On his blog, John Cochrane reports about a Hoover panel including him, Charles Plosser, and John Taylor.
Cochrane focuses on the liability side. He favors a large quantity of (possibly interest bearing) reserves for financial stability reasons. Plosser focuses on the asset side and is worried about credit allocation by the Fed, for political economy reasons. Taylor favors a small balance sheet. Cochrane also talks about reserves for everyone, but issued by the Treasury.
On his blog, Roger Farmer advertizes his new book, “Prosperity for All,” and argues that governments should stabilize asset prices:
Following the Great Stagflation of the 1970s, economists backtracked and revived the classical economic theory that had dominated academic economics for a hundred and fifty years, beginning with Adam Smith in 1776 and culminating in the business cycle theory described by Keynes’s contemporary Arthur Pigou in his 1927 book, Industrial Fluctuations. That backtrack was a big mistake. It is time to realize that much, but not all, of Keynesian economics is correct. …
In my book Prosperity for All: How to Prevent Financial Crises, … I do not conclude that more government spending is the right way to cure a depression. Instead, I argue for a new policy in which central banks and national treasuries systematically intervene in financial markets to prevent the swings in asset prices that have such debilitating effects on all of our lives.
The control of asset prices will seem like a bold step to some, but so too did the control of the interest rates by the Open Market Committee of the Federal Reserve System when it was first introduced in 1913. We do not have to accept hyperinflations of the kind that occurred in 1920s Germany. Nor should we be content with the 50% unemployment rates that plague young people in Greece today. By designing a new institution, based on the modern central bank, we can and must ensure Prosperity for All.
The New Keynesian agenda is the child of the neoclassical synthesis and, like the IS-LM model before it, New Keynesian economics inherits the mistakes of the bastard Keynesians. It misses two key Keynesian concepts: (1) there are multiple equilibrium unemployment rates and (2) beliefs are fundamental. My work brings these concepts back to center stage and integrates the Keynes of the General Theory with the microeconomics of general equilibrium theory in a new way.
inadequate collateral and lack of legal authority were not the reasons that the Fed let Lehman fail. …
… the primary decision maker was Treasury Secretary Henry Paulson–even though he had no legal authority over the Fed’s lending decisions. … evidence supports the common theory that Paulson was influenced by the strong political opposition to financial rescues. … Another factor is that both Paulson and Fed officials, although worried about the effects of a Lehman failure, did not fully anticipate the damage that it would cause.
In his blog, Ben Bernanke discusses the merits of “helicopter drops” as a monetary policy tool.
[A] “helicopter drop” of money is an expansionary fiscal policy—an increase in public spending or a tax cut—financed by a permanent increase in the money stock.
… the Fed credits the Treasury … in the Treasury’s “checking account” at the central bank, and those funds are used to pay for the new spending and the tax rebate.
… it should influence the economy through a number of channels, making it extremely likely to be effective—even if existing government debt is already high and/or interest rates are zero or negative. … the channels would include:
the direct effects of the public works spending on GDP, jobs, and income;
the increase in household income from the rebate, which should induce greater consumer spending;
a temporary increase in expected inflation, the result of the increase in the money supply. Assuming that nominal interest rates are pinned near zero, higher expected inflation implies lower real interest rates, which in turn should incentivize capital investments and other spending; and
the fact that, unlike debt-financed fiscal programs, a money-financed program does not increase future tax burdens.
[Debt financed spending programs lack channels 3 and 4.]
[Helicopter drops are subject to various] practical challenges of implementation, including integrating them into operational monetary frameworks and assuring appropriate governance and coordination between the legislature and the central bank.
The Financial Crimes Enforcement Network (FinCEN), part of America’s Treasury, [has] rescinded a devastating finding against a European bank suspected of facilitating money-laundering. The withdrawal, less than a year after the designation, looks like a climbdown. …
Some suspect the bank was a pawn in a tussle between governments: miffed that Andorra was slow to adopt American-style anti-money-laundering rules … America decided to show who was boss by selecting a bank to pick on. There is some evidence to support this sacrificial-lamb theory. … an American diplomat suggested that America chose to “use the hammer” on BPA as a way of resolving wider concerns about Andorra. …
These cases highlight two problems with FinCEN’s money-laundering cudgel. The first is double-standards. It tends to go after only small banks in strategically unimportant countries … The second is its lack of openness. It faces no requirement to make detailed evidence public, or even available to a court, at the time of action. By the time any challenge is heard, it may be too late for the bank in question.
In his FT blog, Larry Summers argues for a “quite radical” change in government debt-management. He proposes several lessons:
“Debt management is too important to leave to Federal debt managers and certainly to leave to the dealer community. … when interest rates are near zero, it has direct implications for monetary and fiscal policy and economic performance … and … financial stability.”
“… it is fairly crazy for the Fed and Treasury, which are supposed to serve the national interest, to pursue diametrically opposed debt-management policies. This is what has happened in recent years, with the Fed seeking to shorten outstanding maturities and the Treasury seeking to term them out.”
“Standard discussions of quantitative easing … are intellectually incoherent. It is the total impact of government activities on the stock of debt that the public must hold that should impact on financial markets.”
In the US, “the quantity of long-term debt that the markets had to absorb in recent years was well above, rather than below, normal. This suggests that if QE was important in reducing rates or raising asset values it was because of signalling effects … not because of the direct effect of Fed purchases.”
“The standard mantra that federal debt-management policies should seek to minimise government borrowing costs is … wrong and incomplete. … it is risk-adjusted expected costs that should be considered. … it is hard to see why the effects of debt policies on levels of demand and on financial stability should be ignored.”
“The tax-smoothing aspect, which is central to academic theories of debt policy, is of trivial significance.”
Rather than providing opportunities for carry trade, “[t]reasury should reverse the trend towards terming out the debt. Issuing shorter term debt would also help meet private demands for liquid short-term instruments without encouraging risky structures such as banks engaged in maturity transformation.”
“Institutional mechanisms should be found to insure that in the future the Fed and Treasury are not pushing debt durations in opposite directions.”
In a recent paper, Robin Greenwood, Sam Hanson, Josh Rudolph and Larry Summers discuss the joint effect of Fed and Treasury policy on the maturity structure of government liabilities in the hands of the private sector. John Cochrane commends the paper in a blog post.
Greenwood, Hanson, Rudolph and Summers make several points. First, “monetary and fiscal policies have been pushing in opposite directions in recent years.” In spite of QE, long-term government debt held by the private sector increased, mostly due to government deficits but also because the government lengthened the maturity of its debt. Second, Fed and Treasury policies largely are uncoordinated. They argue that this is suboptimal, in particular when the Fed strongly intervenes as it did in the recent QE episodes.
The Federal Reserve has focused purely on the effects that its bond purchases were expected to have on long-term interest rates and, by extension, the economy more broadly. … it completely ignored any possible impact on government fiscal risk, even though the Federal Reserve’s profits and losses are remitted to the Treasury. Conversely, Treasury’s debt management announcements and the advice of the Treasury Borrowing Advisory Committee (TBAC) have focused on the assumed benefits of extending the average debt maturity from a fiscal risk perspective, and largely ignored the impact of policy changes on long-term yields. To the extent that the Federal Reserve and Treasury ever publicly mention the other institution’s mandate, it is usually in the context of avoiding the perception that one institution might be helping the other achieve an objective. Specifically, the Fed does not want to be seen as monetizing deficits, while the Treasury has been reluctant to acknowledge the Fed as anything more than a large investor.
Third, they argue that from a consolidated government policy perspective, the optimal debt maturity structure is rather short. This saves on interest payments to the private sector (on average) and reduces “liquidity transformation” by the financial sector with dangerous consequences for financial stability. They downplay the risk sharing benefits of longer-term debt and argue that short-term debt has additional advantages at the zero lower bound.
Pages 11-12 contain the following figure, among others: