Fed discussing how to ‘inject credit’
Posted by WARREN MOSLER on March 18th, 2009
Problem is those things cut rates, they don’t ‘inject credit’ or alter net financial assets held by the non government sectors.
It’s about price, not quantity.
Fed Wrestles Over How to Inject Credit Into Economy
by Steve Matthews
Mar 18 (Bloomberg) — Fed officials will debate how to provide further stimulus to the economy, from purchasing more mortgage bonds to buying Treasury securities, and will also keep the benchmark interest rate as low as zero percent, according to economist projections. At least three of the 17 top Fed officials want to buy Treasuries or target the supply of money, while Chairman Ben S. Bernanke has favored reviving specific credit markets. Policy makers have disagreed on just how to be more aggressive. They have at least three options: increase the $1 trillion Term Asset-Backed Securities Loan Facility aimed at restoring consumer and business lending; expand purchases of mortgage-backed securities and agency securities; or begin purchasing long-term Treasuries.
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March 18th, 2009 at 7:46 pm
“Problem is those things cut rates, they don’t ‘inject credit’ or alter net financial assets held by the non government sectors.”
Right the government/FED is trading the non government sector one financial asset (Fed cash) for another financial asset (MBS).
So……the amount of cash/reserves in the non government sector will increase while the amount of bonds will decrease. If cash is more likely to be spent, that could add to aggregate demand.
But, these MBS purchases remove future income from the private sector as new interest payments are directed into government/FED coffers.
The quantity of government purchases would have to continually exceed the interest payments received in order to provide a net increase to aggregate demand.
Eventually the amount of cash being removed through interest payments could no longer be compensated for as all private financial assets/interest payments would be owned by/directed to government.
The natural rate of interest would be zero as government spending/taxation would be replaced with government loans/interest collections.
Interest farming would replace tax farming and the government would replace the shadow banks.
The ‘value’ of money would be determined by the ability of a government to collect interest rather than taxes.
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March 19th, 2009 at 7:14 am
Dudes, the more I look at this stuff the more it looks like the dudes running the FED’s show are not stupid! THEY ARE EVIL SELFSERVING GREEDY MEN!
Something is going on in the stock market the past few days too. “Something Shady!?â€ÂÂ
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March 19th, 2009 at 5:39 pm
This isn’t directly related to the post, but I’m not sure where else to post it. So perhaps someone can explain.
The Dec 2008 M2 number is 8,275.4
http://www.federalreserve.gov/releases/h6/current/h6.htm
The Dec 2008 Total Debt Outstanding is 33,517.9 (nonfinancial) + 17,216.5 (financial) = about 50 trillion.
http://www.federalreserve.gov/releases/z1/Current/z1.pdf (page 8, pdf file page 15)
How can outstanding debt be that much larger than M2? I thought that debt outstanding is part of M2.
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March 19th, 2009 at 6:49 pm
“Eventually the amount of cash being removed through interest payments could no longer be compensated for as all private financial assets/interest payments would be owned by/directed to government.”
Karl is telling the masses to beware of ben. He is going to kill the ability of government to deficit spend.
http://market-ticker.denninger.net/archives/878-Caution-On-Quantitative-Easing-QE.html
“The natural rate of interest would be zero as government spending/taxation would be replaced with government loans/interest collections.”
How does the insurance lobby feel about ZIRP?
“Interest farming would replace tax farming and the government would replace the shadow banks.”
Geithner can’t even find a deputy to help offload some work, how is he going to micromanage what used to be done by tens of thousands of market participants?
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March 20th, 2009 at 11:53 am
“How can outstanding debt be that much larger than M2? ”
Corporate and muncipal bonds etc. are in the Z1 where only part of ‘nonbank money’ is in M2, like traveler’s checks which even these could be bank money depending upon how they are created.
“Karl is telling the masses to beware of ben. He is going to kill the ability of government to deficit spend.”
The Fed does seem to be taking a step in that direction which is not necessarily a bad thing to take a small step. From my perspective there should be a balance and if that balance is achieved by removing leverage from the ’shadow banking’ sector so much the better.
Given the Fed now has the ability to offer interest on reserves, which is kind of like a ‘Fed issued treasury security’, inflation could be contained quite easily.
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March 20th, 2009 at 7:58 pm
Winslow, if I don’t pay my taxes I can be arrested, even shot and killed if I resist. But in an “interest collection” world, if I walk away from my house and don’t pay the interest or principal, what can the government do? Isn’t tax farming a more powerful tool of control for the gubbment over the masses than interest farming?
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March 20th, 2009 at 8:13 pm
time short, but interest farming following loans won’t create the demand needed for the currency to have the value needed for it to be useful.
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March 21st, 2009 at 12:57 am
“Isn’t tax farming a more powerful tool of control for the gubbment over the masses than interest farming?”
“time short, but interest farming following loans won’t create the demand needed for the currency to have the value needed for it to be useful.”
I mostly agree (unless the evolution of private security firms continues).
The thought experiment is to show how the Fed could ’strengthen’ the monetary tool not replace, just balance the fiscal tool. At the same time it could improve the economic system by removing the huge privatized gains/socialized losses from the shadow banking sector.
I prefer direct Fed purchases of MBS to the TALF given its current setup. I’m still optomistic this Fed transformation is an evolutionary process for the better, especially since it would be difficult to make it any worse.
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March 21st, 2009 at 6:38 pm
“I prefer direct Fed purchases of MBS to the TALF given its current setup.”
Regarding the TALF present: Obama may be a false prophet for the likes of greenbergs and moslers that think this populist gubbment is about to transfer to them a lot of wealth. I see an aassault on the white males of this world from all quarters of our society. Beware gifts that may have hidden surprises inside. It seems to me all these gung ho types feasting over the carcass they are about to consume like vultures still haven’t learned thier lesson about RISK. 90% tax rates may just be the beginning.
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March 21st, 2009 at 10:16 pm
the fed should take my advice and lend unsecured to its member banks, and announce the 0 rate policy is permanent.
this will drop the term structure of risk free rates to something approaching 0.
they should then encourage tsy to increase the deficit to make up for the fiscal drag from the interest income they have taken away from the non govt sectors as tsy secs will immediately yeild near 0.
if they want to reduce the risk on specific non gov securities the fed should offer to sell default insurance rather than fool with talf like arrangements
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March 22nd, 2009 at 4:04 am
How does Obama suck all you rich white guys into his trap dumping a bunch of declining assets onto you if they do what you say? Those dems are getting J6P riled up to ensure they hold the government for the next 40 years, Al Franken was just the beginning!
The talf is the perfect “honey trap” to suck all you dummies in.
I think you proceed from the false notion that anyone over 250K a year is not going to be hammered by Obamatime. We are all socialists now.
http://www.youtube.com/watch?v=pOqyOeFn0EE
Don’t Forget what that fish dude said in Star Wars “It’s a trap” - Video below will give you very cinematic version of what you are walking into Warren - don’t be dumb, greed is not good.
http://www.youtube.com/watch?v=mNLuq0lW50k
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