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Feb, 19th CSR Fed Report About QE. Things That Make You Go Huh?

It rained here today and so I had time to read the whole 33 page report. Some of the things that caught my eye. (with my comments in the parenthesis)

"Furthermore, inducing spending and discouraging saving are a goal, not an unintended side effect, of QE."

(Discouraging saving is a GOAL of QE...not an unintended side effect...interesting)

"For example, if QE succeeds in reducing the unemployment rate, then net savers who would otherwise be unemployed are likely to be spending more even though their interest income is lower."

(I've never come across an unemployed person who was a "net saver".)

"Compared with the past, asset prices do not look bubbly in large U.S. markets by standard measures. It is difficult to be certain, however, because standard economic theory does not provide a way to identify bubbles and asset bubbles often become apparent only after they have burst. Bubbles are undesirable because, as the recent financial crisis demonstrates, they result in a misallocation of resources and can lead to excessive volatility in the broader economy."

(Standard economic theory does not provide a way to identify bubbles and asset bubbles often become apparent only after they have burst.? Well, that’s because its Keynesian economic theory! Bubbles are undesirable? Really? Then why keep fueling bubble after bubble after bubble?)

"Since 2008, the Fed has paid banks 0.25% on bank reserves held at the Fed. This policy has also been criticized on the grounds that banks should not be given an incentive to hold funds at the Fed that could be lent at a time when credit is tight. If the interest rate on bank reserves were lowered to zero, banks would have more incentive to lend those funds out..."

(You Think?)

"The issue could be viewed from a different perspective, however—what economic benefit is offered by paying interest on reserves, and does it outweigh the costs? If paying interest on reserves offers a marginal disincentive to lend and no appreciable economic benefit at this time, then there arguably appears to be little rationale for keeping it."


"Economist Alan Blinder, former Vice-Chairman of the Fed, has proposed to first reduce the interest rate on excess reserves to zero, and if that causes no problems, to then begin charging banks a small penalty interest rate for holding excess reserves. (Lending out reserves would cause excess reserves to decline and required reserves to rise, however.) It could therefore be argued that charging a penalty rate on reserves would penalize banks for something that they did not cause and only indirectly influence. Further, it would create an incentive for banks to avoid accepting deposits, which could potentially reduce the stability of the banking system."

(God Forbid, don't ever do ANYTHING to penalize the banks!)

"Any reduction in the interest rate on reserves would increase the Fed’s net income, which is largely remitted to the Treasury, where it becomes general revenues. Therefore, it would decrease the budget deficit. It would also decrease banks’ income and profits. In a competitive market, economic theory predicts that banks would pass those costs on to customers."

(Okay, DECREASING the budget deficit is a GOOD thing! Decreasing banks income and profits...God Forbid, don't ever do ANYTHING that would do that! In a competitive market.? What competitive market? and of COURSE the banks will pass the costs on to customers. God Forbid, the banks having to absorb any costs!)

"In the United States, the presence of over $1 trillion in excess bank reserves suggests that illiquidity is not the main factor currently holding back bank lending..."

($1 trillion is excess bank reserves only "suggests" that illiquidity is not the main problem? I think we can safely remove illiquidity from the main problem list.)

"Some economists have argued that the Fed should add more stimulus to the economy by modestly raising its inflation target and pledging to do whatever it takes to reach that target. (Currently, the Fed has set a “longer run goal for inflation” of 2%. They argue that this would demonstrate to individuals that the Fed had a greater dedication to stimulating the economy than individuals currently believe, and a change in beliefs would in and of itself by stimulative. Proponents believe such benefits to include more flexible wages (because of the greater possibility that wages could fall in real terms while still rising in nominal terms) and the likelihood that the federal funds target will be further from the zero bound when monetary easing begins in the future, so that more easing can take place before the zero bound is reached."

(When monetary easing begins in the future? You’re planning to handle the next crisis like you have handled this one?)

"There are at least two potential pitfalls to this approach. First, such a proposal seems to rest on the belief that only faster growth would lead to higher inflation, but that is not necessarily the case. Higher inflation could also occur through an increase in individuals’ expectations of inflation without a change in their expectations of growth. In that case, inflation would reach the higher target, but the economy would be no closer to full employment. Second, the textbook prescription for raising inflation would be for the Fed to increase the monetary base. As a result of QE, there have been extraordinary increases in the monetary base that have not led to any demonstrable increase in inflation thus far. Unless inflation rose simply because the announcement changed expectations, it is unclear what other tools supporters of a higher inflation target intend for the Fed to use to achieve higher inflation given that increasing the monetary base has not succeeded. If the Fed pledged to achieve higher inflation and then failed to achieve it, it could undermine the Fed’s credibility."

(The reason there is no inflation so far is because $1 trillion in member bank reserves is sitting at the FED. As long as it sits there and doesn't enter circulation, inflation can be held at bay. But member banks are still getting paid interests on that $1 trillion that is sitting there (on a computer screen) doing nothing. And God Forbid, we would never want to undermine the Feds credibility!)

"From the perspective of the world economy, the drawback to foreign exchange intervention is that the stimulus comes from an offsetting contractionary effect (referred to as “beggar thy neighbor”) on other countries, given that for any bilateral exchange rate, when the exchange rate depreciates for one country, it appreciates for the other one. Since the United States has the largest economy in the world, this consideration is likely to be important. Devaluation in one country can lead to cascading rounds of compensating devaluations in other countries that ultimately leaves no country better off."

(sometimes referred to as “currency wars”).

"Complicating any efforts to prevent the Fed from using unconventional policy tools are two factors: (1) inflation has remained low, so unconventional policy has not proven inconsistent with the Fed’s mandate thus far; and (2) limiting the Fed’s broad discretion could hamper its future ability to respond to unforeseen circumstances."

(So, the reasons they should not stop printing money is because it’s not inconsistent with their mandate and they might be told they can't do it again in the future)

"Given that it is unlikely that the economy would return to full employment significantly sooner if the Fed purchased assets at a faster pace, some have argued for policies that are even more unconventional as a means to additional monetary stimulus. The economic benefits of such policies would need to be weighed against their costs—the economic risk that they would lead to high inflation and the political risk that they would undermine the Fed’s political support and possibly its credibility."

(The REAL bottom line. God Forbid, NEVER do anything that may cause "political risk" or undermine the Fed’s political support and possibly its credibility! And lets not forget THE BANKS!)

I don't recall any mention of doing what was in the interest of the American People

Download the .pdf here

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If any sane person stopped

If any sane person stopped for a second and pondered:
What kind of government taxes my retirement fund and my ability to support myself and spouse at the end of my life?;
they'd soon realize the sad truth that they intentionally do not want you to be able to support yourself. Why would a free, self sufficient man require government?

Southern Agrarian