tag:blogger.com,1999:blog-5908830827135060852.post4316503391023919945..comments2024-03-01T02:40:14.946-05:00Comments on Bond Economics: Economic Stability And The Size Of GovernmentBrian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-5908830827135060852.post-57018821118926882352015-06-11T12:34:57.014-04:002015-06-11T12:34:57.014-04:00I had some email exchanges on the logic/strategy o...I had some email exchanges on the logic/strategy of QE with W. Mosler. If I understand his main points correctly, in a counter-factual scheme, the consolidated government could insure all bank liabilities and allow unlimited overdrafts at the central bank, it could deficit spend to provide Treasuries, and banks and nonbanks would be able to absorb all of those Treasuries. The central bank would not be forced to do QE.<br /><br />In the circumstances of the bailout (as I would characterize) Treasury had to operate under a debt ceiling, banks were borrowing reserves from Fed in large volume in part because nonbanks were not rolling over repo lending and large (uninsured) time deposits to banks, nonbanks were reluctant to inject new paid-in bank equity, and Fed initially tried to control interest rates by selling Treasuries to offset the increase in reserves due to discount window borrowing by banks. The remedy for Fed running out of Treasuries and controlling interest rates is quantitative easing with nonbanks to add reserves to banks and interest on excess reserves. The solution if Treasury must operate under a debt ceiling or insufficient deficit spending is quantitative easing. I think too many experts don't give the experts at Fed and Treasury due credit for attempting to provide liquidity under factual circumstances. I infer some of the above conditions from levels in the flow of funds.Joe Leotehttps://www.blogger.com/profile/01292763300917387201noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-46360848716134011332015-06-11T06:29:48.193-04:002015-06-11T06:29:48.193-04:00Yes, excess reserves may be more convenient for ba...Yes, excess reserves may be more convenient for banks (and interest rate advantages can go either way). But they cannot be used by anyone else. Treasury bills and Treasury repos can be used for liquidity management by everyone (who is big enough to trade repos). The formal banking sector has more position-making instruments than it needs, but this is at the cost of draining the non-banking sector's liquidity. The shadow banking sector is an extension of the formal banking system.<br /><br />And it is not just the problem of repo liquidity, about which there is a lot of whining. The loss of Treasurys on balance sheets makes investor balance sheets more vulnerable to a crisis. This also effects those investors that do not take part in repo trading, and do not face the same illiquidity risks like banks (e.g., pension funds).Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-807123011808951762015-06-10T22:27:26.287-04:002015-06-10T22:27:26.287-04:00Regarding the need for Treasuries outside federal ...Regarding the need for Treasuries outside federal government (Fed) this is a Fed paper on the liquidity and federal credit enhancements (read footnotes) of Agency MBS:<br /><br />http://www.newyorkfed.org/research/epr/2013/1212vick.pdf<br /><br />Interest on excess reserves (IOER) are effectively better than short term Treasury bills which had lower interest rates post-crisis. So QE provided the aggregate bank with the equivalent of Treasury bills. Treasury provided added assurance of credit enhancements for Agency MBS with properties similar to Treasuries but paying higher interest.Joe Leotehttps://www.blogger.com/profile/01292763300917387201noreply@blogger.com