gopher is back?! :))

And if you notice, I am winning.
http://www.youtube.com/watch?feature=endscreen&v=TdYTggv4ZQc&NR=1

It's like free money, right Gopher?

Okay, what the author is proposing is ludicrous, but there's nothing wrong with the Fed earning money, since it just goes right back into the Treasury.

Except that they are manipulating the price of credit and distorting economic incentives in ways that they don't understand. I'm not claiming that I understand either, but I know that the people making the decisions really don't have a clue as to what the second and third order general equilibrium effects will truly be. They know that they don't know and are doing their best, but it is a bit scary.

To even apply to work at the Fed, you need to have at least a PhD in economics, so I'm sure they're doing the best humanly possible job.

The price of credit is the cheapest in history, and inflation is still under control, so I really don't see what they're doing wrong.

It makes me think of over-educated elves tinkering about with santa's sleigh.

Goldfinger, They are essentially printing money to pay off debt. I don't know, but it seems wrong to me.

@Goldfinger.....Yeah, but when interest rates of zero you are supposed to be able to maintain low inflation. The inflation kicks in when you exit the zero interest rate environment. Other than that one (highly theoretical) paper by Narayana (currently attending every FOMC meeting), I don't know of anyone who has really analyzed the dynamics of this world. It is also startling how bad the modeling of monetary economics is. There are statistical exercises looking just at money and prices, but there is very little that is good that tries to integrate money into actual economic models with people doing normal things. Also the Fed doesn't necessarily end up with the best and the brightest. I know people who work at the Fed without having finished or in some cases started PhD's. But yeah they (FED people generally) are smart people of goodwill who take their missions seriously. But that doesn't mean that we should just assume that they actually know what they are doing.

@Devonian.....they deny that they are paying off the debt. They claim that they are just paying artificially high prices for it and then putting it in a vault and collecting the interest on it. That is where the "profits" are coming from. Another matter to get worked up over is that my friend Thomas took an internship in the research department at the NY FED and I would contend that he has done more to effectively regulate banks than the entire enforcement division of the FED system. Thomas is the guy who uncovered the price fixing in LIBOR, entirely on his own.

Gopher,
Ok, so they print the money and throw it in a vault, and keep the debt. They still have the debt, but now they have a corresponding asset. It's essentially the same thing, they just are adding an additional step that launders the process.

I wasn't disagreeing with you. It is just that there is this claim that the Treasury will still pay off the debt to the FED at some point in the future. But yeah, the FED is printing money and using it to buy government debt thereby driving down the interest rates on the debt and probably stoking future inflation which further reduces the real interest rate. The FED did something like this after WWII to help pay down that massive debt, but it was on a smaller scale and the government was not using the suppressed interest rates to run up more debt. Like I said, I know that the experts don't really understand the impact of everything that they are doing. Most of my family have just finished refinancing their debts for as long of term fixed rate debt as they can get.

I still think the fact that a 20-something grad student getting the heads of major banks fired while working as a research department intern when the regulatory people sat on their hands seems worth getting worked up over. The governments of the US and UK seem most interested in preventing the banks from getting sued out of existence than they are in the underlying fraud.

I didn't think you were, and I wasn't disagreeing with you either.

In my opinion, its basically its a money laundering scheme. The Treasury and the FED are "independent", but they both serve the same master... the US Government. The Treasury has the debt, and the FED prints money, which buys debt. The FED is "non-profit", and all "excess income" from the debt that was bought, goes to the Treasury. The Treasury then can use the "excess income" to pay off the debt.

Devonian - that's the only way we can increase the money supply though. If the money supply wasn't increasing, then we could potentially get deflation, which is very very bad.

I think they can also increase the money supply by lowering the reserve requirement and lowering the discount rate. Although the discount rate option is somewhat exhausted.

I also think increasing the GDP will also increase the money supply. Plus, if more people buy goods, it fosters inflationary pressure, which also increases the money supply.

I don't know, but I think the open market has somewhat been affected also. I think banks are voluntarily keeping excess reserves, which reduces the money supply.

I think a better way for the US government to grow the money supply would be to create an environment where sustainable growth in the GDP is fostered. Then, banks would want to lend to the full reserves, and people will buy more goods. Printing money, in my opinion, works against all three of these.

I'm not convinced that deflation is very very bad. Unexpected deflation is bad. But expected predictable deflation could easily be benign. The Friedman Rule implies that the optimal policy in terms of welfare would be a consistent slightly negative inflation rate or mild deflation. It does presuppose that policy makers can in fact generate predictable consistent levels of inflation as desired, which of course they cannot.

I'm not sure how increasing the GDP would increase the money supply generally. In our current situation, there are massive excess reserves piling up at the FED on deposit from the banks. This fact points to one problem with using the Reserve Requirement as a policy tool. Lowering it right now would have no effect. It is also very difficult to raise the Reserve Requirement as a regular policy tool. But you have gotten pretty close to Narayana's theoretical result on inflation. As long as interest rates are zero, reserves can pile up. When we try to exit the zero interest rate environment, all of those excess reserves flow out all at once and BAM! the implied inflation from the "money printing" explodes all at once. Also I agree that creating an environment where sustainable growth in the GDP is fostered would be optimal. I'm pretty sure that every single person at the FED would agree with you as well. Alas, I don't know how to do that.

I don't want to really get into a long technical discussion, but I don't understand how monetary policy works mechanically. I've addressed my quandary to several of the best monetary economists in the world who have cycled through the FED as research fellows and as one time visitors. Every one has said that they cannot be sure that I am wrong in my critique nor are they sure of how to even test it with data.

Gopher,

"I'm not sure how increasing the GDP would increase the money supply generally."

In the formula for money supply: M=(PQ)/V:

M is the total dollars in the nation’s money supply
V is the number of times per year each dollar is spent (velocity of money)
P is the average price of all the goods and services sold during the year
Q is the quantity of assets, goods and services sold during the year

Q is usually measured using GDP, and P reflects inflation.

So, all other factors being equal, if GDP goes up, money supply goes up, and if inflation goes up, money supply goes up.


"In our current situation, there are massive excess reserves piling up at the FED on deposit from the banks."

I was not aware of this, but assumed it was true. This is a huge problem for the reason you stated. I don't know if you have tried to get a mortgage lately, but it is very difficult. The hoops people have to jump through are horrible. We have swung so far away from easy credit that it is hard to refinance or get a loan for a purchase.

"Also I agree that creating an environment where sustainable growth in the GDP is fostered would be optimal. I'm pretty sure that every single person at the FED would agree with you as well. Alas, I don't know how to do that."

I don't think the problem lies (entirely) in the monetary policy. I think, right or wrong, that businesses do not trust the current administration to foster business friendly environment.

Presuming that the "velocity" of money and the "Price level" remain constant, that would be true. The question becomes which is most probable.

What you are citing is Irving Fisher's work from the 1920s, which is an approximately true relationship in that it holds in relatively normal time. I know that it breaks down under high inflation and it may very well breakdown in deflationary environments as well.

With the behavior of human beings, unfortunately mathematically mechanical relationships tend to not work as well as one would like.

My aunt recently inherited a house from the woman who used to care for my step great-grandmother. She is renting it to own to a couple because they could not get a mortgage for the amount that they needed given some repair work that needed to be done on the property, so I hear y'ah. But there in lies the FED's problem. They only have the tools that they have. I have suspicions that all of the major banks are technically insolvent or at least that the FED is scared to death that they are.

I noticed that John Chipman signed the Economists' Letter supporting Mitt Romney over Obama on the grounds of policy positions. I do not wish to open that can of worms, but John Chipman is a fairly partisan Democrat and of the generation with Walter Heller, Harlan Smith and Leo Hurwicz. Most of the list were the usual suspects of right wing politicized economics, but Chipman is one of the 90 year old Keynesian Democrats from the Kennedy era. I'm not sure what the Obama Administration should do. I do not pretend that any of my policy disagreements with them are grounded in economics or that any of the things I would personally advocate for would really move the needle in terms of GDP growth. I tend to be of the opinion that George Mitchell is having a bigger impact on our GDP growth than any of Obama's economic advisers. George Mitchell is the 95 year old guy who got natural gas out of shale formations using horizontal hydraulic fracturing South of Ft. Worth 15 years ago.

" It does presuppose that policy makers can in fact generate predictable consistent levels of inflation as desired, which of course they cannot"

Actually, the Bundesbank has done a remarkable job of hitting inflation targets over history, beginning in the 1980s. I forget what variable they actually target (Its foggy in my mind, and I'll check in a bit) but they've hit very close to the 2% mark consistently.

"I have suspicions that all of the major banks are technically insolvent or at least that the FED is scared to death that they are."

That's the real issue here. The reason credit is so tight is that people are so scared of insolvency and who really has the ability to pay things off. Even though the credit market is still tight (for us average joes) the result has been a dropping in delinquency rates to historically low levels. As the overall economy improves, things will get better. However, I can see how this could be a symptom of the Fed crowding out private investors from the traditionally safe asset of US Treasuries, which could theoretically lead to tighter private credit markets.

Also, gopher your knowledge of theory far exceeds mine, so I'm just gonna take a lot of what you say at face value haha.

Does the Bundesbank exist? When did it last exist? 1992? 1999? 2002?

It still exists

http://uk.reuters.com/article/2013/02/22/uk-ecb-banks-cash-idUKBRE91L00F20130222

I would think it operates similar to a branch of the Fed rather than an independent central bank though.

That was a joke. Clearly the Minneapolis FED has never done a remarkable job of hitting inflation targets.

Well, when it was independent I mean. Now, I would assume it operates much as a regional branch does, with the ECB and all. I haven't studied it though.

Hence the significance of your since the 1980s comment. If the Bundesbank largely ceased to exist after 1992, then your point becomes kind of moot. Interest rates were much too high for Germany from the mid-90s on, just as they were much too low for Ireland and Spain.

I had this conversation when I was probably a bit younger than you in the late 90s with Bob Mundell. German real interest rates were historically lower than those of France and Italy by roughly half the difference in average inflation rates. So if German inflation averaged 2% and Italy's averaged 4% then Germany's interest rates would be 3% lower than Italy's. Once interest rates converged, Germany lost that advantage in real interest rates and may have actually seen their real interest rates rise above France's and Italy's and Spain's. That goes a long way towards explaining the post-unification stagnation that all of Germany seemed to blame on the Ossies.

And if you notice, I am winning.
http://www.youtube.com/watch?feature=endscreen&v=TdYTggv4ZQc&NR=1

Winning can die now.

kaner's beat gophers any day of the week, I challenge you to a 1v1 duel - any map you choose :)

I love you too, kaner.

Once again it is dancing gopher time.

http://www.youtube.com/watch?feature=endscreen&v=TdYTggv4ZQc&NR=1

http://www.youtube.com/watch?v=krVXRCcr2M4

http://www.youtube.com/watch?v=9xsEorfQHOU

http://www.youtube.com/watch?v=DKtpli35MIs

http://www.youtube.com/watch?v=xpdoZ_8JdgY