The new administration’s rescue plan(s) will impact over the longer term, if at all. There will be no near term impact, zero, notwithstanding the mix. We are left with the Fed.
Few of us specialize in central banking. Yet central banks - Fed if American, Bk of Eng if Brit, ECB if European - hold the key to the West’s economic well being. Fed policy now impacts all of us Americans directly, sometimes immediately. Thus, hadn’t we better get a grip? Who are these guys and what are they up to?
We are told that the Fed’s target is near zero. What in the world does this mean? From soph year, Eco & Bkg 101 recall that banks are required to hold a certain % of reserves against loans. Day to day some are flush, some are short. Those that are flush lend o/n to those that are short. The rate they charge is called the Fed Funds rate. This is also the Fed’s target. Here is why. Reserves and currency are base money - the heart of the system. The Fed figures that by manipulating, fine tuning the amount of reserves available it can fan or retard the economic flames. Very true, usually. The FF’s rate simply indicates tension. The Fed can increase or decrease the supply of "non-borrowed" reserves through so-called "open-market operations". No big deal here. It means that the NY desk injects reserves by buying U S securities, usually on a temporary basis, or repo, agreeing to reverse the transaction in a few days. It does the reverse to shrink reserves. In the orchestration it is far more complex; fine, we don’t care as long as we have the thrust of it.
So now, with the FF’s target at near zero banks can fetch all the reserves they want (with which to make loans) at practically nothing. But they’re not. Why? It’s not just that they’re risk adverse - wimps really, but that is for another sketch. It’s that many of their assets are near garbage and even they don’t know what they’re worth, yet. They’d rather see to that first, as soon as they can get a grip, poor things.
Back to the Fed. So orthodox policy is not working. What is next is what Bernanke calls "quantitative easing" or the Bk of Eng "the nuclear option". It’s not nuclear or new, just rarely used. No one at the Fed has much experience with it; yet the Fed as it turns out can buy anything they want, outright (not temporary, not a repo) - a herd of long horn steers / the NY Giants. All the Fed needs is emergency powers and those exist under Article 13 (3) of the code. Where does the Fed get the $? Out of thin air. For a non-special forces approach, assume the U S gov’t cuts taxes, financed by bond issuance. The Fed can buy this US debt outright. The Fed’s balance sheet expands, the $ goes to US citizens.
But the Fed is now working out of its comfort zone, more of a Delta Force approach. Bernanke says he can "expand the menu of assets he buys". Sure enough, the Fed is already fast at it. Have a credit card? Haven’t received a notice that your limit has been reduced? Likely because the Fed is already buying securities collateralized by credit card receivables. Have a mortgage? Terms are easier? Same answer. You’re a corporation with a good credit but can’t sell your commercial paper (short-term IOU’s) anymore? Call the Fed. For three months they have been buying this stuff.
Back to Eco 101. Isn’t this inflationary? Guess not. All observers see are signs of deflation. There is no fear on the part of central bank officials at the moment. They’ll reverse policy at the appropriate time. Maybe.
Robert Craven
Few of us specialize in central banking. Yet central banks - Fed if American, Bk of Eng if Brit, ECB if European - hold the key to the West’s economic well being. Fed policy now impacts all of us Americans directly, sometimes immediately. Thus, hadn’t we better get a grip? Who are these guys and what are they up to?
We are told that the Fed’s target is near zero. What in the world does this mean? From soph year, Eco & Bkg 101 recall that banks are required to hold a certain % of reserves against loans. Day to day some are flush, some are short. Those that are flush lend o/n to those that are short. The rate they charge is called the Fed Funds rate. This is also the Fed’s target. Here is why. Reserves and currency are base money - the heart of the system. The Fed figures that by manipulating, fine tuning the amount of reserves available it can fan or retard the economic flames. Very true, usually. The FF’s rate simply indicates tension. The Fed can increase or decrease the supply of "non-borrowed" reserves through so-called "open-market operations". No big deal here. It means that the NY desk injects reserves by buying U S securities, usually on a temporary basis, or repo, agreeing to reverse the transaction in a few days. It does the reverse to shrink reserves. In the orchestration it is far more complex; fine, we don’t care as long as we have the thrust of it.
So now, with the FF’s target at near zero banks can fetch all the reserves they want (with which to make loans) at practically nothing. But they’re not. Why? It’s not just that they’re risk adverse - wimps really, but that is for another sketch. It’s that many of their assets are near garbage and even they don’t know what they’re worth, yet. They’d rather see to that first, as soon as they can get a grip, poor things.
Back to the Fed. So orthodox policy is not working. What is next is what Bernanke calls "quantitative easing" or the Bk of Eng "the nuclear option". It’s not nuclear or new, just rarely used. No one at the Fed has much experience with it; yet the Fed as it turns out can buy anything they want, outright (not temporary, not a repo) - a herd of long horn steers / the NY Giants. All the Fed needs is emergency powers and those exist under Article 13 (3) of the code. Where does the Fed get the $? Out of thin air. For a non-special forces approach, assume the U S gov’t cuts taxes, financed by bond issuance. The Fed can buy this US debt outright. The Fed’s balance sheet expands, the $ goes to US citizens.
But the Fed is now working out of its comfort zone, more of a Delta Force approach. Bernanke says he can "expand the menu of assets he buys". Sure enough, the Fed is already fast at it. Have a credit card? Haven’t received a notice that your limit has been reduced? Likely because the Fed is already buying securities collateralized by credit card receivables. Have a mortgage? Terms are easier? Same answer. You’re a corporation with a good credit but can’t sell your commercial paper (short-term IOU’s) anymore? Call the Fed. For three months they have been buying this stuff.
Back to Eco 101. Isn’t this inflationary? Guess not. All observers see are signs of deflation. There is no fear on the part of central bank officials at the moment. They’ll reverse policy at the appropriate time. Maybe.
Robert Craven
