Which is what you'd think if you listen to Scott Sumner and Mark Sadowski. Mark likes to insist that fiscal policy is like a shiny toy dashboard that has no power to steer the car at all. Tom Hickey pointed to where Bernanke admitted that in fact the CB is the agent of the Treasury. Of course, as Sumner's Minister of Information, Mark came in with the save for Sumner like he always does. It turns out this isn't what Bernanke means even though it's what he said. It's like when Bernanke says explicitly we need more fiscal stimulus and Sumner tells us to pay no attention-he knows much more about that Bernanke really thinks than
"Bernanke was responding to a question by Senator Pat Toomey about how the Fed would have dealt with the effect of hitting the debt ceiling:"
"Toomey: "So clearly there were plans regarding how to deal with processing of Fed payments, for instance, and other things. Could you give us a sense of what those plans consist of and what you can tell us of those plans?"
"Bernanke's response referred specifically to the processing of payments. When Bernanke said "we are the agent, of course, of the Treasury" he meant that the Fed is the *fiscal* agent of the Treasury, as outlined in Section 15 of the Federal Reserve Act (FRA):
http://www.federalreserve.gov/aboutthefed/section15.htm
"In brief, funds held in the general fund of the Treasury are deposited at Federal Reserve banks, which then act as fiscal agents of the Treasury."
"The word "agent" in the context of Bernanke's response to Toomey's question thus obviously referred to the processing of Treasury payments, not to the conduct of monetary policy."
"This particular quote was originally tweeted by Stephanie Kelton, who either did not understand its meaning (although she should have), or she is using it for its value as the kind of out-of-context "gotchya" quotes that one finds so typical of adherents of MMT. Neil Wilson, and Tom Hickey are similarly guilty of either being ignorant of its true meaning, or of trying to misrepresent the content of Bernanke's response to Toomey's question."
"Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary."
http://monetaryrealism.com/did-the-fed-have-a-legal-basis-for-rejecting-the-coin/
Bernanke himself.
"Now there's something that really needs to be put into context."
"Bernanke was responding to a question by Senator Pat Toomey about how the Fed would have dealt with the effect of hitting the debt ceiling:"
"Toomey: "So clearly there were plans regarding how to deal with processing of Fed payments, for instance, and other things. Could you give us a sense of what those plans consist of and what you can tell us of those plans?"
"Bernanke's response referred specifically to the processing of payments. When Bernanke said "we are the agent, of course, of the Treasury" he meant that the Fed is the *fiscal* agent of the Treasury, as outlined in Section 15 of the Federal Reserve Act (FRA):
http://www.federalreserve.gov/aboutthefed/section15.htm
"In brief, funds held in the general fund of the Treasury are deposited at Federal Reserve banks, which then act as fiscal agents of the Treasury."
"The word "agent" in the context of Bernanke's response to Toomey's question thus obviously referred to the processing of Treasury payments, not to the conduct of monetary policy."
"This particular quote was originally tweeted by Stephanie Kelton, who either did not understand its meaning (although she should have), or she is using it for its value as the kind of out-of-context "gotchya" quotes that one finds so typical of adherents of MMT. Neil Wilson, and Tom Hickey are similarly guilty of either being ignorant of its true meaning, or of trying to misrepresent the content of Bernanke's response to Toomey's question."
http://diaryofarepublicanhater.blogspot.com/2014/02/ben-bernanke-proves-sumners-wrong-about.html
So what Mark is claiming is that the Fed is the agent of the Treasury only on the matter of the debt ceiling. Here's the problem. We have this toy fiscal authority that's just for show. Yet it is this toy authority what gave the Fed it's mandate in 2014, It created it, it defined it's duties and it has on a number of occasions since adjusted and altered this mandate. Sumner's claim of monetary offset could only even plausibly apply in the post Volcker Fed. In the Eccles Fed, clearly the Treasury wholly dominated the Fed. Into the 70s we didn't have the kind of 'Fed Independence' we've become accustomed to over the last 33 years or so.
Logically, this could change, then. Barney Frank and the late Congressman Henry Gonzalez among others has argued that the Fed ought to have its independence curbed a little. A good start would be to get rid of the 5 bank appointed members of the FOMC. Greenspan himself knows this and has admitted that Fed Independence continues at the consent of the fiscal authorities. Now unless Mark and Sumner would like to claim that the CB was first and by it's action created the Presidency, Congress, and the SJC I don't see how you get around this. However, if there is still somehow some confusion on this point where some people like Mark think that the CB was created in 1789 and the toy Congress only in 1914 Tom Hickey has made it even more clear with what he's left now:
"12 USC § 246 – Powers of Secretary of the Treasury as affected by chapter"
"Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this Act in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary."
http://monetaryrealism.com/did-the-fed-have-a-legal-basis-for-rejecting-the-coin/
As Archie Bunker would say, case closed.
"This particular quote was originally tweeted by Stephanie Kelton, who either did not understand its meaning (although she should have), or she is using it for its value as the kind of out-of-context "gotchya" quotes that one finds so typical of adherents of MMT. Neil Wilson, and Tom Hickey are similarly guilty of either being ignorant of its true meaning, or of trying to misrepresent the content of Bernanke's response to Toomey's question."
ReplyDeleteTo the contrary. Of course, BB is addressing a particular question but he gives a generic answer — The Fed is the agent of the Treasury, that is, the government's bank and it takes its cues from the Treasury other than in setting monetary policy, i.e., the FFR and discount rate. This constitutes the political independence of the cb, which continues to exist only as long as Congress delegates it. The Fed values its political "independence" and is not going to jeopardize it by join going against Congress to any degree that would provoke Congress to change the rules. The idea that Congress created the Fed as brake on its own fiscal policy is simply not believable.
The Fed and Treasury are not adversarial. They closely cooperate operationally on a daily basis wrt to monetary and fiscal policy, to the degree that one can say that operationally they are informally consolidated. Even through the Fed is politically independent in setting monetary policy, i. e., the interest rate, the Fed and Treasury are joined at the hip in conducting the government's policy, of which monetary policy is one part, which Congress has delegated to the Fed in order to isolate it from day to day politics. (In the UK, the BoE lets the banks set Libor, and look what happened.) When the Fed wanted to pay IOR in order to increase liquidity while still setting the rate, Congress obliged.
BTW, here is Alan Greenspan on US solvency, for example.
ReplyDeletePAUL RYAN: “Do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?”
ALAN GREENSPAN: “Well, I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.”
http://youtu.be/GdOsybbBVEU
Here is former Fed chair Marriner Eccles on the Fed funding the Treasury indirectly:
"There was a feeling that this [Fed overdrafts to the Treasury's General Account] left the door wide open to the Government to borrow directly from the Federal Reserve bank all that was necessary to finance the Government deficit, and that took off any restraint toward getting a balanced budget. Of course, in my opinion, that really had no relationship to budgetary deficits, for the reason that it is the Congress which decides on the deficits or the surpluses, and not the Treasury. If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed.
"Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true."
http://jpkoning.blogspot.com/2012/06/marriner-eccles-on-treasury-borrowing.html