QE2

Regardless of what Section 2a (added in 1978) of the Federal Reserve Act says, the Fed exists first and foremost to serve the banks. As a result, QE2 was not designed to create jobs but to provide the banks the seed capital necessary to loan themselves money (nobody else is borrowing, and they have a lot of debt to rollover) to use for speculation in commodities that are consumer staples. The increased prices that this will cause will create the illusion of inflation, but it will lead to a version of stagflation that will shift aggregate demand from discretionary spending to the bare necessities, which will increase unemployment (which you view as a bug but the banks view as a feature). A banker buddy of mine at Credit Suisse calls this “screwflation” (not approvingly, by the way). So, don’t pay attention to the smoke and mirrors, deflation is what is in store.

Your assessment that the tax cuts will prove “counterproductive and unsustainable” assumes that the goal is to reach full employment. But that’s not the goal. No, the goal is to recreate 70s style stagflation, which prompted dropping Keynesianism in favor of neoliberal Chicago School monetarism, so as to prompt dropping neoliberal Chicago School monetarism in favor of neoliberal Austrian School rentieronomics that lock in the ill-gotten gains that the Chicago School’s ponzinomics netted the rentiers. When you follow Hayek’s advice, all roads lead to serfdom.

Infrastructure projects, etc. Eh?

Pr Q said:

With the five-year bond rate at just over 1 per cent, the amount the private sector would demand to hold these bonds (that is, the annual interest payment) is about $7 billion, which is rounding error in the context of the current crisis.

Its interesting to watch federal agencies feverishly run through the various contingency plans for economic salvation, like a test pilot trying to pull an experimental plane out of a slow-motion spin. (Or maybe ER staff trying to revive a flat-lining patient, laid out on the guerney.)

Plan A: slash the interest rates to zero – check. (pushing on a string.)
Plan B: bail-out bankrupt banks – check. (paid for itself, but banks still recalcitrant)
Plan C: massive fiscal stimulus – check. (too little, too late)
Plan D: quantiative easing Mks I, II, III… – check (p*ssing in the wind)
Plan E: ??? (There appears to be no plan E.)

Yeah, the manual ends abruptly at Plan D.

Meanwhile the US jumbo continues its relentless descent towards the deck, with options running from soft-landing to crash-and-burn.

Pr Q said:

But what is really needed here is fiscal stimulus focused on job creation, combined with a long-term plan for fiscal consolidation (that is, higher taxes and/or lower expenditure).

You forgot to mention a pony for Christmas.

Pr Q said:

Shorter Quiggin: There is no way the current legislative REPs are going to sign off on a large fiscal stimulus. So we’ll all be ruined.

Jesus, its a pity your wet blanket couldnt be used to stop global warming. Its certainly big enough.

Meanwhile the US jumbo continues its relentless descent towards the deck, with options running from soft-landing to crash-and-burn.

Economy’s been growing for the last five quarters, private sector employment’s been rising for the last nine months.

Now, better policies could have made this happen better and faster and more, but it’s still not crash-and-burn.

“Economy’s been growing for the last five quarters, private sector employment’s been rising for the last nine months.”

Debt has been increasing at unsustainable rates, is already at the point where, should T bond interest rates return to historically plausible levels the entire budget would be consumed by debt servicing. If you need to maintain an unsustainable policy to keep the economy looking vaguely ok, you ARE in trouble, even if you can put the final reckoning off for a few years at the cost of making it much worse.

It’s kind of like the difference between being normally wide awake, and swallowing another upper towards the end of a binge. If you squint they might look the same, but they aren’t, really.

Essentially the argument right now is whether to crash now, which would be bad, or crash later, which would be worse. But a crash is now inevitable, for all that “After me the deluge” is a more popular policy among politicians than, “Put on your hip waders, we’re having the flood next Tuesday.”

I don’t follow DeLong or Quiggin. Corporate bonds, commercial loans, home mortgages, etc., all price off the T-bond rate, so driving that rate down drives all the other rates down too. The $7 billion number doesn’t seem like the right measure.

With interests rates so low there is no reason for the Government not to go on a building binge. We should be laying fiber optic cable to every city and town, investing in green energy power plants, rebuilding roads, improving public transit, ect. I know that this won’t happen, but it is what should happen.

I don’t follow DeLong or Quiggin. Corporate bonds, commercial loans, home mortgages, etc., all price off the T-bond rate, so driving that rate down drives all the other rates down too. The $7 billion number doesn’t seem like the right measure.

That’s exactly the point: that 600 billion is a drop into that ocean of bonds, and will drive down rates by only a very small amount.

Look at it this way: QE replaces bonds in the market by new zero-interest cash, and the interest rate indicates how much more people currently prefer holding spendable cash instead of bonds that can only be spend 5 years later.

If you look at very short-duration bonds, they have nearly zero interest: at the margin don’t want to spend the money anyway, so they don’t care whether they have cash or bonds. Quantitative easing has no effect there, because bonds and cash are seen as almost the same.

For these 5-years bonds, the difference is not zero, but still small. The 7 billion indicates how small: it’s what the market is willing to pay to have 600 billion of cash instead of 600 billion of bonds.

The low rate indicates that people currently see 5-year bonds as almost the same as cash, so you need to replace a lot of bonds by cash to make a difference.

R Kutta, the government now pays interest to the fed, who turns its profits back over to the government. So it’s the same.

The reason to do it this way is to split two choices: the size of the deficit is set by the political system, but whether it is paid for by loans or printing is done by technocrats. It is a system that worked well for decades, but whether it is still the right system is a question beyond my pay grade.

Why not just build the stuff with the new money and pay zero interest?

That would be soc1alism. Can’t have that, now can we.

oops: http://www.youtube.com/watch?v=vVkFb26u9g8&feature=related
Money as Debt. This link is active.

The interesting thing re: this topic, that no economist [my guess] has paid much attention to is the fact that the Fed could have done all of this imaginative intercession in the financial sector of the economy back in 2008, bailing out the banking/insurance sector by simply buying up every sort of paper available in the financial markets. If it had done so in a timely fashion, like earlier in the Spring of 2008, it could have prevented much of the debacle that followed.

If the banks had been allowed to write off their worthless paper holdings at a ‘manageable pace’, the Fed could have simply bought up all kinds of debt and paper assets at the same time and bank reserves across the country would have been maintained at acceptable levels. All the dollars spent on those assets would have quickly found their way into the loanable reserves of banks everywhere, repairing their balance sheets.

It would have had to buy up trillions of dollars of worthless paper, at a level far exceeding the current level of QE, but doing so would have actually been no more unacceptable than what the Fed is doing today. It is outrageous, but I doubt there are more than a few economists in NA that would be willing to point the finger at the Fed and say “they should not be allowed to do this!”

I would argue that the only reason the Fed did not do this “bailout” all by itself was because it/they feared the political backlash that might ensue, if they were they to act so boldly and obviously re: their ultimate purposes, which had little to do with the public interest, but a lot to do with protecting the interests of the financial elite. They were willing to allow the country to suffer through a severe recession in order to make its immoral agenda seem ‘necessary’ in some way.

Apparently, the Fed collective agreed that it could not act on its own, in such an unprecedented way, unless it had some political cover. Congress would be willing to give the Fed permission to use ‘extraordinary’ powers if it also had a big role to play in ‘saving the economic system from utter collapse.’ Clever, very clever.

Zamfir:

“That’s the essence of democracy, right? That parts of the state need “political cover” before they can do big, unprecedented things?”

I’m not quite sure what you mean by this statement, but the Fed is not ‘part of the state’, actually. It is a privately-owned entity, and is thus a part of the private sector. It has authority sanctioned by and limited by Congress, but it essentially serves the commercial banking industry.

Yes, they are careful to promote the idea that they are part of the government, but they actually are not. The Fed truly is “the Bankers’ [Central] Bank.”

James, the Fed is not “owned” by anyone. It’s pretty close to a foundation. But its profits go the US state, which also appoints its leadership, sets its goals and has a right of oversight.

In Sweden, most of the public sector is connected to the government in a similar way. Strangely, no one thinks that Sweden has such a small state.

The Fed receives no funding whatsoever from the U.S. government.
That’s pretty similar to the way a state oil company is funded: the company gets a valuable right from the government (to drill for oil, or to literally print money and buy assets with it), subtracts its expenses from the profits, and hands over the rest to the government.

Note that the “stock” of the federal reserve banks doesn’t have any ownership rights associated with it. It doesn’t give a claim on the profits (only on a fixed dividend) and it doesn’t give a vote in the control. It only gives a (non-proportional) vote in the choice of directors of the regional banks, but those directors are subordinate to the Board of Governors, which is officially a government agency.

So the terminology is simply misleading. Banks own ‘stock’ in the Federal Reserve banks, they get ‘dividend’ and appoint some of their ‘directors’. But the stock isn’t like normal stock, the dividend is not like dividend and the directors are not the highest rung of the hierarchy.

Doesn’t mean banks have no influence, just that the stocks are not the channel of influence. European banks have lots of influence on the ECB too.

“actual government entities are funded by tax dollars, or dollars borrowed by taxpayers.”

That is by no means true as a universal proposition: there are plenty of turnpike authorities, bond issuing agencies, etc. which are self-funding, but which are definitely “government entities.”

” (I am more than half convinced that Bernanke and some others on the Fed are partisans.)”

I’m convinced that Beranke and the rest are morons. Nothing works, because the haven’t a clue.

.

Guys – a plea. It’s meaningless to discuss how big the deficit should be now or in the future, without reference to two concepts (1) sector financial balances (govt deficit is balanced by private sector delevering), and (2) fiscal sustainability (monetarily sovereign govts face inflation risk, but NEVER solvency risk).

Quiggin’s saying we should plan for fiscal consolidation down the road indicates he probably thinks of the govt like a household or business which needs to pay down its debt – this is Bretton Woods or Gold Standard thinking, and inapplicable in today’s era (unless you’re from the Eurozone or run a currency peg).

Strongly suggest this for starters: Introduction to MMT

MMTP

Looking back over the thread again, I see that zamfir and ajay imply the Fed is a mix of public and private, but claim it is more public than private. Let’s look at that.

First, the regional Feds. Banks own stock and get dividends, but these dividends are fixed, not variable like most stock dividends. According to ajay, this is not a “true” dividend. If it’s real money, it’s a real dividend. If I invested in a local business on the understanding that my share of the profit would be a constant amount each month regardless of actual profit, this would be unusual, and riskier than doing such a thing with the Fed, but no one would deny that I was engaged in a private enterprise for profit. The unusual nature of the dividend does not even move it closer to being a government operation. Also note that zamfir’s statement that the member banks do not have a claim on the profit is simply false: a fixed dividend is a claim on the profit, just like any other dividend. It is a limited claim, but to compensate that, it is without risk. The statement that the Fed turns its profit over to the government is also, for this reason, not entirely true.

And it is real money: 6% per year, without risk. What percentage of Dow stocks provide 6% in dividends per year, decade after decade, throughout the business cycle? Certainly not without risk. Why are the banks making a profit on a government entity that largely represents their interests anyway?

Nor do the restrictions on alienability matter. Employee stock ownership often involves restrictions on alienability; so do some forms of real estate ownership. No one calls these government ownership in consequence; it would be silly. A corporation that has a limited membership, sells stock only to those members in fixed quantities, and only allows sales back to the corporation? That’s my neighborhood grocery coop. A little unconventional, but clearly a for-profit private enterprise, not at all a government entity, nor, for that matter, a foundation.

As for control, I think I’ve already showed that the private banks have a substantial voice, not only in the regional Feds, but in the FOMC too. But let’s look at that more closely.

Suppose I want to control the FOMC, and I have a choice of the following two hands:
A) I appoint 7 of the 12 voting members and none of the non-voting. They then serve 14 years terms from which I cannot fire them. They have an explicit mandate to tell me to bugger off if they feel like it, and, in fact, take considerable pride in this.
B) I appoint 5 of the 12 voting members and all 7 of the non-voting. They serve 4 year terms, but only one year voting, so I can remove them in a reasonable time if they don’t do what I want. I also have the verbal influence of the non-voting members, giving me the majority of the people in the room. Anyone who’s been in a corporate meeting knows that the voting is not the whole story. Meetings are conducted in the medium of language.

“A” is the hand the public has; “B” is what the banks get. Which is the better hand? I would clearly say “B”. It’s not completely dependable, but it is more likely to get me what I want. If that is the case, then the banks have stronger control over the FOMC than the government, representing the public, does.

So I’m with James here. More private than public.

zamfir, the defining feature of a loan is expectation of repayment, and there is none here, so it is not a loan. The defining feature of ownership is control: it is the Regional Feds in which the banks hold stock, and they select two thirds of the directors of those institutions. That is definitely control. If the federal government transfers a dollar to a regional Fed, what happens to that dollar depends on whether the Fed has fulfilled its dividend obligation to its shareholders. If not, the dollar could indeed go to the banks, at least if they choose to press the matter. Furthermore, the claim of the banks on profit is actually much stronger than that of traditional shareholders. Ordinary dividends are discretionary on the part of the issuing institutions. They can choose to reinvest their profits instead, with “reinvest” defined very broadly: they could purchase a new fleet of company cars for executive use. The banks have a mandatory claim on the Fed. And, in fact, it is not true that in traditional public corporations, owners by definitions share in the profits and losses. You only share in the profits if the company chooses to issue dividends (and this is not purely theoretical; many do not), and the major purpose of the whole system is that you will not have to share in losses beyond your investment.

You don’t seem to acknowledge that the FOMC, not the Board of Governors, is the main place where Fed power in exercised, and that in the FOMC, the Regional Directors do indeed have binding, not merely advisory, votes, which the Governors cannot simply erase. If unanimous, the Governors could prevail, but the Directors do have real votes, and a large number of advisory voices in addition. In case there is any doubt as to where the power is in the Fed, let me quote a House Report:

“The FOMC, the Federal Reserve’s ,key monetary policy decision-making unit, formally meets eight times a year in Washington, D.C.[3] It oversees open-market operations, the principal tool of monetary policy which influences short-term interest rates and determines reserve and monetary growth. It also directs foreign exchange market operations of the Federal Reserve System. The FOMC is made up of the seven Board Members and five of the 12 Reserve Bank presidents.[4]. These presidents bring “grass roots” information to the meetings and, historically, have had relatively conservative voting records due in part to their insulation from political pressures.[emphasis added, and you notice the Directors lack of insulation from financial industry pressures is graciously unmentioned -M ]”

So the FOMC, not the Board of Governors, is the ball to keep your eyes on. And the Regional President votes there are real votes, not merely advisory. This paragraph neglects to mention that all regional presidents attend the FOMC meetings, not just the five with votes.

As you yourself wrote:

“Of course, that would change if the Fed was also part of private command hierarchies, and tied stronger to those than to the hierarchy of the state. This would be the case if the votes of directors where binding, which they are not. They are only recommendations to the board, which the board can in principle ignore. The board usually doens’t, but that is not formal control over the board.”

The counterfactuals here are actually true, save some details. The directors are chosen by the private command hierarchies of the member banks. Their votes in the FOMC are binding, not advisory. The Directors are tied more closely to the banks than the Governors are to the state because the long terms and avowed independence that deliberately curtail public control of the Governors have no equivalent for the Directors.

As for the Courts, the reason the question of private vs. public control doesn’t come up for them is that there is no private control. The Court system is not terribly democratic, and one could debate the merits of that. But there are no judges appointed by private actors, at least not not officially. And the highest court consists entirely of people appointed by elected officials. If the Supreme Court were like the FOMC, it would look like this:

1) 5 of the justices would be appointed as now.
2) 4 of them would by appointees of private for-profit corporations.
3) The public appointees would be, as now, for life, but the private ones would be for six-year terms. If the corporations accidentally put in Ralph Nader, they can correct the error, but the public gets stuck with Scalia for decades.

That looks considerably worse than what we have.

One thing that bothers me about Pr Q’s analysis (and De Long and Krugman) is that he makes no mention of the most important effect of QE: depreciation of the USD. There are so many extra USDs out there in global circulation that the price of existing USDs is now in serious decline. Which will certainly help US exports, following Eco 101.

The USD has been on a steady decline for the second half of the naughties. But the USD now seems to have broken through and stayed below the psychologically crucial 80 barrier after the first round of QE in late 2009.

Obama has certainly focused on export-led growth, from the get-go. And this seems to be having the desired effect on US exports which have been leading the recovery. US export orders are on the up and up.

So why haven’t Krugman, De Long and Quiggin focused on the USD? There are other blind spots in their analysis of the causes and cures of the GFC, most noticeably the attempt to downplay the role of Fannie Mae and Freddie Mac in promoting sub-prime loan fiasco. But the USD decline does not seem such an ideological hot potatoe.

What gives?

Jack Strocchi, I think at least Paul Krugman have written quite a lot about this. See for instance:

http://krugman.blogs.nytimes.com/2010/10/16/a-fine-european-whine/
http://krugman.blogs.nytimes.com/?s=devaluation

So to shift the subject a little, the current GOP are just economic terrorists, yes? Orrin Hatch even admitted before Obama even came into office that if the public sees Bush wreck the economy and Obama and the Dems come in and fix it, that’s the end of the Republican Party. So they have no option other than sabotage, and that’s exactly what they have done in the first 2 years of Obama’s presidency. Incredible.

Not really, it’s more that the over the thread the relevant structures have all been mentioned, and I’d say we basically agree on the actual power lines that exist. Whether you call the result public or private, or where you place ‘ownership’ is more a judgement call now.

To be clear, I don’t want to deny that banks have significant influence on fed decisions, not at all. I also think am not knowledgable enough to judge whether that amount is too much. Part of that is that I am not American. Fed decisions are relevant to my life, but whether they are made to the advantage of US banks or the US public is of less importance to me. The former might well be in my best interest.

Here in Europe, the ECB is undoubtedly a public institute, without any of the hybrid structure of the fed system. Yet it’s independece from politics is very comparable, and in practice banks appear to have a very similar voice in its decisions, even if there is less of a formal channel for that. Which is exactly why I am skeptical of claims that the fed is ‘private’: that implies that influence of US banks is an anomaly caused by the weird structure of the fed.

While in practice, the functioning of both the fed and the ECB seem very close to each other, and also to how the political process intended them to operate. If private parties have to much influence on their decisions, the solution lies in a wider political consensus to change that, not in specifics of the US system.