was -- reserves did not ...Prior to 2008, the theory was -- reserves did not pay interest, and loans did pay interest. So, if the Fed bought Bank X's trearies, increasing thier reserves, the bank would write a loan againt those reserves, which would drive real economic activity.<br /><br />But if the Fed pays IOR, then the bank just lets the reserves sit at the Fed with no increase in lending.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-51271631758958903922013-05-24T10:09:23.279-05:002013-05-24T10:09:23.279-05:00Shouldn't we be able to look at how markets re...Shouldn't we be able to look at how markets react to QE pronouncements in order to determine if they're contractionary or not? Granted, we'd have to know what the previous expectation was so we could adjust for how much new information is being learned, but it doesn't sound insurmountable.Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-54802993450540139712013-05-23T22:53:55.738-05:002013-05-23T22:53:55.738-05:00Are you implying that the rest of my comments aren...Are you implying that the rest of my comments aren't gems? :)DOBhttp://catalystofgrowth.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-1200677460437483822013-05-23T19:36:12.022-05:002013-05-23T19:36:12.022-05:00http://www.time.com/time/photogallery/0,29307,1947...http://www.time.com/time/photogallery/0,29307,1947816_2013204,00.html Notice to basketballs http://www.time.com/time/photogallery/0,29307,1947825_2013232,00.html Notice the backboard<br />This can only be done through extreme dedication And focus. And a lot of time. Very impressive.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-1105870167379896082013-05-23T18:34:15.042-05:002013-05-23T18:34:15.042-05:00The Fed lends its securities (reverse repo) quite ...The Fed lends its securities (reverse repo) quite regularly to primary dealers. Data are available at http://www.newyorkfed.org/banking/tpr_infr_reform.html<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88988653490929638562013-05-23T18:22:01.436-05:002013-05-23T18:22:01.436-05:00Since seignorage is negative (t-bill yield < in...Since seignorage is negative (t-bill yield < interest on reserves), there's a sense in which there's a base money glut. This is dumb because it unnecessarily adds to the government deficit (compared to lowering IOR and reducing reserves). But is it a macro problem? No.<br />Maxnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67981672833629495342013-05-23T18:04:25.675-05:002013-05-23T18:04:25.675-05:00Anonymous: You have to expand this comment. The Fe...Anonymous: You have to expand this comment. The Fed is obviously not repoing (borrowing against) its treasuries as that would undo the expansion of reserves. It sounds as if you're saying that the Fed directly lends its Treasuries, as one would lend a stock to a short-seller. Is this true? Do you know where one sees that on the Fed balance sheets? You failed the "use small words" request!<br /> John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-53625482704288897252013-05-23T17:56:20.255-05:002013-05-23T17:56:20.255-05:00Kessler apparently isn't aware that the Fed us...Kessler apparently isn't aware that the Fed uses the tri-party repo system. Those assets of the Fed are being lent out all the time. There is no shortage of collateral.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-21143012911788403882013-05-23T17:02:36.656-05:002013-05-23T17:02:36.656-05:00Three gems in these comments:
*The distinction th...Three gems in these comments:<br /><br />*The distinction that's made between Treasuries and bank reserves is unwarranted. One can be turned into the other for a handful of basis points in the repo markets<br /><br />*If truly there was massive excess demand for Treasuries (because somehow they can be used in ways that reserves cannot be), Treasuries would be repo'ing massively special. <br /><br />*If that were the case, the Fed would probably step in and loan out its treasuries. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28930182708003480712013-05-23T16:43:12.484-05:002013-05-23T16:43:12.484-05:00You are right. How can we expect significant lendi...You are right. How can we expect significant lending from traditional banks when rates are at all time lows, and they are being rewarded for not lending by interest on their reserves? <br /><br />So the Fed pumps up liquidity but nothing happens with banks. Sounds like a different approach is needed.KyleNhttps://www.blogger.com/profile/15766641765942339253noreply@blogger.com