Fed As Interest-Rate Crackheads? The Funny Letter Received By Former FOMC’er Bob McTeer Regarding Cocaine Junkies

A Benjamin Cole post

“What is it about the Fed and raising rates? They are addicted to it like a junkie is addicted to cocaine as the one answer to every situation other than outright depression.”—A letter received by Bob McTeer, former Federal Open Market Committee (FOMC) member, as revealed on his blog.

The portrayal of the FOMC as interest-rate crackheads is funny—and yet falls short of the mark.

Not only do various FOMC members seem to have a monomaniacal obsession with raising rates, but the tool of QE has vanished from the short-term collective memories of FOMC’ers and Ben Bernanke.

The Fed Wants To Live in Yesterday

I have been reading Ben Bernanke’s blog, and wondering when he will tackle the topic of QE, which was, after all, his monetary policy flagship for several years.

Evidently I will have a long wait. Bernanke blogs long and hard about interest rates, and also about “normalizing” Fed policy—that is, raising rates. Maybe Bernanke is not yearning like an interest-rate crackhead, but…what happened to QE?

The policy of central-bank buying of bonds, aka quantitative easing or QE, seemed to work in the United States to boost aggregate demand and resulted in little if any inflation (while paying down the national debt, no less). What is not to like?

You would think central bankers would wheel out QE as the super-weapon to end all recession-depressions forever.

But endlessly we hear Fedsters crying to get back to the good old days, when a central bank could jigger interest rates and obtain macroeconomic results. The Fed seems to want to good old days of moderate inflation and a viable Fed policy consisting of hopping interest rates around—but without the moderate inflation.

Is that not a null set? Interest rates do not work at ZLB. And with a 2% inflation target then ZLB is always on the doorstep—when not in the house.

Bernanke Talks Up Big Federal Deficits

“But economically, it would be preferable to have more proactive fiscal policies and a more balanced monetary-fiscal mix when interest rates are close to zero.”—Bernanke, in his latest blog post.

In a fleeting mention, Bernanke relegates QE back “to the shelf,” once everything gets back to normal, presumably after Washington borrows and spends gobs of taxpayer money.

Yet, what has been the success of Japan in fighting deflation, after years—even decades—of mind-boggling and world-record federal deficits?

Until they recently got serious about QE, they were still in deflation!

Interest-rate Crackheads?

You know, the more I re-read that letter to Bob McTeer…the less funny it becomes.

Atlanta Fed Says Q1 U.S. GDP At Standstill; Nation Below Target-Inflation, Interest Rates Falling; Fed Ponders Rate Hike

A Benjamin Cole post

The Atlanta Fed, usually a quiescent bunch, just X’ed out growth in its Q1 forecast GDPNow index.

Of course, headline inflation is at 0% and rates on 10-year Treasuries are skidding below 2%. Hiring is seizing up, the Dow is stutter-stepping, and unit labor costs have not risen in six years.

And the Fed?

The Fed is endlessly jibber-jabbering about raising rates and getting back to normal.

I have some advice for the Fed: From the clues I detect, raising rates will not get you back to normal. My other advice to the Fed is to send reconnaissance teams to Europe and Japan. It you think now is not normal, wait ‘till you see what comes next.

Back to The Future: QE

I have been tooting all along that the Fed should stay with QE, adding my kazoo to the cacophonic, conductor-less global orchestra of macroeconomic e-pundits.

But, perhaps it wouldn’t matter if I had Gabriel’s Trumpet, and not a kazoo.

I suspect Janet Yellen is marching to the Fed’s own drum, and the beat goes on. And on. And on. And on

Bernanke Disappears QE. Is Blogger Beckworth Seduced?

A Benjamin Cole post

Former Fed Chair Ben Bernanke is blogging, but somehow the topic of quantitative easing (QE) has disappeared from the room, at least so far. In fact, ignoring the pachyderm QE standing alongside, Bernanke blogs there is little the Fed can do even about interest rates.

This policy dead-end is then supplemented by Bernanke’s most recent post, in which he points out that if real interest rates are zero, then it makes commercial sense to flatten the Rocky Mountains and build a toll road across. In short, low interest rates must result in explosions of investment, and a more-robust economy.  Still no mention of QE.

David Beckworth, Western Kentucky University scholar and wonderful Market Monetarist blogger, appears to be seduced, at least for now. In Beckworth’s latest post, he seems to accept Bernanke’s proposition that low interest rates alone are enough to beat recessions, ergo secular stagnation is a hoax.

Japan, Europe, And the United States?

Of course, we have seen in Japan and now Europe, that very low interest rates do not always do the trick. In particular, rates were low for 20 years in Japan, and they mired along. Corporate bond yields are skimpy in the U.S. presently, yet business investment is lackluster.

This Bernanke-ist historical amnesia regarding QE is troubling for another reason: As a practical matter, it may be that the United States enters the next recession with interest rates still dead in the water. Then, the Fed will be largely out of ammo even as a recession unfolds—unless it goes to QE.

Which raises the most important question of all: Should the Fed wait until there is a recession well under way to resort to QE—the present inclination—or should it use QE as a prophylactic against recessions?

QE As Conventional Policy?

What would be the argument against the Fed conducting $100 billion a month of QE whenever the nominal GDP growth rate shrank below, say, 3%?

Could it be that, for reasons not yet in textbooks, that QE must become conventional policy at central banks?

Buying off government bondholders with fresh cash has not resulted in meaningful inflation anywhere yet, but has coincided with better growth and lower public debt loads.

Is the reluctance to use QE a case of dogma and theory trumping practical observation?

With QE, The Fed Digitized $12,539 For Every U.S. Resident

A Benjamin Cole post

Of late, certain economists and observers have described central bank quantitative easing as, and only as, “a swap of bank reserves for bonds.”

Thus we have University of Chicago light John Cochrane expressly delimiting his description of the Federal Reserves $4 trillion QE program to a “swap,” and George Mason scholar and blogger-titan Tyler Cowen calling the European Central Bank’s QE efforts “an asset swap.”

In the old days, when central banks conducted conventional open market operations, this limited definition may have been mostly true. Before 2008, the Fed tried to stimulate the economy by buying bonds, and then automatically placing an equal amount of reserves into the commercial bank accounts of the 22 primary dealers—the Morgan Stanleys, the Cantor Fitzgeralds, the Nomura securities—the only entities from which the Fed buys bonds.

As commercial banks can lend vast multiples of reserves—from 10 to 30 times—the Fed boost of commercial bank reserves helped allow bank new lending, and added much more money to circulation.

After 2008

But the world has changed. As we know, banks are sitting on reserves. So, from the old perspective, post-2008 QE was inert. Some scholars insist so today.

But the scope and scale of QE after 2008 dwarfed any open market operations the Fed had ever attempted pre-2008, when the Fed might buy or sell in the tens of billions of dollars from time to time.

With QE, the Fed bought $4 trillion in bonds, in a space of five years.

Post-2008, the stimulus comes from the fact that bond sellers have been given $4 trillion in cash, where before they had $4 trillion in inert bonds. A bond-owner cannot spend or re-invest the cash locked-up in a bond.

By the way, $4 trillion means about $12,539 in new digitized cash for every U.S. resident, under QE. Bank reserves swelled by an equal amount. And the Fed had $4 trillion in bonds.

(To understand QE please read this Fed-approved  QE CHART)

The Unanswered Questions

In a remarkable riddle, no one seems to really know what the bond-sellers did with their $4 trillion, and I have queried Fed representatives on this point. (If any readers have a clue, tell us!)

No doubt, some who sold bonds to the primary dealers (who sold to the Fed) deposited their share of the $4 trillion of newly digitized cash into commercial banks, where it might be considered inert. Other bond-sellers re-invested into other bonds, stocks or property, a process the Fed describes in the most ascetic, neutral terms possible, as “portfolio rebalancing.” The U.S. did have stock, bond and property rallies alongside QE—you think $4 trillion of new demand might have played a role?

Some bond-sellers might have simply spent their money.

Another riddle is that since QE, about $500 billion in paper U.S. cash has entered circulation, bringing the paper-cash total to $1.34 trillion, as I addressed in my last post. No one knows how much of this cash circulates domestically, or in the overseas underworld briefcases that figure in so many celluloid storylines. The serious cash-scholar Edgar Feige, University of Wisconsin prof, says 75% of U.S. cash stays onshore, probably in U.S. grey markets.

This topic of cash is resolutely ignored by most economists—an ostrich-pose that becomes increasingly untenable. With $4,200 in paper money circulating per U.S. resident, the role of cash must be growing, not shrinking. The fact that there is a huge schism between the lives of sinecured academics and grey marketeers in the U.S. does not mean there are no grey markets.


The Fed’s QE program was modestly successful, limited only by its scale—too small—and the Fed’s penchant for obscurantism, and possibly its political instinct to avoid any description of QE as “printing money.”

But the Fed did print (digitize) $4 trillion, and they even monetized U.S. debt, when they bought U.S. Treasuries. Heresy, upon heresy. I mean, printing $12,539 for every U.S. resident is some serious money printing (digitizing).

Would that the Fed had printed up a few trillion dollars more.