tag:blogger.com,1999:blog-582368152716771238.post2208693560412009179..comments2024-03-28T11:14:02.660-05:00Comments on The Grumpy Economist: Dudley on reservesJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-582368152716771238.post-63769078462601793192020-01-08T10:55:21.672-06:002020-01-08T10:55:21.672-06:00"I think there was some residual monetarist f..."I think there was some residual monetarist feeling..."<br /><br />Under Greenspan and early Bernanke, the NY Fed targeted excess reserves (a trivial amount) while letting total reserves float. I don't see how this had anything to do with monetarist thinking.<br /><br />Consider: The NY Fed’s model predicted the amount of reserves its member banks would require, and then the trading desk simply added $1.5 bln (the targeted excess) to determine its trades. So total reserves floated, money was endogenous, and the tweaking that needed doing to achieve the fed funds target was highly exaggerated. Fed traders will tell you they only needed to run their model and target the $1.5 bln, since markets automatically adjusted to the FOMC’s published rate target.<br /><br />But the main point I wanted to add is that the old method, while not monetarist, has roots in a free-market philosophy that the Fed should only be in the background when it comes to credit creation. With that philosophy, you might rule out IOR while letting others, especially the private sector, determine the total amount of credit in the economy.<br /><br />In other words, you might choose to influence credit creation only by setting wholesale interest rates, not by QE or recent policies that some call QE and others don’t. QE and QE-light mean that the Fed plays a bigger credit-creation role through more active and lasting security purchases than with the old-style OMOs and without IOR. That seems relevant on a free-market-oriented blog ;)<br />Daniel Nevinshttp://nevinsresearch.comnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37506514615491882192020-01-08T09:02:57.174-06:002020-01-08T09:02:57.174-06:00"The main argument for a small balance sheet ..."The main argument for a small balance sheet and minimal reserves that I hear at the Fed is entirely political: Congress is too dimwitted to understand that the Fed is not subsidizing banks by paying interest on reserves, and they think the balance sheet is there to be raided for political projects. It is extremely unhealthy for an agency such as the Fed to do things it understands are bad economic policy out of fear that Congress will do what that agency thinks are silly things."<br /><br />John, plenty of critics of the floor system, myself among them, understand perfectly well that interest on excess reserves isn't necessarily a subsidy to banks. Nor do most of us want to eliminate it. Instead we favor a corridor system with an IOR lower limit of the sort that has been quite successfully employed by many nations. <br /><br />As for the possibility that a Fed balance sheet of potentially unlimited size might be "raided for political projects," taking that risk, and political considerations more generally, into account isn't "bad economic policy." On the contrary: ignoring political reality is bad policy. George Selginhttps://www.alt-m.org/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6316222170609873842020-01-07T21:50:05.322-06:002020-01-07T21:50:05.322-06:00I hope a less-dimwitted commentator than myself wo...I hope a less-dimwitted commentator than myself would like to explain to me why paying interest on reserves is not a subsidy to banks. Anybody interested?<br /><br />Or perhaps more accurately, paying interest on reserves is part of a larger regulatory framework that restricts competition in banking, pays the banks interest, saves them when they take too much risk, and funds it all through seigniorage, which is a tax on holders of nominal-value assets. We shouldn't pick on any part of this framework in isolation, but isn't it correct that the central bank performs a routine and massive transfer of wealth from the general population to banks, by paying interest on reserves, among other things?Michael Lhttps://www.blogger.com/profile/03825467898707191856noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38293855897053615592020-01-07T13:15:06.873-06:002020-01-07T13:15:06.873-06:00At the heart of all of this is the view that inter...At the heart of all of this is the view that interest rates are used in aggregate demand management. Empirical evidence suggests it does but I've never understood the credible mechanism behind it.James Carlylehttps://www.blogger.com/profile/06778250145758547603noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-23357248214254360712020-01-07T11:50:34.268-06:002020-01-07T11:50:34.268-06:00"It involves rewarding people simply for hoar..."It involves rewarding people simply for hoarding money." Oh, dear, it must be sinful! Do we envy the grocer for hoarding our food, and say he should not be rewarded?<br />Why should any discussion pander to the idea that "the rich" are going to benefit more than "the poor"? This is a shoddy, confused sociology and worse economic analysis.<br />I appreciate nobody reading this agrees with Marx about social classes and conflict. Unfortunately all modern journalists sincerely follow his fallacy.<br /><br />Joe Cobbhttps://www.blogger.com/profile/15119712576012191219noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86648958747990733722020-01-07T11:44:54.058-06:002020-01-07T11:44:54.058-06:00The "world economy" [the 'open part&...The "world economy" [the 'open part'] is one (closed system) economy at its best, so global arbitrage is what would affect the Units of Accounting used by different governments (exchange rates, domestic price inflations). <br />Not "money" but "capital" flows easily across borders. Subtle conceptual shift. (i.e. ownership by a foreigner)<br />Joe Cobbhttps://www.blogger.com/profile/15119712576012191219noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13375276821522032442020-01-07T11:44:24.595-06:002020-01-07T11:44:24.595-06:00Take total debt (including SS trust fund) from Fre...Take total debt (including SS trust fund) from Fred. Divide by interest charges. The division yields 2.5%, growth is between 1.9% and 2.3%. <br /><br />What is missed are the rollovers, we generally borrow at yesterdays higher rate for today's spending. We used to pay the ten year rate, using the same calculation. Now we pay the 30 year rate.Matt Younghttps://www.blogger.com/profile/08404998406161097199noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-14513838141851558062020-01-07T06:41:01.532-06:002020-01-07T06:41:01.532-06:00"The interest the Fed pays on reserves largel..."The interest the Fed pays on reserves largely determines interest rates elsewhere"---John Cochrane.<br /><br />Well...do we have globalized capital markets and is money fungible? Yes.<br /><br />So, money flows easily across borders? Yes/<br /><br />So, we really have several major central banks undertaking monetary policy actions, including the ECB, the Fed, the PBoC, the Bank of Japan, and perhaps the BoE and Swiss National Bank? Yes. <br /><br />Seems to me long-term interest rates are set globally then, by the global market and perhaps the combined actions of all the major central banks. <br /><br />Does it make sense to talk about a lone central bank and any particular national economy, as if that economy is a closed system? <br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83238405033445053962020-01-06T18:36:39.505-06:002020-01-06T18:36:39.505-06:00As long as interest rate is below GDP growth, I do...As long as interest rate is below GDP growth, I don't see why you are concerned about the rich hoarding money.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-65855502477868659742020-01-06T14:47:17.632-06:002020-01-06T14:47:17.632-06:00A problem with a very large stock of reserves and ...A problem with a very large stock of reserves and controlling interest rates by adjusting the interest rate paid on reserves is that it involves rewarding people simply for hoarding money. Or to be more brutal, it involves rewarding the rich for hoarding money.<br /><br />To that extent, the MMT idea, namely a permanent zero rate is better. As for controlling demand, that can be controlled by adjusting the deficit, which in turn changes the size of the national debt, which in turn influences demand. <br /><br />But it would probably be going too far to say the rate of interest should NEVER vary from zero. Clearly adjusting interest rates is a useful tool to have. <br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.com