In Greenspan, Rubin had his “wizard”!

In “The Search for a Monetary-Policy Wizard and Political Moral Hazard”, Rubin downplays monetary policy:

In the eurozone, leaders of key troubled countries—including Italy, Spain, France and, most immediately, Greece—need to undertake structural reforms, further strengthen banking systems, and strike a fiscal balance between sufficient discipline to win market and business confidence and adequate fiscal room for growth. As to Japan, the fundamental requisite is structural reform.

In all three major advanced economies, there should be a clear-eyed view of the moral hazard created by disproportionate focus on central banks. Monetary policy should be treated with a pragmatic analysis of all its attendant risks and rewards. Instead of looking for a wizard at the end of a yellow-brick road, we should demand that elected officials take the difficult fiscal, public-investment and structural actions that could do so much good now and that are imperative for the longer term.

Does he really think he could have accomplished the “difficult fiscal actions” in his time with the low quality monetary policy of today and at the same time keep the economy growing vibrantly?

Rubins Wizard_1

Rubins Wizard_2


Rubins Wizard_3

A “price” is never “guilty” of anything. It´s just a variable that reflects its fundamental determinants!

Matt O´Brien does a long and convoluted analysis on the dollar in “The strong dollar is the biggest threat to the economic recovery

So the dollar, in other words, is strong because the U.S. economy is strong, and it is about to get even stronger because the Fed is about to start tightening even more. Well, that and the fact that the rest of the world is slowing down.

He could have been more simple and explicit. Saying the strong dollar reflects the (relatively) strong economy is fine. Saying at the same time that it is the biggest threat to the economic recovery is just the common mistake of reasoning from a price change.

What is clear, however, is that it´s not the strong dollar that´s the big threat to recovery. It´s the fact that the Fed is “about to start tightening even more”. Among other things, that would cause a shift in the demand curve for dollars, strengthening it. In that case, both the strengthening of the dollar and the fall in the pace of the recovery would be the consequence of monetary policy tightening.

Is John Cochrane’s “The Banks Just Swapped Treasuries For Reserves—QE Was Mostly Inert” Narrative A Little Glib? Do Right-Wingers Confuse Financial Intermediaries With Ultimate Bond Buyers And Sellers?

A Benjamin Cole post

Many right-wingers predicted the Hyper-Inflationary Doomsday when the U.S. Federal Reserve undertook quantitative easing back in 2009. The Fed ultimately bought about $4 trillion in Treasuries and mortgage-backed securities, and we now see near-deflation on the horizon.

Meanwhile, economic growth in the U.S. picked up after QE, particularly when the Fed finally went to open-ended results-dependent QE3 in 2012. It sure looks like central bank QE and printing (digitizing) money works, at least when you have an underutilized modern-day economy near deflation (duh). My guess is the Fed should have done QE bigger, harder and longer.

Never to be chastened, the right-wing had to develop a new counter-argument to this heresy of a central bank printing money with good results. But the standard-issue right-wing hyperinflation-scare stories were in tatters.

Thus, the “banks just swapped Treasuries for reserves” argument was fashioned, with a side-dollop story that QE was mostly inert. The “economy recovered through natural forces, and see the 1921 recession” story line emerged.

Some right-wingers even say, “The Fed did not print money.”


But let’s examine the “with Fed QE, banks just swapped Treasuries-for-reserves” narrative. Does it hold water?

Well, no.

The Federal Reserve did buy $3 trillion in Treasuries—but not from commercial banks. The Fed buys their Treasuries from “primary dealers.” That is a list of 21 firms that includes Cantor Fitzgerald, Goldman Sachs, Jefferies, Nomura Securities, etc. These are government bond-dealers. Not commercial banks. Even with Glass-Steagall in ruin, these old business lines broadly hold up.

The primary dealers did not have $3 trillion in Treasuries in their own accounts or inventories, so they had to go into bond markets and buy $3 trillion in Treasuries, and sell those to the Fed.

The Fed, in fact, printed (digitized) $3 trillion and bought the Treasuries from the primary dealers. The primary dealers bought the Treasuries from the real sellers, who were people and companies. The primary dealers were intermediaries.

So where swelling commercial bank reserves come from? From the NY Fed: “So when the Fed sends and receives funds from the [primary] dealer’s account at its clearing bank [depositary institution, or commercial bank], this action adds or drains reserves to the banking system.”


Now, after QE, the real or ultimate sellers of the Treasuries —not the primary dealers—had the freshly printed (digitized) Fed cash in their hands.

The real, or ultimate, private-sector bond sellers could then buy other bonds, or equities, or property, or spend the money, or bank it.

Now, it happens at the time the Fed was conducting QE that commercial bank deposits in the U.S. also swelled.

To be sure, some of the people and companies selling Treasuries to the primary dealers simply banked the freshly printed money, causing commercial bank deposits and related reserves to swell. And such deposits could be said to be “inert.”

But the swelling in bank deposits had many fathers. Households were also paying down debts and saving more in bank accounts. Corporations were and are sitting on growing cash hoards. Then, there is an undetermined amount of global flight capital deposited and parked into U.S. banks, from the Mideast and Far East.

In short, the people selling Treasuries to the primary dealers put some of the freshly printed money into banks, but they also then bought equities or property or bonds or spent the loot. All good, all expected—and all stimulative to the economy. And as the economy had plenty of slack, stimulative but not inflationary.

John Cochrane

John Cochrane, the brilliant University of Chicago econ prof, has long touted the desirability of commercial banks with trillions of dollars of excess reserves, and he may have a point.

But Cochrane also reprises that “banks just swapped Treasuries for reserves” theme. But he never explains where primary dealers obtained the bonds they sold to the Fed, or that primary dealers have accounts at depositary institutions.

It strikes me that Cochrane is providing a glib explanation, and obscures some very important facts on the ground: Like who are the ultimate sellers of the bonds purchased by the Fed, and what do they really do with the freshly printed cash they have in their pockets?

Poland never really understood why it didn´t crash in 2008

It took three years, but in late 2011 Poland finally botched up and went the way of the majority of countries, letting NGDP fall way below trend. They didn´t (correctly) react to the 2007-08 oil price rise, like the US, UK, EZ, etc. and fared well, but didn´t resist when oil prices picked up again in 2010-11, when, among the initial group, only the ECB was dumb enough to react.

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Ravi Varghese tweeted: “I guess every central bank has at least one cringe-worthy member. Polish edition with Jan Winiecki”

Annual price growth dropped below zero in July, starting Poland’s longest stretch of deflation since the statistics office started publishing monthly price data in the 1980s. Consumer prices dropped 1.3 percent in January from a year earlier, deepening their 1 percent decline in December.

Inflation has undershot the central bank’s 2.5 percent target for 26 months and has been below the lower bound of its 1.5 percent-3.5 percent tolerance range for two years.

Winiecki said “it’s quite possible” that sustained deflation or below-target inflation may prompt the next Monetary Policy Council, which takes office in early 2016, to consider “whether it makes sense” to keep targeting price growth at 2.5 percent.

It’s probably impossible to achieve this CPI target, and I don’t see anything changing this for another decade or so,” Winiecki said.

As the Oscar-winning editorial punch line from the Guardian said:

If that is the analysis, though, then it really is time to retire the target, and move to another that is in line with the real objectives. For when chancellors cheer at their own targets being missed, then, instead of strategic economic direction, we are left with aiming in the dark.

Oscar for Best Editorial Punch Line in the “Monetary Policy Target” Category

The Guardian view on inflation: way off target

George Osborne puts his personal weight behind the target, by reaffirming it in every budget. He has shown himself especially alert to the danger of dragging the economy down by obsessing about an overshoot, refining the mandate to empower Threadneedle Street “to use unconventional monetary instruments to support the economy”. How odd it was, then, to have the same chancellor welcome last week’s slide in inflation to so far below where he thinks it should be as “a milestone for the British economy”.

At one level, of course, Mr Osborne – whose sudden enthusiasm for disappearing inflation was loyally echoed by his Lib Dem deputy, Danny Alexander, as well as by Nick Clegg – is simply trying to say popular things before an election. Inflation is down because petrol has got cheaper, and most voters will be cheerful about that, so there is no political merit in souring the good news. And indeed, it could even be that the economic effects of ultra-low inflation will prove benign, if it is indeed cheap oil that is the sole cause.

If that is the analysis, though, then it really is time to retire the target, and move to another that is in line with the real objectives. For when chancellors cheer at their own targets being missed, then, instead of strategic economic direction, we are left with aiming in the dark.

HT Giles Wilkes

Oscar for Best Headline in the “Reasoning from a Price Change” Category

Oil’s Plunge Could Help Send Its Price Back Up

If something is cheaper, people will likely buy more of it. That core principle of economics is proving to be especially true with oil after its recent plunge.

That means: Oil prices plunge over an elastic mat and get propelled back up!

Oil jumps up


No way to conduct monetary policy!



Patience isn’t a virtue when it is too-rigidly defined by markets.

Federal Reserve Chairwoman Janet Yellen testifies next week before Congress in one of her semiannual trips to Capitol Hill, giving investors another chance to obsess over when the central bank is likely to begin raising short-term interest rates. In addressing questions about the so-called liftoff, Ms. Yellen must take on two communication challenges.

The first is to soften investors’ interpretation of what will happen when the Fed drops the word “patient” from its post meeting statement. The general view in the markets is that once this occurs, a rate increase will follow two meetings later.

But as the Fed tries to regain a more normal monetary policy stance, it will surely want to get less specific in its guidance. The idea is that investors should be prepared for it to raise or lower rates at any meeting, as used to be the case before the current era of zero rates.

Re-establishing this mind-set is no easy task. As shown by minutes of the Fed’s January meeting, released this week, policy makers fretted that dropping the word “patient” would risk a shift in market expectations for tightening in an “unduly narrow range of dates.” That could cause sharp market moves.

Reminded me of this: 


Is an academic discussion of free speech potentially traumatic? A recent panel for Smith College alumnae aimed at “challenging the ideological echo chamber” elicited this ominous “trigger/content warning” when a transcript appeared in the campus newspaper: “Racism/racial slurs, ableist slurs, antisemitic language, anti-Muslim/Islamophobic language, anti-immigrant language, sexist/misogynistic slurs, references to race-based violence, references to antisemitic violence.”

No one on this panel, in which I participated, trafficked in slurs. So what prompted the warning?

Smith President Kathleen McCartney had joked, “We’re just wild and crazy, aren’t we?” In the transcript, “crazy” was replaced by the notation: “[ableist slur].”

Can President Obama Yet Appoint 2 And 8/11ths of the 12 FOMC Members? Maybe.

A Benjamin Cole post

In addition to the present two empty seats on the seven-member Federal Reserve Board, there will soon be two empty regional Federal Bank presidencies—happily enough, we are talking about the pending exits of Charles Plosser, Philadelphia, and Richard Fisher, Dallas.

Okay, it gets complicated, but the short story is that 11 non-NY regional bank presidents rotate on and off of four seats on the 12-member Federal Open Market Committee (FOMC), the body that makes U.S. monetary policy.

So who appoints the 12 Fed regional bank presidents? They are chosen by the nine-member regional boards of directors—but also subject to approval of the Federal Reserve Board itself. That’s important.

Market Monetarists, This Is Our Hour!

Together, the Fisher-Plosser replacements will have 4/11ths + 4/11ths of an FOMC vote, or 8/11ths. Moreover, all Fed regional presidents attend every FOMC meeting, and participate, thus becoming part of the consensus or mood.

Both Fisher and Plosser were anti-inflation hysterics, voting for tighter money even in the Great Recession, and sounding relentless klaxons of the inflationary Doomsday ahead.

Events have shown otherwise, to put it mildly.

The dynamically-wrong duo also were prominent media presences, and thus confused, if not actively undercut, forward guidance messages from the Fed.

Action Plan

If you are a Market Monetarist, or just want a more growth-oriented Fed, and live in the Dallas and Philadelphia areas, I encourage you to contact the boards of your local Fed regional bank, and send a friendly e-mail advising such.

Here is the contact info:




There are business journals in those two markets, the Philadelphia Business Journal and the Dallas Business Journal.

The local business journals (some of which I worked for, many moons ago) are very receptive of locally authored op-eds. If a Dallasian or Philadelphian wishes, I can write an op-ed for placement in the two business journals, under your name (edit as you see fit, of course).

And, all of us can send e-mails to the national Federal Reserve Board, or Janet Yellen, advising a signal be sent to Philadelphia and Dallas that only “responsible” candidates for appointment to regional bank presidencies will be approved. In English, “Do not send any more tight-money nuts to the FOMC.”

It is worth pondering that whoever replaces Fisher and Plosser earns a 4/11ths seat on the FOMC for five years—but since Fed regional bank presidents are routinely re-appointed by the local boards, that term can stretch out indefinitely. Fisher and Plosser both served 10 years.

That is a long time to listen to another tight-money hysteric, let alone to witness the damage that could be done to the real economy.

Mr. Bullard is in a hurry!

Concerning the FF rate increase, he says:

Federal Reserve Bank of St. Louis President James Bullard said the U.S. central bank needs to change its policy statement to give it more room to maneuver with interest rate increases, in comments that also expressed hope the first rate rise will come soon.

“I do think it’s important to provide the [Federal Open Market Committee] some optionality” when it comes to its choices about what to do with short-term interest rates, Mr. Bullard told a Sirius satellite radio program on Friday.

“It would be important to take out the patient language at the March meeting” to allow the Fed to better tie changes in short-term rates to changes in economic data, he said.

Later he says:

Mr. Bullard said his preferred way of raising rates would be to boost the rate the Fed pays banks for reserves to 0.50%, while lifting the rate offered on reverse repurchase agreements to 0.25%, with the overnight fed funds rate target trading between those two points. Mr. Bullard said making the first move will help ease fears the Fed will get behind the curve and be forced to engage a more aggressive and disruptive campaign of interest rate increases.

Bullard does not get that, as it is the Fed is behind the curve. If not, why with all the so-called “extreme” degree of policy accommodation inflation has been below the 2% target and is still travelling in the wrong direction?

Bullard in a hurry

His “hearty ignorance” shows up clearly in the last paragraph:

Mr. Bullard shrugged off the impact of the strong U.S. dollar on the economy and said the nation would be getting additional support from low oil prices and low borrowing costs. He expressed surprise over the state of European economic weakness.

I bet that he would be extremely worried about inflation if oil prices were on the rise and the dollar was depreciating.

These people are “unidirectional”. For them inflation can never be too low and always risks going too high!