Surely Sumner's smiling:
"The U.S. economy could use another boost, and it won't come from fiscal policy. Can the Federal Reserve provide it?"
http://online.wsj.com/article/SB10000872396390444873204577537212738938798.html?mod=googlenews_wsj
This is straight Market Monetarism-fiscal policy can't do it only monetary policy can. And Blinder argues in this post entitled "How the Federal Reserve Can Get Banks Lending Again" that the Fed should take off the IOER-Interest on Excess Reserves-which encourages banks to hold onto the reserves-because they get paid interest on them-rather than lend them.
"The simpler option is one I've been urging on the Fed for more than two years: Lower the interest rate paid on excess reserves. The basic idea is simple. If the Fed reduces the reward for holding excess reserves, banks will hold less of them—which means they will have to find something else to do with the money, such as lending it out or putting it in the capital markets"
"The Fed sees this as a radical change. But remember that it paid no interest on reserves before the 2008 crisis and, not surprisingly, banks held practically no excess reserves then. In early October of that year, Congress gave the Fed authority to pay interest on reserves, which it promptly started doing. When the Fed trimmed the federal funds rate to its current 0-25 basis-point range in December 2008, it also lowered the interest rate on reserves to 25 basis points, where it has been ever since."
"My suggestion is to push it lower in two stages. First, test the waters by cutting the interest on excess reserves (in Fedspeak, the "IOER") to zero. Then, if nothing goes wrong, drop it to, say, minus-25 basis points—that is, charge banks a fee for holding their money at the Fed. Doing so would provide a powerful incentive for banks to disgorge some of their idle reserves. True, most of the money would probably find its way into short-term money-market instruments such as fed funds, T-bills and commercial paper. But some would probably flow into increased lending, which is just what the economy needs."
It's true that the Fed didn't pay IOER prior to 2008 but it's interesting that it only was able to begin it by getting Congress' permission. How is this any different than fiscal policy at least in the sense that it's up to Congress?
One reason that is given to prefer monetary to fiscal policy as a stabilization tool is that fiscal policy is too contentious an issue. Miles Kimball explains this premise:
"Long-run fiscal policy is unavoidably political, since it involves the tradeoff between the benefits of redistribution and the benefits of low tax rates, but stabilization policy can and should be kept relatively apolitical. The politicization of stabilization policy in the last few years is an unfortunate, and fundamentally unnecessary, turn of events."
http://blog.supplysideliberal.com/post/27696861831/preventing-recession-fighting-from-becoming-a-political
That was actually Miles quoting Mike Konczal but he agrees with the premise and elaborates:
"The other type of redistribution, which is more controversial (because the redistributive benefit is smaller and the economic efficiency cost is higher) is taxing the rich in order to help the middle class. Given the fact that redistribution needs to be financed by taxes or by deficit spending, Republicans and Democrats differ substantially on how much redistribution they think should be done of either type. As a result, the political fights over long-run taxing and spending policy are often bitter."
Yet, what we've seen sine 2009, that many Republicans are as implacably opposed to monetary policy as they are to fiscal policy-how much of this is shear political opportunism; ie, monetary policy could help the President at least in theory and how much of it really is principled is open to debate.
We've heard talk of "Treason" and of treating Ben Bernanke "ugly." And as Blinder's quote shows, IOER is also the prerogative of Congress. Getting the House Republicans to accept this might not be any easier.
Another criticism of IOER is that it doesn't do much. Blinder finds this point silly-though he concedes it may be true:
"The other objection is that making the IOER zero or negative would push other money-market rates even closer to zero than they are now, thereby hurting money-market funds and otherwise impeding the functioning of money markets. My answer two years ago was that we have more important things to worry about. My answer today is that it has mostly happened anyway: U.S. money-market rates are negligible."
"It is noteworthy that the European Central Bank just jumped ahead of the Fed by cutting the rate it pays on bank deposits to zero—and European money markets did not die. Denmark's National Bank went even further, dropping its deposit rate to minus 20 basis points. Yet the Little Mermaid still sits in Copenhagen harbor."
"The Fed's hostility toward lowering the interest on excess reserves is almost self-contradictory. When Mr. Bernanke lists the weapons the Fed plans to use when the time comes to tighten monetary policy, he always gives raising the IOER a prominent role. His reasoning is straightforward and sound: If the Fed makes holding reserves more attractive, banks will hold more of them. Why doesn't the same reasoning apply in the other direction?"
"But suppose it doesn't work. Suppose the Fed cuts the IOER from 25 basis points to minus 25 basis points, and banks don't lend one penny more. In that case, the Fed stops paying banks almost $4 billion a year in interest and, instead, starts collecting roughly equal fees from banks. That would be almost an $8 billion swing from banks to taxpayers. There are worse things."
The 'it may not do anything but it's worth a try' argument is hard to argue with. Still you think of MMT-and also a recent piece in Alpha-that argues that it can't be beneficial as the banks don't lend out reserves...
Of course, many see MMT as merely a fringe group but if they're right it's a pointless exercise. What never ceases to amaze me is how "psychosomatic" the concept of monetary policy really is.
Phill Gramm made news in 2008 with his talk of Americans falling into a "mental recession" but in a way this is the whole premise of Monetarism. If we feel that things will get better, they will, If we don't they won't,
As Blinder mentioned the ECB recently took off IOER. He points out that the house didn't burn down. If the sky didn't fall though it didn't seem to give much positive benefit either. Indeed, Sumner the very next day declared that he didn't think it would have any impact as the ECB didn't mean it or was unable to signal confidence to the markets.
Critics of the MMers are accused of being too mechanical, too "hydraulic" etc. People who ask too much about a transmission mechanism are the "People of the Concrete Steppes." Yet if you conceptualize the economy as a medical patient what it seems to imagine is that we don't have to get the dosages or the surgery right just let the patient feel like he will get better and he will.
Obviously a doctor who prescribed sugar pills for serous problems would be sued for malpractice pretty quickly.
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