Saturday, December 21, 2013

The Fed's Non-plan Plan

From today’s Mises Daily:

If economists agree that there is no long-term trade-off between inflation and unemployment, and the current Fed strategy to lower interest rates has failed miserably to boost growth, then we must ask, why is the Fed, even after this week’s taper, in effect printing $75 billion a month?

Because the purpose wasn’t to achieve lower unemployment or some amount of consumer price inflation as commonly measured, but to help the banks achieve solvency.  If they wanted price inflation, they could have achieved it – charging a negative rate on excess reserves (a modern, digitized form of Wörgl), is an idea currently being floated.

How will the U.S. government react if it has to refinance at interest rates of 12 percent or more, like in 1981?

They might put the Fed under Congress, including taking over all shares of the central bank.  This is another dream of those who can’t think straight about monopolized money (in this case, the subset of monetary crank half-wits who complain that the problem is that the central bank is “private”).  Such an action will achieve the result of the highest price inflation recorded since the inception of the Fed.

Yellen is no Volker; will she be able to tame the inflation beast as Volcker did?

This likely isn’t why she was chosen.  It seems reasonable to conclude that her job is to get money to the masses, now that the solvency issues of the banks have been, for the time being, resolved.

Instead of helicopter money over lower Manhattan, Yellen’s job might be C-130 cargo drops over flyover country. 

One way to achieve this is to charge a fee for holding excess reserves….

1 comment:

  1. Well stated, bionic mosquito.

    Here is a thing that I ponder about the mountain of excess reserves being nudged into becoming bank loans. In a rising interest rate environment, who will want to hold those loans? The banks are too smart to want to trash their balance sheets again by holding depreciating assets, such as fixed interest rate loans in a rising interest rate environment.

    The banks will either need a patsy to sell their loans to (think Fannie Mae with mortgages), or they will need a way to hedge against the seemingly inevitable losses that holding depreciating loans will cause.

    I don’t know the answer, just the questions. Who will they sucker into holding the loans, or how will they hedge them?

    In fact this basic problem (plus the interest paid on excess reserves), can be seen as a contributing factor to the currently unprecedented amount of excess reserves.