Quantitave Easing
I was fretting the other day that the American system of government might have too many veto points to grapple with the economic crisis in a decision way. Something that I should have thought of is that we have, quite smartly, set up a quasi-independent Federal Reserve system that’s able to take action without going through the veto point process. Instead, the script is flipped—congress can dictate to the Fed, but in order to do so it needs to pass through a large number of veto points so in practice the Fed can take decisive action in a crisis. Hence, things like today’s dramatic announcement of “quantitative easing”.
This is something most people don’t understand very well, but when you hear people talk about how the Fed “set” short-term interest rates at such-and-such a level, the people are being a bit inaccurate. What the Fed does is make decisions about how to target interest rates. Then it engages in a bunch of actual financial transactions—buying or selling of short-term bonds—to make the market prices move in line with the target. Ordinarily, you would fight a recession by lowering interest rates. Unfortunately, we’ve already lowered rates as far as they can go and yet there’s still a recession. Under such circumstances we turn to “quantitative easing” or “unconventional monetary policy” in which, basically, the Fed buys other stuff. In this case, long-term bonds, Fannie & Freddie securities, and some mortgage-backed securities. The goal here is to make interest rates on mortgages extremely low. That way homeowners will be able to refinance their loans at low rates and save on their monthly payments. That, in turn, will free up money that can be used to buy stuff, encouraging a return of production and retail jobs and a revival of business investment.
At any rate, that’s the theory. We’ve never before been in a situation where this is actually tried on a substantial scale.
71 Responses to “Quantitave Easing”
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March 18th, 2009 at 6:34 pm
This is probably a silly question but, as long as we’re on theory here – if the goal is to reduce mortgage interest rates specifically, then why does the Fed not just make mortgage loans at whatever rates it pleases? In practice, it could always commission Countrywide to do the actual work.
March 18th, 2009 at 6:47 pm
Note that lowering mortgage rates way down also has the potential to delay the “price discovery” in the housing market. Artificially lowering mortgage rates sets us up for another price decline or stagnation once rates are allowed to return to normal. People who buy these things when rates are super low will find that, once rates rise again, no one can afford to buy them for that price any more. This may be more evidence that Bernanke believes that the bubble wasn’t really a bubble.
March 18th, 2009 at 6:51 pm
“That way homeowners will be able to refinance their loans at low rates and save on their monthly payments. That, in turn, will free up money that can be used to buy stuff…”
Hey its 2001 all over again! BTW, “quantitative easing” in this case means the Fed “buying” long dated treasuries with money it creates out of thin air. So there you are. America’s central bank printing money so as to buy the American government’s debt because the market demands interest rates on that debt that are “too high”. Draw you own conclusions.
March 18th, 2009 at 6:56 pm
I feel the federal reserve has too many conflicting priorities. Here in Canada the central bank’s primary mission is to maintain stable and low inflation (1-3%). Quantitative easing makes sense but often once inflation begins to rise there is a reluctance to do anything about it. Such was the case in early 2000s. And if the feds priorities are to maximize employment and maintain stable inflation aren’t these priorities conflicting (in certain economic circumstances)? Would progressives oppose what Volcker did in the 80s if inflation gets out of hand?
March 18th, 2009 at 7:03 pm
“Quantitative easing makes sense but often once inflation begins to rise there is a reluctance to do anything about it.”
That’s where the Fed’s political quasi-independence that Matt referred to comes in. Price stability is one of the Fed’s two policy mandates, and when inflation returns, Bernanke (assuming he hasn’t been replaced by an Obama appointee by then) would have no qualms about jacking up rates at that point to deal with it.
March 18th, 2009 at 7:06 pm
Now I guess we know why Matt has seemingly become an expert on a wide variety of topics he used to know nothing about. Honestly, the last year makes so much more sense to me now.
March 18th, 2009 at 7:12 pm
re: “dramatic”
It should be made clear that the fomc statement did *not* use the term “quantitative easing”. Now that is indeed their policy, but one on which they’ve been quite explicit about following since oct or so of last year. But they don’t use that term afaict. This current move is an increase of what they have been doing, but *not* a change in course. So I would take issue with ‘dramatic’. It is still quite unprecedented, however.
March 18th, 2009 at 7:15 pm
Re Matthew’s comment “The goal here is to make interest rates on mortgages extremely low. That way homeowners will be able to refinance their loans at low rates and save on their monthly payments. That, in turn, will free up money that can be used to buy stuff, encouraging a return of production and retail jobs and a revival of business investment.”
—————–
ha ha ha
Actually, it makes it likely that those $60 TRILLION in Derivatives contracts that the Five Big Banks hold won’t kick them in the ass over the next several months. But I’m sure that’s just a coincidence.
March 18th, 2009 at 7:16 pm
This sounds like a desperate attempt to prop up the housing bubble by providing artificially cheap mortgages. This is not confidence inspiring.
March 18th, 2009 at 7:26 pm
The purchases of existing mortgage backed securities does not will not and cannot lower the rates on new mortgages.
What it does do is help the banks balance sheets since apparently but never admitted to, they are buying MBS’s which might be worth 20 cents to 50 cents on the dollar because of their underlying defaults, at full value. They are printing money to do this. Printing money to inflate bank assets. This is welfare turbocharged with nitrous.
Any bank that exists when the housing market bottoms will lend when the price and borrower are right. That applies to Citi or Podunk State Bank. The only thing being done is making sure Citi will be there. That a healthier more distributed banking system will arise from the crisis.
If the Fed printed $2 trillion and sent it to every taxpayer do you think the economy would grow? What about $10 trillion?
I used to joke years ago that counterfeiting was good for the economy. It increased demand after all. What was the downside? Nobody could ever actually come up with a downside except that it was “wrong”. It’s OK for the Fed to counterfeit however, as long as they give the money to banks?
We are so fucked.
March 18th, 2009 at 7:27 pm
I would say that if you look at agencies, you see a lot of discretion to do what they want within broad “intelligible principles” handed down by congress. A parliamentary system is much better, but what we have isn’t entirely veto-ridden.
March 18th, 2009 at 7:31 pm
Why precisely is it a good thing for the Fed to fill the asset side of their books with assets that are too toxic for banks to hold?
This is Bernanke’s great big original idea, to sidestep the fact that monetary policy tends to be relatively ineffective in a recession and loses all its bite once cash rates are pushed to 0.1%.
Because, being a “New Keynesian” means pretending to be a Keynesian in the short term while still buying the whole marginalist story of the macroeconomy automatically tending to full employment on its own, “in the long run”. With the safety net of the marginalist long term, Bernanke can play games with the balance sheet of the Fed.
Except, that is a safety net assumed into marginalist models, it has not actual existence out here in the real world.
March 18th, 2009 at 7:37 pm
“Unfortunately, we’ve already lowered rates as far as they can go and yet there’s still a recession.”
Ever heard of negative interest rates?
March 18th, 2009 at 8:12 pm
What price did the fed pay for this horseshit? There are numbers that could make this not crazy, but those numbers would make the Masters of the Universe cry. I don’t think Geitnar made them cry.
March 18th, 2009 at 8:25 pm
Curious Capitalist blog on Time says such ‘quantitative easing’ was indeed tried during WWII. So this is not the first time.
Essentially it is the Fed ‘printing press’ in overdrive. Helicopter Ben is printing notes. Dollar tanked. Will continue to tank further. Gold went up. Will continue to go up. Good for American Export. Oil will go up because Dollar is cheap, good for American Alternative Energy Industry.
What is the down side? Chinese will be upset more. Wen Jiabao next time will not stop only expressing his anguish. This policy brings near the point when Chinese may be induced to harm America despite damage to them (by dumping bonds which will increase interest rates despite Ben printing press). That is the importance of jaw boning ‘we will control our deficit in future…’
But there are no good choices left for Obama. It is which ‘poison to choose’. He has to take some risk. America is in precarious stage whichever way we look. ‘Economies of other countries are in worse shape’ neither do create any jobs here nor do bring food on my table.
March 18th, 2009 at 8:27 pm
There’s probably a good answer for this but: why doesn’t the Fed just buy the banks? It would be “nationalization” without the actual government stepping in to do it, and the Fed could print money to make the purchase. If there’s an upside in the future, that would feed back into the ordinary Fed coffers, which would–since the upside would presumably take place in a larger market upswing–at that point be in the process of bulking up in preparation for the next market problem.
Where does this go wrong?
March 18th, 2009 at 8:38 pm
So once again we get an unfair policy that tells us that home-owners are true Americans and fsck everyone else.
Look, I have no problem with a policy like this AS LONG AS THE COST IS APPLIED FAIRLY. In this case, a reasonable quid pro quo, IMHO, would be to abolish the mortgage interest rate deduction.
(a) Every economically literate person knows this is a scam on every dimension you can think of. It ramps up the cost of houses (since the price of houses rises to whatever mortgages prevailing wages can afford), and it primarily benefits the wealthier.
(b) The people who are benefiting from lower mortgages are precisely the same ones who benefit from this deduction.
So, yes, abolishing the deduction today would be counter productive. But I see no problem with writing a law today that abolishes it in say five years.
March 18th, 2009 at 8:39 pm
That’s where the Fed’s political quasi-independence that Matt referred to comes in.
Yes but even if we assume the Fed’s independence can withstand public opinion (this hasn’t really been tested) the Fed’s mandate may prevent them from reining in excessive inflation. The US central bank’s goal is to both maximize employment and keep inflation stable.
After the whole Alan Greenspan fiasco does it really make sense to have such an abstract and often conflicting central bank purpose? Wouldn’t something like exclusively targeting inflation be not only more objective but more effective? It has worked pretty well for Canada (that and other things).
I used to joke years ago that counterfeiting was good for the economy. It increased demand after all. What was the downside?
I know there are a variety of opinions on the short-term effects of unexpected inflation but I haven’t yet heard one that completely neglects its consequences. Please elaborate.
March 18th, 2009 at 8:59 pm
On a big balance sheet sort of view the Fed printing to buy crappy assets will either
1 not be enough so assets will continue to deflate
2 be just right and when all is said and done things will be just about as before
3 be more than enough so financial assets actually start to inflate smartly.
4 some combination of the above except some of that money jumps he fence of the financial sphere and bleeds into the real economy. Which is what happened when oil and wheat went to the moon.
What the ultimate outcome of the Central Banks assets being comprised of crap is not easy to say. It can’t be good. It is really the bell sounding on the crackup of the monetary system. In 10 or 20 years whatever it is everyone thinks money is will be far different than what they think now.
Followed to one logical conclusion your money would be a Goldman Sachs note.
March 18th, 2009 at 9:18 pm
Wow. The past six months have led you to conclude that we need to give more decision making power to unelected elites embedded in the class and culture of the riches 1 percent of Americans?
I’m amazed. Although I imagine, Matt, that you don’t really believe that.Or at least I hope you don’t. Decisive action was taken – what, after all, is more decisive than bank robbery? Of course, it was the bankers that were doing the robbery, but still, it is the decisiveness that counts.
It worries me that the liberal sphere seems not to understand what is happening here. This is not just a little fix time, and we can go back to Larry Summers’ wet dream of an economy.
March 18th, 2009 at 9:23 pm
Now I guess we know why Matt has seemingly become an expert on a wide variety of topics he used to know nothing about. Honestly, the last year makes so much more sense to me now.
Matt is part of the vast left-wing conspiracy with ACORN, Paul Krugman, Bill Ayers, Nancy Pelosi, the NY Times and George Clooney. They now control the country and they are coming to take your money.
March 18th, 2009 at 9:30 pm
To stimulate the economy one must find in this country big pockets of money to extract and spend. That money is locked up in homes. To get it out of those homes and start spending, this looks like the best strategy. Other piles of money reside with the richest people, but they’re not spending it; they’re sitting on it. Businesses have piles, but not enough to both spend and meet expenses. Sick people are being drained of their cash for getting sick, so no pool of cash there. Average credit card users are totally tapped out of cash and paying 29.9% interest on their balance, so no pile of dollars there. We can’t manufacture lots of widgets to get cash flowing, because we no longer make widgets people want — that activity required labor which financial manager folks don’t like to pay for.
No choice: need to extract the cash from home owners, and can only do that with 4% mortgages.
March 18th, 2009 at 9:52 pm
“Now I guess we know why Matt has seemingly become an expert on a wide variety of topics he used to know nothing about. Honestly, the last year makes so much more sense to me now.”
JournoList also explains why David Leonhardt of the NY Times just parroted Matt’s recent call for adding more tax brackets above the current top bracket.
March 18th, 2009 at 9:52 pm
thomas fisher Says:
Nonsense, money is just pieces of paper and account entries at commercial banks that functions as a means of exchange, store of value, standard of deferred payment, and unit of account because government assesses taxes in it, the Fed requires banks to be able to clear payments in it, and courts assess civil penalties in it.
The idea that we need to find “money” somewhere is silly … its taking the false sense that money is intrinsically valuable and buying into the fiction.
What we need are real resources … natural resources, ability and willingness to work, productive equipment … and to mobilize those resources in a way that creates purchasing power not much faster than new goods can be brought to market to buy with the purchasing power.
In fact, we already tried the “get cash out of homeowners” trick. Its how we recovered from the Tech Bubble. Its what drove the economy in the Bush Recovery.
It turned out to be such a massive fail that the proposal to just do it again except with the Fed directly buying trash assets to restart the housing bubble is quite clearly and obviously absurd, even to those with very little understanding of economics at all.
March 18th, 2009 at 9:59 pm
“What we need are real resources … natural resources…”
Fortunately, we have a lot of natural resources. This would be a good time for the party in power to relax its usual near-blanket opposition to new drilling and mining projects. I know of one little company with the rights to a molybdenum deposit in Colorado that could generate royalties and taxes for the government and high-paying jobs for a lot of local workers if it can successfully wade through the thickets of the regulatory process. I’m sure there are numerous similar situations, where we’re missing out on the revenues and high-paying jobs because of ‘progressive’ opposition to the development of natural resources projects.
March 18th, 2009 at 10:03 pm
Quantitative easing is one of those things that is great to have as an option, but pretty crappy to actually have to use. I consider it to be only slightly less dangerous than running the presses 24/7 in order to print our way out of debt (which we do have the ability to do, once).
March 18th, 2009 at 10:18 pm
This definition of quantitative easing is ridiculous. It has always meant an increase in the money supply through means other than not printing money. And it has been used ever since the creation of the Fed in the 1910s. We’re just trying a different method of quantitative easing.
March 18th, 2009 at 10:24 pm
Wow. Printing money to buy Treasurys (U.S. debt) = Point of No Return. Now we really are playing chicken with our creditors. “Still like the dollar, huh? How about now? Oh, yeah? Well, HOW ABOUT NOW??”
March 18th, 2009 at 10:27 pm
I was fretting the other day that the American system of government might have too many veto points to grapple with the economic crisis in a decision way. Something that I should have thought of is that we have, quite smartly, set up a quasi-independent Federal Reserve system that’s able to take action without going through the veto point process.
You know, the idea that there are to many veto points so we need someone who does what he wants and ignores all of the supposed veto points – hmm… what recent president livved by that philosophy?
March 18th, 2009 at 10:29 pm
The reason why Quantitave easing hasn’t been tried before is that it will not work for a number of reasons.
1. The market for long term treasuries is very liquid. I’m not sure 300 billion would be enough to move the entire yield cuvre. Remeber the U.S. has 9 trillion dollars worth of debt. So the amount of money the govemenr will need to print will drastically increase the money supply. This would increase inflation which would raise rates.
2. This also assumes that people will continue to hold U.S. treasuries no matter what the interest rate is. I might be willing to hold a 10 year treasury at 2% but I might not be willing to hold it at 1%
3. This will not reduce mortgage rates. Instead of mortgage rates being prices at 1.5% spread over treasuries they will be priced at 2.55 spread over treasurites. The Fed can change the rate but they can’t change the risk profile of the mortgages. The perceive risk is a main driver of interest rates.
March 18th, 2009 at 11:12 pm
Veto points = democracy.
But what the fuck.
March 18th, 2009 at 11:20 pm
Thank God the Fed is on the case….if not we would be looking at Great Depression 2.0 courtesy of the republicans.
March 18th, 2009 at 11:20 pm
The past few days there’s been some guy calling himself daFed putting in all sorts of crazy bids on stuff on eBay…
March 18th, 2009 at 11:26 pm
There is a reason why they Fed can affect the short term rate because the market for fed funds are mostly banks tryingtto meet there capital requirments. I don’t belive the market for long-term bonds are as homogenous as that.
The fed is going have to print a lot of money to move interest rate. The printing of all that money will cayse inflation which will raise interest rates.
There is a limit to monetray policy and I believe we are reaching it. At this point it is better to spend money on fiscal policy. I realize that politically it is easier to use monetary policy but there isn’t much more that can be done.
March 18th, 2009 at 11:53 pm
Fortunately, we have a lot of natural resources. This would be a good time for the party in power to relax its usual near-blanket opposition to new drilling and mining projects.
Drill, baby, drill! Joe the Plumber is on line 2, Dave!
March 18th, 2009 at 11:57 pm
Ordinarily, you would fight a recession by lowering interest rates.
Actually, what’s gone on often in the recent past is that an overzealous economy is chilled into a recession by raising interest rates. The subsequent “fighting the recession” part is the brakes being eased off.
Unfortunately, that’s not the case now.
March 19th, 2009 at 12:22 am
In the end the Fed did what it had to do I guess. Indirectly they will monetize the gigantic mountain of debt congress has obligated the Treasury to borrow. The alternative was going to be further deflation across all asset classes, in unpredictable ways.
They method they are using is to pour the money into the financial sphere, the banks and hedge funds and whoever else they can think of, and they will buy up the mountain of Treasury securities. And then? Nobody knows?
Sadly by having to work through the banking and financial giants the crack heads who did so well on the way up will do very well we try to go up again.
March 19th, 2009 at 2:23 am
rapier (#10) says: I used to joke years ago that counterfeiting was good for the economy. It increased demand after all. What was the downside? Nobody could ever actually come up with a downside except that it was “wrong”.
Give each person in America a trillion dollars and see what happens. I predict that our subsequent inflation rate would make Zimbabwe’s 231,000,000% annual inflation rate look modest (Zimbabwe inflation hits new high). Would you call this a downside?
March 19th, 2009 at 3:06 am
цитируем…
Something that I should have thought of is that we have, quite smartly, set up a quasi-independent Federal Reserve system that’s able to[...]…
March 19th, 2009 at 3:12 am
Money no longer has ANY value. Gold is traded on paper, what a joke. There’s no longer any gold to value the dollar. It’s all an illusion. You borrow your own money and pay them interest. The bankers rule the world, not the President.
They say that they don’t know where the money went. I know where it will wind up…in the hands of the Rockefellers, Rothchilds and other Elitists.
We told them NO BAILOUT, not once but twice and they still did it. This says something about our Politicans..they aren’t for the people. They are pushing the bankers and Wall Street’s agenda. Obama has ex Wall Street employees on his staff and as advisors. Only they are telling him what to do and say to the world. Obama can’t fuction without a teleprompter..he’s a puppet.
March 19th, 2009 at 4:13 am
Roger says:
“Wow. The past six months have led you to conclude that we need to give more decision making power to unelected elites embedded in the class and culture of the riches 1 percent of Americans?”
Indeed.
March 19th, 2009 at 4:58 am
I think many people on this blog are confused about what the Federal Reserve can and cannot do. The Fed can’t “print money.” They don’t take a dime of taxpayer funds. They are a bank, with over $2 trillion in assets at the moment. If they choose to buy other types of assets with some of their deposits, that’s not much different transactionally than taking money out of your savings account and buying some stock.
The Fed’s actions are qualitatively different from other organizations’ actions because their purpose is the fiscal policy and economic well-being of the United States, not of the Federal Reserve. Whether or not their actions are actually helpful in this regard is of course a matter of debate.
There’s a reason our dollars have Tim Geithner’s signature on them and not Ben Bernanke’s. The Treasury prints the money. The Fed just has a lot of it lying around.
March 19th, 2009 at 4:59 am
Shoot. Monetary policy, not fiscal policy. First-year macro.
March 19th, 2009 at 7:00 am
DTM — Thanks for bringing a much-needed clear head to this discussion! It’s refreshing to read a commenter who understands the Fed’s reasoning and doesn’t just want to rage against the machine.
The Fed isn’t democratic at all, and that’s a good thing. There are a few areas of our society in which democracy is highly inappropriate and expertise is needed instead. When Kansans decided to democratically take on the scientific method, for instance, they opted for creationism in biology class. Science isn’t a good fit with democracy, because people’s opinions have nothing to do with the truth or falsehood of a scientific proposition.
This situation is similar. The average commenter, myself included, shouldn’t be running the economy; it’s just too large and complex, and we don’t have the necessary systemic perspective. But we see tiny instances of things we don’t like (AIG bonuses, this Fed action), refract them through our populist prisms, and come out with comments such as, “decision making power to unelected elites embedded in the class and culture of the riches 1 percent of Americans”!!!!
The Fed does not like the big banks right now, but they are realists and not ideologues. Some of their actions will help the banks. Even so, as DTM said, this action is designed to help people refinance their mortgages. There is probably a way for the rich money managers to benefit, but if that’s the case, it’s because the ENTIRE SYSTEM of American capitalism is set up to benefit them, not because the Fed made this decision! And lest we forget, that system was installed democratically.
Let the Fed do its job, and save the bile for the people who deserve it: Bush, Paulson, Phil Gramm, and the Congressional Republicans.
March 19th, 2009 at 7:13 am
Raivo Pommer
raimo1@hot.ee
US-Notenbank
Zur Stützung des amerikanischen Finanz- und Immobiliensektors will die US-Notenbank zusätzlich eine Billion US- Dollar (770 Mrd Euro) in die Märkte pumpen.
Wie die Federal Reserve am Mittwoch in Washington ankündigte, will sie bis zu 750 Milliarden Dollar (577 Mrd Euro) an hypothekenbesicherten Wertpapieren erwerben. Außerdem sollen bis zu 300 Milliarden Dollar an langfristigen Staatsanleihen gekauft werden, um die Zinsen auf verschiedenen Märkten zu drücken. Dadurch sollen Kreditklemme und Immobilienkrise überwunden werden. Zugleich beließ die Fed den US-Leitzins auf seinem historischen Tiefstand von knapp über null Prozent, der Mitte Dezember festgelegt worden war.
Click here to find out more!
“Die Federal Reserve wird unter den gegebenen Umständen alle verfügbaren Mittel einsetzen, um die wirtschaftliche Erholung voranzutreiben und Preisstabilität zu gewährleisten”, hieß es in der Mitteilung der Notenbank nach der Sitzung des Offenmarktausschusses.
March 19th, 2009 at 7:32 am
Johny Bravo, that is a bit too slippery by half.
Yes the Treasury actually has the presses and workers to print money but the Fed has the authority to “ask” the Treasury to print up an extra trillion. The Fed got that money, for which it paid pennies on the dollar, and then used that money to buy bonds “formerly known as toxic assets”.
The people of the United States are responsible for making good on the value of those dollars, not the Fed.
So in that sense the Fed pulled almost a trillion dollars out of our collective ass yesterday.
And yes the Fed has assets of about 2 trillion but has already overspent or committed more than the total value of all those assets.
Who will cover that shortfall?
Only a few years ago the Reserve spoke in terms of tens of billions and the Fed could easily raise a few billions more by selling some of the Treasury notes it holds or by calling on member banks in a real liquidity crisis.
But now the Fed holds almost a trillion dollars (with more to come) in mortgage backed securities which, with luck, are really worth only a bit less than a third that amount.
And the Fed has already announced plans to buy even more bad debt.
Because the Fed
1) gets no money from Congress and
2) will be short trillions in assets versus liabilities and
3) their only other source of income is member banks and
4) taxpayers are the source of emergency funding for the banks then:
Taxpayers are on the hook for the trillions the Fed is spending to cover the losses of our ruling class. It really is not more complicated than that.
When will our crisis end?
When the guv’ment has made good all the losses of our Overlords. And not a moment before.
Call it TARP call or it anything you want but that is what is going on.
March 19th, 2009 at 7:48 am
Saucy sauce, the economy is so large and complex, that nobody “runs” it. DTM’s explanations and responses are fine, and I generally share his optimism, but don’t kid yourself that the commenters expressing concern (or concern dressed as zeal, or zeal dressed as concern) about inflation, corporate governance, moral hazard or other downsides to the approaches the Fed and Treasury seem to be taking are unreal or trivial. They are very valid concerns, even if they are inartfully expressed sometimes, and it will take as much skill and good fortune for those at the commanding heights to manage monetary and other economic matters once we come out the other side as will be required in the near term. I’m confident Bernanke is aware of all these issues (Geithner, I’m not so sure about); framing this awareness into a consistent dynamic policy response that is more complex than a blog comment and then implementing it will be a tough challenge, and I’m pulling for them.
I also suggest you not kid yourself that the purpose of any particular Fed or Treasury program is to “help people do this or that.” Those organizations are not (or are only just barely) in the people helping business. Their policy choices (I hope) reflect a judgment about what course of action seems to minimize some measure of overall harm to or in the economy. But it ain’t rocket science, and for every course of action there will be people who will be worse off in its wake, because their circumstance fell outside the range of beneficiaries (so that, in financial terms, they were long what they should have been short).
March 19th, 2009 at 8:07 am
Damn it Yglesias, I told you NOT to discuss this outside of THE LIST.
March 19th, 2009 at 8:16 am
Actually, that’s not entirely a bad idea. Why stop with MBSs? The Fed could buy old fart-ridden sofas or love seats from individuals — which are almost surely distributed inversely with respect to family income. The results would be very progressive.
The Fed wouldn’t actually have to take possession, just require an emailed pic of the item and a receipt from the landfill. This might even increase the demand for new sofas.
Of course, this would be a one shot deal. The Fed couldn’t reverse policy and sell them when inflation reared its ugly head. But, we should be so lucky — right, DTM?
March 19th, 2009 at 8:23 am
bdbd says:
But it ain’t rocket science, and for every course of action there will be people who will be worse off in its wake, because their circumstance fell outside the range of beneficiaries
Funny ain’t it how the middle classes always fall outside the “range of beneficiaries”?
This is the most insidious and unhealthy form of class warfare, the pretense that monetary policy is geared to maximize good for an amorphous and unknown “other” and the fact that it always benefits our Overlords is just accidental fallout.
Jefferson certainly knew better… have we all acquired amnesia?
March 19th, 2009 at 8:31 am
JT, Overlords benefit, or at least aren’t much harmed, by most any scenario, that’s part of what makes them Overlords. It comes with the territory (and it was territory Jefferson liked living in, which is part of the reason he could be so glib about mixing things up from time to time!). Fight the Power!
March 19th, 2009 at 9:04 am
Yeah, it’s time we had policies that benefited the middle class, not the 50% of Americans who live in households with home mortgages!
March 19th, 2009 at 9:23 am
Njorl… other than the faint and unsubstantiated hope that the purchase of toxic assets will lead to lower mortgage rates and thus will enable some lucky few people to refinance how does the 1.2 trillion giveaway aid middle class homeowners?
It doesn’t.
To the contrary it lessens the value of any assets they own because of dollar devaluation. It impedes recovery because of the known drag that deficit spending imposes.
It really wasn’t that long ago that we were promised that the first trillion given our Overlords would grease loans and help Main Street.
How’s that working out for ya?
Oh yes I know:
“But it wopuld have been sooooo much worse!”
And bdbd,
Thanks for acknowledging that the system is in fact purposefully gamed to benefit our masters and not as an accidental outcome of impersonal forces.
And yes Jefferson was, like almost all our founding parents, a member of the upper class. Fortunately for us all that did not prevent him from working largely on behalf of his less privileged fellows. Was he far less than perfect? Well yeah!
How that in any way diminishes his wisdom and advice escapes me however.
And death to the Fascist Insect that preys on the Life of the People!
March 19th, 2009 at 9:26 am
It has been a sad aspect of this recession that every move made by policy makers (or non-move) is judged simply on whether it is a direct help to ME. Maybe this is because this recession is happening to the Baby Boom Generation just as they are (were) going to retire. No generation has been more selfish or demanded more for itself.
A growing economy helps everyone in America. If a policy action really helps this group of people, but leads from recession to growth, then take it. Yes, homeowners can refinance. Why do renters get so bent out of shape? Their landlords will refinance and maybe be able to keep rent down (maybe not). But auto loans are also cheaper. Municipal bond rates will be cheaper (which mean lower debt costs for public transit agencies). To look at just the positive effect on homeowners misses the forest for the trees. Businesses will also be able to borrow cheaper, leaving more money for salaries.
This is like the silly arguments you here that the Fed is hurting seniors when they lower rates since they get less interest on their savings. So, we should just keep rates high, and live with endless recession, so people on fixed income can continue to scrape by. Makes sense to me.
Lower mortgage rates will also lead to higher tax revenues since lower interest amounts on mortgages leads to lower deductible interest costs, which mean higher effective tax rates. So, homeowners will be paying more taxes on their income, not less. No reason for punitive taxation to make up for them benefiting from Fed policy.
March 19th, 2009 at 9:26 am
“Mario Says:
March 18th, 2009 at 7:06 pm
“Now I guess we know why Matt has seemingly become an expert on a wide variety of topics he used to know nothing about. Honestly, the last year makes so much more sense to me now.”
Thanks Mario, interesting link. That sounds like a very bad idea. If you’re using an screen name on the litserv, then people can only take it on faith that you’re one of the great and the good. And if you use your real name there, what’s the advantage of posting to the private listserv instead of a public blog?
There’s nothing private about it. If you write something foolish or politically risky, you should assume that someone who has it in for you, like the janitor in that Matthew Broderick movie Election, will someday leak the information at the worst possible moment.
March 19th, 2009 at 9:50 am
Lowering interest rates does not fight a recession, it just sets the interest rate to the productivity increases in the economy. To fight a recessio one actually has to apply techology to the economic constraint.
March 19th, 2009 at 10:27 am
Lower mortgage rates will also lead to higher tax revenues since lower interest amounts on mortgages leads to lower deductible interest costs, which mean higher effective tax rates. So, homeowners will be paying more taxes on their income, not less. No reason for punitive taxation to make up for them benefiting from Fed policy.
This will be a rather modest effect, for both individuals and the Treasury, don’t you think?
March 19th, 2009 at 10:44 am
could have had euros at $1.26
guess krugman can stop worrying about the deflationary trap
March 19th, 2009 at 11:53 am
I was just playin’ with ya, DTM. Good comments overall.
March 19th, 2009 at 12:09 pm
So…to put it in laymen’s terms, the Fed took decisive action to try to reinflate the bubble?
And that’s a good idea how?
March 19th, 2009 at 12:09 pm
First, the hope is not faint. Fannie and Freddie are refinancing huge numbers of mortgages at lower rates.
Second, most middle class people have assets that scale with inflation, and long term debts that do not.
Third, recovery is only impeded by deficits when government borrowing crowds out private borrowing. This isn’t happening. Government is borrowing to create conditions that facilitate private borrowing.
Well, I’m glad you know it. You don’t act like it though.
If AIG fails, many large banks among our closest foreign trading partners collapse, causing the world to lose faith in the American financial system. The value of the dollar, and all currencies pegged to the dollar plummets. That’s not even getting into the effects of eliminating AIG’s other insurance functions.
It would have been nice if we could have found a way to stave off disaster without aiding the ones who caused it. Let me know when you think of one.
March 19th, 2009 at 12:23 pm
It’s more like they’re slowing down how fast the air comes out.
If you assume that unemployment will eventually turn around, and that normal inflation will increase the eventual floor of the housing market, then the delay helps. People who do not have jobs now, may get jobs that allow them to pay their mortgage. Houses that would drop in value below their mortgage will stay above it long enough for inflation to make keeping the house sensible.
March 19th, 2009 at 12:28 pm
This
If you assume that unemployment will eventually turn around, and that normal inflation will increase the eventual floor of the housing market, then the delay helps. People who do not have jobs now, may get jobs that allow them to pay their mortgage. Houses that would drop in value below their mortgage will stay above it long enough for inflation to make keeping the house sensible.
is the sort of thing I meant earlier by this
I also suggest you not kid yourself that the purpose of any particular Fed or Treasury program is to “help people do this or that.” Those organizations are not (or are only just barely) in the people helping business. Their policy choices (I hope) reflect a judgment about what course of action seems to minimize some measure of overall harm to or in the economy.
March 19th, 2009 at 3:05 pm
Most (well, all) of the people screaming here about “printing money” have no idea about how a modern monetary system works. If you want to get a better idea of what this means, here’s a good link:
http://bilbo.economicoutlook.net/blog/?p=661
March 19th, 2009 at 5:16 pm
Great article, after lowering interest rates and “quantitative easing”, what’s the next step in terms of Federal action? I hope it’s not panic.
March 20th, 2009 at 11:42 am
Krugman has a useful blog post on these issues (including the “and then what” that is asked at 70 and elsewhere
http://krugman.blogs.nytimes.com/2009/03/20/fiscal-aspects-of-quantitative-easing-wonkish/#more-1641
Twitter version: Quantitative easing today gladly buys you fiscal expansion on Tuesday