Sunday, July 3, 2011

Quantitative Easing Might be Good for Something

In the past, I have mentioned that when the Government sells Treasuries it is affecting only the level of reserves in the banking system and providing a subsidy for the rich rather than financing the deficit. QE1 and QE2 consisted of the Fed buying back Treasuries from the Banks in the hope of stimulating borrowing a low rates. It didn’t work.
Yesterday, Ron Paul, whom we all know well, stumbled on to a good idea here. Perhaps it was tongue in cheek when he suggested just abolishing the debt held by the Fed. The  $79 billion paid to the Fed in interest is just returned to the Treasury anyway.
Dean Baker picked up on this idea here and sized it up this way,
“Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs.”
As Baker explains, this would leave the Fed with excess reserves in the banking system, which would keep the Fed funds rate at 0% where it is destined to stay for some time in any event. Later on the Fed would have to look to other means to hit its target funds rate.
The idea, which is admittedly tarnished by its source, is actually too good to be put into effect by the clowns of Congress. However, even discussion of it would, perhaps, make people think more realistically about our the national debt and Fed bank reserves.

1 comment:

  1. Fascinating idea. Is there any link to a site that would clarify the various "pots" of money and debt held by the U.S. government? Help me with the distinction between the Federal Reserve, and the U.S. Treasury, and the budget, and tax income, and Social Security "debt" ("reserves"). My understanding is that the latter have been pillaged for years and folded into the government operating expenses. Where do U.S. savings bonds come into the picture? What about the bond debt that the U.S. owes to China? I do understand that the deficit is not the same as the debt; the former is short-term and the latter arose largely during the Bush administration as a result of unfunded expenditures. What are the various "pots" that are summed to generate the figure for "the national debt"? How can part of it (Fed owes Fed?) be wiped out with a stroke of a pen? And why does the Fed owe the Fed?