Patterico's Pontifications

3/28/2015

Paul Krugman’s Babysitting Co-op, Debunked

Filed under: General — Patterico @ 1:25 am



Krugman brings up this babysitting co-op example all the time and referred to it again on March 25:

And by the way: if you want a simple, homely example of how demand shocks can happen and cause unemployment, there is the baby-sitting coop.

The link goes to a famous, and ridiculously flawed, Krugman article in Slate from 1998. Since Krugman constantly brings up this babysitting co-op example, I think it’s about time a modern, conservative/libertarian blog not narrowly specializing in economic theory took on this canard. I am at your service!

I’ll let Krugman describe the problem at length, and then I will reveal what he didn’t tell you. Finally, I will ask you if you can figure out the solution — which seems to me to be perfectly obvious.

Here’s 1998 Krugman:

Twenty years ago I read a story that changed my life. I think about that story often; it helps me to stay calm in the face of crisis, to remain hopeful in times of depression, and to resist the pull of fatalism and pessimism. At this gloomy moment, when Asia’s woes seem to threaten the world economy as a whole, the lessons of that inspirational tale are more important than ever.

The story is told in an article titled “Monetary Theory and the Great Capitol Hill Baby-Sitting Co-op Crisis.” Joan and Richard Sweeney published it in the Journal of Money, Credit, and Banking in 1978. I’ve used their story in two of my books, Peddling Prosperity and The Accidental Theorist, but it bears retelling, this time with an Asian twist.

The Sweeneys tell the story of—you guessed it—a baby-sitting co-op, one to which they belonged in the early 1970s. Such co-ops are quite common: A group of people (in this case about 150 young couples with congressional connections) agrees to baby-sit for one another, obviating the need for cash payments to adolescents. It’s a mutually beneficial arrangement: A couple that already has children around may find that watching another couple’s kids for an evening is not that much of an additional burden, certainly compared with the benefit of receiving the same service some other evening. But there must be a system for making sure each couple does its fair share.

The Capitol Hill co-op adopted one fairly natural solution. It issued scrip—pieces of paper equivalent to one hour of baby-sitting time. Baby sitters would receive the appropriate number of coupons directly from the baby sittees. This made the system self-enforcing: Over time, each couple would automatically do as much baby-sitting as it received in return. As long as the people were reliable—and these young professionals certainly were—what could go wrong?

Well, it turned out that there was a small technical problem. Think about the coupon holdings of a typical couple. During periods when it had few occasions to go out, a couple would probably try to build up a reserve—then run that reserve down when the occasions arose. There would be an averaging out of these demands. One couple would be going out when another was staying at home. But since many couples would be holding reserves of coupons at any given time, the co-op needed to have a fairly large amount of scrip in circulation.

Now what happened in the Sweeneys’ co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple’s decision to go out was another’s chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.

Since most of the co-op’s members were lawyers, it was difficult to convince them the problem was monetary. They tried to legislate recovery—passing a rule requiring each couple to go out at least twice a month. But eventually the economists prevailed. More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy. Eventually, of course, the co-op issued too much scrip, leading to different problems …

If you think this is a silly story, a waste of your time, shame on you. What the Capitol Hill Baby-Sitting Co-op experienced was a real recession. Its story tells you more about what economic slumps are and why they happen than you will get from reading 500 pages of William Greider and a year’s worth of Wall Street Journal editorials. And if you are willing to really wrap your mind around the co-op’s story, to play with it and draw out its implications, it will change the way you think about the world.

Oh, Good Lord. Krugman’s solution: print more money and everything is fine!!!!!

Except, not so much. That last sentence of Krugman’s penultimate paragraph (the ellipsis is in the original) should cause you to raise an eyebrow. So printing more scrip worked, but then there was too much . . . leading to “different problems” . . .

. . . which we won’t discuss, but will simply allude to with an ellipsis . . . and then we’ll move on to elaborate about how great printing money is. Woo-hoo! Printing money!

If you’re thinking: “maybe someone should Google the original article to find out what these mysterious ‘problems’ were that were caused by too much scrip” . . . then I’m one step ahead of you. Here is the article (.pdf), and here is what happened:

Whatever the cause, the golden age lasted only a couple of years. (Golden ages are like that.) Maybe morals deteriorated-or perhaps the scrip was again out of whack. Now the problem was that more people wanted to go out than to sit.

In fact, the ten-scrip reform has moved the co-op from a position where there was too little scrip and the amount was shrinking, to a position where there was just about the right amount of scrip but the amount was growing. After a while, it naturally followed there was too much scrip and more people wanted to go out than to sit.

What a shock.

So: it turns out that Krugman’s little money-printing solution was not the ideal solution after all. It ended up leading to inflation and excessive demand (for babysitting services). Who could have guessed?!

Krugman’s description of the co-op’s initial reaction is hilarious, and says so much about how government responds to economic problems.

Let’s remind ourselves what the problem was; too much supply (of babysitting services) and not enough demand. And look at what the co-op did to try to address this problem: “They tried to legislate recovery—passing a rule requiring each couple to go out at least twice a month.”

In other words, faced with low demand . . . they tried to pass a rule ordering demand to increase! You vill go out and consume der babysitting services!

I’m wiping tears from my eyes at how much this reminds me of government.

After listening to an episode of the Tom Woods podcast that briefly alluded to this, I spent a little time Googling some discussion, and (especially because this seems like a very simple problem to solve) I was very amused at some of the bizarre reactions. Here’s an Austrian economist who says we’re not talking about money at all, but barter. (Brian Doherty at Reason.com seems to agree.) And this fellow thinks the problem was “consumer confidence” — and that the members of the co-op simply needed to be rational, put their heads together, and agree to stop hoarding scrip! And here’s a guy (at Forbes, no less! Forbes!) who says: Krugman is exactly right — and that Krugman’s amazing observational skills prove that Bitcoin is doomed. Doomed!

Oh. My. God. Is this really that difficult, folks? Really?

Again: let me remind you what the problem was: too much supply and not enough demand.

Can you imagine a possible solution to this incredibly difficult conundrum?

Please leave your suggestion below in the comments before reading the extended entry — which you can read from the main page by clicking “more.”

[Extended entry]

So: how in the world could the co-op have dealt with this situation of excessive supply and inadequate demand?

I presented the problem to my family. How do these babysitters get these couples who are hoarding coupons to employ them and give up some coupons? It’s quite a mystery, isn’t it?

Bless her heart, my wife came up with the answer in seconds.

Why not let the babysitters charge less?

Whoa! You’re saying that inadequate demand could be addressed by lowering prices????

Well of course it can.

The co-op’s problem was simple: they fixed prices from the get-go. They said one piece of “scrip” was worth one hour of babysitting. This was price-fixing. When market conditions resulted in supply outstripping demand, there was no way to adjust the prices to respond to these conditions. In essence, the government (the co-op) had artificially set prices too high for the prevailing conditions. Therefore, buyers hoarded their “money” (scrip) and refused to consume the available services.

All they had to do was set each piece of scrip to a “unit” of babysitting rather than a fixed amount of time, and let the market determine what each “unit” was worth. In other words, they needed to let people set their own prices.

Letting people set their own prices allows people to adjust for the fact that babysitting on Saturday night is worth more than babysitting on Tuesday night. It allows people to adjust for the fact that Mrs. Smith does a better job than Mrs. Jones. It allows all manner of adjustment to ever-changing conditions that cannot possibly be predicted in advance by a central authority.

A few sites have gotten this right. After I lectured my family on the principles involved (an evening at the Frey home is good fun, as Dad holds forth on the merits of the free market! — don’t you wish you were there?!) I looked up some of them. It appears my instincts are not unique, which is not surprising and is in fact a considerable relief. See here for one example.

But most sites, including many professional economists, seem baffled.

And the Nobel-prize winning Krugman is the most confused of all.

260 Responses to “Paul Krugman’s Babysitting Co-op, Debunked”

  1. Ding.

    Patterico (15be32)

  2. I know how he feels When I found out about ayn rand taking medicare when she publicly opposed it for everyone else I realized I was on the wrong side!

    truther (e665bd)

  3. Natural price floating would solve certain issues. However, there might be a fundamental imbalance in the “currency” in that some co-op members may simply demand more than others, and some supply more than others. Given the scrip is for single purpose use, unless it could be exchanged for a cash value, there were going to be problems, problems which not even price adjusting could solve. (The cash exchange question also begs the question of how the scrip was issued in the first place.) It is an interesting exercise in understanding money supply (and more importantly, money velocity). But it’s only a starting point — the cash economy is dynamic and propelled by needs, not just wants, and the currency, when properly managed, accounts for changing velocity and, among other things, investment in new ideas and productivity growth. All things scrip for a specific service would have a hard time accounting for — assuming they even tracked basic velocity metrics. Without some kind of growth/ inflationary aspect, hoarding is a natural result in any system.

    Money velocity is the ultimate metric, rarely discussed in the media. In a system depending on x% growth yoy, every fiscal and monetary action is more or less built around it. Price stability too, but somewhat less so.

    Joseph D (8bc5c1)

  4. Did the price change for more than one kid? For some three year old who’s still in the terrible twos?

    Richard Aubrey (f6d8de)

  5. “Truther[?]”: I suggest that you try to think why Ayn Rand’s personal decision to take Medicare has nothing to do with her political opposition to Medicare. It is not a very complex reason why both fact are complementary and not in opposition.

    Michael Keohane (dd6911)

  6. I am opposed to income tax, yet I pay it. I guess I’m just a hypocrite.

    Kevin M (25bbee)

  7. i don’t think you’re a hypocrite

    the IRS terrifies me

    happyfeet (831175)

  8. Too much supply? Reduce the selling price. As JosephD explained, the best way would be to value the service in dollars since those dollars are fungible (could be used for other things,) which would allow a better understanding of the significance of the going rate. Since these are lawyers, the starting hourly rate would probably be in the $300 range, and there would surely be an over supply. Knock the price down to $3 an hour, and there would surely be an under supply. Somewhere in the middle there is a sweet spot. And remarkably, the older children of the lawyers might find this to be an opportunity to earn some walk around money, freeing up their parents. That’s the way it worked in the 50’s.

    bobathome (ef0d3a)

  9. It’s income inequality that’s the problem. All those coupon RICH couples

    exploiting all the POOR partying couples.

    It’s UNEQUAL I tells ya.

    jakee308 (49ccc6)

  10. Before reading after the fold: What a bunch of BS.

    nk (dbc370)

  11. Since most of the co-op’s members were lawyers, it was difficult to convince them the problem was monetary.

    Right there is the problem.

    Hoagie (58a3ec)

  12. After reading below the fold: Holy cow, Patterico takes it seriously?

    This is an old chestnut. The original was about a bunch of people on an island who made their living by taking in one another’s washing. Single-commodity, closed system. Know of any place, any time, where it ever succeeded?

    nk (dbc370)

  13. truther, every time you post you lower our IQ. Please stop.

    Hoagie (58a3ec)

  14. And BTW, you were born on the wrong side you red diaper squid.

    Hoagie (58a3ec)

  15. truther is Perry, you guys.

    nk (dbc370)

  16. truther is Perry, nk. I’ve had the pleasure(?)of lunching with him once along with Dana and Hube. And I must say the longer his tooth the more radical, almost insanely, leftist he gets. Usually people mature with age. Not with him. The older he gets the more deeply he buries his head in the sand. He seems unable to step back and observe that the people and policies he supports are the very ones which destroy societies and cultures. Or perhaps that’s his goal. A self-hating American. And his utter hatred of Republicans is pathological. If he said the same things about blacks he’d be more racist than the Gran Wizard of the KKK.

    Hoagie (58a3ec)

  17. I should’ve picked up on that right away, since I play EvE. The only game with it’s own market exchange reporter: eve-central.com

    JWB (6cba10)

  18. Usually people mature with age. Not with him.

    There are various traits associated with genetics (ie, innate biological factors), and I’m sure a person’s ideology is one of them. Or the ability to filter through information, facts and reality (and an awareness of the fundamentals of human nature) in a sensible, non-foolish way. That aspect of a person can be mutually exclusive to his or her intelligence, as traditionally defined and measured. For example…

    monthlyreview.org, By Albert Einstein, May 1949: This crippling of individuals I consider the worst evil of capitalism. Our whole educational system suffers from this evil. An exaggerated competitive attitude is inculcated into the student, who is trained to worship acquisitive success as a preparation for his future career.

    I am convinced there is only one way to eliminate these grave evils, namely through the establishment of a socialist economy, accompanied by an educational system which would be oriented toward social goals. In such an economy, the means of production are owned by society itself and are utilized in a planned fashion. A planned economy, which adjusts production to the needs of the community, would distribute the work to be done among all those able to work and would guarantee a livelihood to every man, woman, and child. The education of the individual, in addition to promoting his own innate abilities, would attempt to develop in him a sense of responsibility for his fellow men in place of the glorification of power and success in our present society.

    ^ BTW, Einstein was around 70 years old when he penned that opinion.

    Mark (c160ec)

  19. I enjoy these theoretical posts a great deal. It’s funny how Krugman points to the myopia of lawyers reflexively trying to solve problems with laws, and then as an Keynesian economist just says to throw in more money.

    It’s surprising this problem was that hard to fix… it would be easier to build coupons (Since you can multiply them by babysitting a pair of kids). So just let supply and demand set the value of a coupon. It’s that word, value, that undoes the whole problem. Instead of insisting we barter one coupon of service for one unit of service, we realize that the benefit is more valuable than the effort of babysitting for an hour. Everyone gets richer even with babysitting work being worth less than babysitting usage. The system forced an equity that wasn’t really equal, and that’s what caused all the economic problems.

    Krugman is right that this is a great lesson, even if the lesson escaped him.

    Dustin (2a8be7)

  20. I wonder if this would work with tap water. Maybe the price should not be fixed.

    Michael Ejercito (d9a893)

  21. Without reading below the fold, I would guess adding teenaged babysitters for cash to introduce some competition.

    Mike K (90dfdc)

  22. Natural price floating would solve certain issues. However, there might be a fundamental imbalance in the “currency” in that some co-op members may simply demand more than others, and some supply more than others.

    How would price floating not solve that issue? If one member couple tends to demand services more than others, that couple will go low on scrip and either stop demanding as much, or increasing their supply. Similarly, why should members of the coop care if some supply more than others? Those who do will build up more scrip, and will have more ability to demand services; so what?

    I don’t see the “imbalance” issue. Eventually any “imbalance” will either smooth out to a point where there is an equilibrium price, or result in a situation where higher producers have the resources to demand more. Again: so?

    Patterico (15be32)

  23. (Pre-reading more)

    I’m thinking the solution to too much supply would be to adjust the value of the scrip. Instead of 1 hour, maybe it’s 1/12 hours per scrip or 2 hours.

    Dejectedhead (83e1bc)

  24. Ah, price charging. That would be the better solution than money tinkering.

    Dejectedhead (83e1bc)

  25. But it’s only a starting point — the cash economy is dynamic and propelled by needs, not just wants, and the currency, when properly managed, accounts for changing velocity and, among other things, investment in new ideas and productivity growth. All things scrip for a specific service would have a hard time accounting for — assuming they even tracked basic velocity metrics. Without some kind of growth/ inflationary aspect, hoarding is a natural result in any system.

    Phrases like “the currency, when properly managed” frighten me. Currency cannot be “properly managed” other than by setting it free in the market. Instead, we have a system where the Fed just got through pumping three trillion dollars into banks. That money has not yet caused inflation because it’s not yet being lent; it’s sitting idle. But one day — unless the Fed withdraws that money (and they haven’t the slightest clue how to do that) — that money will indeed get lent out . . . and when it does, fasten your seatbelts, because the Wild Ride starts that day.

    As for your concern about “hoarding” in the absence of inflation, I think the concern is misplaced. “Hoarding” (which some might call “saving”) represents an increased demand for cash balances. When that happens, prices of goods tend to fall, because people are demanding cash more than goods. As prices fall, it creates an incentive for “hoarders” to spend, because, look at all the stuff you can buy.

    There is this crazy notion that deflation causes people not to buy anything, because they will eternally be waiting for prices to drop, and then we get the “deflationary spiral.” Nobody buys anything, so businesses go out of business, so wages are lower, so people demand less, and the circle goes round and round. If this theory were true, nobody would ever buy computers, which are dropping in price and increasing in quality all the time. But people do buy them, because some people’s time preference is such that they demand a good now, because they want to actually enjoy it.

    The fallacy is in looking at the economy only from the demand side, while it is the supply side that really drives the economy. In truth, businesses going out of business means higher prices, because there is less competition and less capital investment driving down the costs of production. The lower supply of goods drives up prices. Meanwhile, there is always going to be some minimum level of demand, since people have to eat, have shelter, etc. The key to prosperity is a humming economy where businesses produce so many goods at low prices that everyone’s purchasing power increases — meaning lower prices.

    The bottom line is: deflation is not something to be scared of. It’s a good thing. It’s good when your computers get cheaper every year. It’s good when your purchasing power increases every year. This notion that we must constantly erode the value of the money we earn is at the root of a lot of our problems.

    Summary: three cheers for hoarders!

    Patterico (15be32)

  26. I’m thinking the solution to too much supply would be to adjust the value of the scrip. Instead of 1 hour, maybe it’s 1/12 hours per scrip or 2 hours.

    Your instincts are right, but if the central authority re-sets the price, that will simply result in a different imbalance.

    The point here is that the central authority can’t determine prices without putting everything out of whack. They can’t mandate more demand. They can’t flood the market with cash (or re-set the price to a lower level, which is functionally the same thing) without creating inflation and excessive demand.

    Solutions can’t come from the central authority. They must come from individual decisionmakers.

    Oh, except for interest rates! That’s the one place where having central planners determine prices (in this case, of money) works beautifully. According to supporters of the Fed. And never mind those bubbles that keep happening, that is an unrelated phenomenon, we assure you.

    Patterico (15be32)

  27. Still above the jump, a couple of questions arise: What do they do when, as all are somehow employed in the same area of congressional work, they are all expected to attend some kind of an employee appreciation event leaving all in need of a sitter and none available provide it? (Such and event would be funded by the taxpayer, but that is a different issue.)

    Over time the children would grow older (if I could work the links I could provide some science as a foundation for that concept) and eventually reach an age where they did not need to be baby-sat, and then an age where they could sit their younger siblings, or even go along with the parents when they went out. By the time they reached that point where they would not be caught dead going anyplace with their parents they would be old enough to not need a sitter. What then?
    All this to show that the demand would decrease over time unless new younger couples, or more kids are produced.

    If your script is only good for buying buggy whips, the automobile causes your system some trouble.

    Gramps, the original (9e1415)

  28. They thought he’d be a problem but he was the solution to the baby-sitting issue!

    https://www.facebook.com/video.php?v=1035962323085794

    Colonel Haiku (2601c0)

  29. “Oh, except for interest rates! That’s the one place where having central planners determine prices (in this case, of money) works beautifully.”

    Patterico – In the case of interest rates, central planners certainly help influence the level and direction of rates and the set the rates for borrowing from the fed. Other than those rates, which ones do you believe they actually set?

    daleyrocks (bf33e9)

  30. Let’s just assume we have a can opener, Gramps. http://en.wikipedia.org/wiki/Assume_a_can_opener

    nk (dbc370)

  31. Sounds like supply and demand. Anyone who has ever run a business, whether it succeeded or failed, can tell you the solution: Change prices! Too many potatoes? charge less for them. Not enough potatoes? Charge more. If no one is buying your services then you are charging too much. The stupid thing about the scrip is that the price is fixed and there is no room for changes in supply and demand. I bet a “black market” could have fixed that problem.

    felipe (56556d)

  32. Without reading below the fold, I would guess adding teenaged babysitters for cash to introduce some competition.

    That’s what I can’t get over, Mike K: that these Washington lawyers are too miserable and cheap to create job opportunities for teenagers.

    JVW (a1146f)

  33. Patterico – In the case of interest rates, central planners certainly help influence the level and direction of rates and the set the rates for borrowing from the fed. Other than those rates, which ones do you believe they actually set?

    I am primarily talking about the federal funds rate, which is effectively “set” through their open market operations which push the rates towards their target.

    The Fed does not set the prime rate but the federal funds rate is obviously so influential as to be determinative in most cases of the prime rate.

    I’m sure you’re not contesting the fact that the Fed manipulates interest rates, right? So the question is whether that central planning is wise, comrade.

    Patterico (15be32)

  34. Sounds like supply and demand. Anyone who has ever run a business, whether it succeeded or failed, can tell you the solution: Change prices! Too many potatoes? charge less for them. Not enough potatoes? Charge more. If no one is buying your services then you are charging too much. The stupid thing about the scrip is that the price is fixed and there is no room for changes in supply and demand.

    Bingo and bingo.

    Patterico (15be32)

  35. You guys remember how gas got really, really scarce in the hurricane Sandy affected area? The fixed price of gas did not ensure its availability, but rather, ensured its scarcity by ignoring supply and demand.

    felipe (56556d)

  36. Every minute spent reading Krugman sucks an hour of joy from the rest of your life.

    Comanche Voter (3f753e)

  37. We try rubles for potatoes in Latvia. Politburo take all potato, give people rubles. People have no potato, eat rubles. Very sad.

    nk (dbc370)

  38. Comrade nk make joke. Is no potato, is no ruble, only scrip with picture of potato.

    felipe (56556d)

  39. “I am primarily talking about the federal funds rate, which is effectively “set” through their open market operations which push the rates towards their target………..

    I’m sure you’re not contesting the fact that the Fed manipulates interest rates, right? So the question is whether that central planning is wise, comrade.”

    Patterico – I think we can agree that the Fed can set the fed funds rate, but with respect to other lending benchmarks against which loans are priced I prefer my choice of word “influence” rather than yours of “manipulate.” Changing the prime rate is still an individual bank decision and treasuries are still sold through a public auction procedure, although that is currently distorted by the magnitude of fed purchases, and treasury purchases by the government are also open market purchases.

    daleyrocks (bf33e9)

  40. Actually, the Soviet economy fits Krugman’s wet dream. A fiat currency that could only buy one crop — Soviet-made goods, it was not accepted outside the USSR — based on the value of labor. And we know what happened.

    nk (dbc370)

  41. I’m still babysitting coop story, but must stop as this sticks out like a big red flag: Eventually, of course, the co-op issued too much scrip, leading to different problems …

    If Krugman is saying that they just printed more scrip (money), which I think he is, it’s funny that he, an economist, couldn’t see that that would lead to “different problems”? What problems, Dr. Krugman??? You kind of think that he of all people, should know and make a point to explain exactly why that won’t work. Anyway, it’s funnier that the pervasive attitude of the liberal elite and entitled in our society, is: if we run out of money, no worries, we can just print more! As if there is nothing more to it than that.

    (On a side note, it reminds me when I was about 7 or 8, my mom took me to the bank with her and as she filled out a withdrawal or deposit slip (can’t remember which), I asked her about her checkbook sitting on the counter. She gave a very simple explanation of what it was and how it was used. I then asked her if we could go to the Woolworth’s afterward and buy something or another. She said, no, we didn’t have money for that. According to her, I had look of disbelief on my face (I remember feeling confused)and said, just write a check! She again explained, there wasn’t money in checking account to pay for anything extra. Again, not understanding, I repeated, just write a check! In my childish mind, if there was a piece of paper that could be filled out to take the place of actual money, that was all that was necessary. I simply could not grasp that there had to be a positive balance in this mysterious thing called an “account” to back up the check.)

    So, yeah, Krugman…

    Dana (86e864)

  42. My family belonged to a baby sitting coop in the late 1980s-early 1990s with a 1:1 ratio of hours sitting, hours out. We only had 12-15 families to keep it pretty tight knit, but never experienced the type of problems Krugman describes.

    daleyrocks (bf33e9)

  43. Eventually, of course, the co-op issued too much scrip, leading to different problems …

    Other than that, Mrs. Lincoln, how was the play?

    Patterico (15be32)

  44. My family belonged to a baby sitting coop in the late 1980s-early 1990s with a 1:1 ratio of hours sitting, hours out. We only had 12-15 families to keep it pretty tight knit, but never experienced the type of problems Krugman describes.

    In a tight-knit group there is a lot more social pressure to do your part. It’s not like the impersonal economy.

    Patterico (15be32)

  45. Between reserve requirements, the discount rate, and the open market operations, the Fed exercises enough influence over interest rates that I think the word “manipulate” is accurate. But let’s put semantics aside. Is this level of control over interest rates by a central authority wise, comrade daleyrocks?

    Patterico (15be32)

  46. hahahahahaha- obviouly fake co-op.
    no one would ever trust a lawyer to babysit

    steveg (794291)

  47. Wouldn’t the entire problem (too many or too few coupons in “circulation”) simply disappear if there was a secondary market for the coupons – i.e. if you had too many coupons, you could sell them for some extra spending cash, and if you didn’t have enough coupons, you could simply buy them from another couple? There needn’t be a fixed price – just whatever price satisfied both the sellers and the buyers at that particular point in time.
    Am I missing something here? (BTW, I totally understand why this would never occur to somebody like Krugman.)

    MrJimm (dfcd39)

  48. “In a tight-knit group there is a lot more social pressure to do your part. It’s not like the impersonal economy.”

    Patterico – I completely agree.

    daleyrocks (bf33e9)

  49. “But let’s put semantics aside. Is this level of control over interest rates by a central authority wise, comrade daleyrocks?”

    Patterico – Since the government does not control the ultimate price suppliers of capital charge users of capital for use of their money and ample evidence exists to show spreads over various lending benchmarks vary widely over time by asset class and risk, I am more than happy to put semantics aside and agree that the government as I originally stated influences the level and direction of interest rates and that degree of influence is generally not wise comrade Patterico.

    daleyrocks (bf33e9)

  50. I believe that the Fed’s control of interest rate is rather simple and direct. The Treasury auctions U. S. 10 year bonds, for example, on a predictable schedule. Buyers may either submit a bid for a quantity of the bonds at a specific yield, or they can simply agree to buy bonds at the “winning” bid (the highest yield demanded amongst the competitive bids accepted.) So the Treasury adds up the guaranteed purchases to determine how many bonds have to be sold to bidders who fixed a price to their bid. Beginning at the lowest yield bids, they accumulate the orders until they have enough to cover the quantity needed to complete the sale. The Federal Reserve has been buying enough of the bonds that what they don’t buy has been covered by the guaranteed purchases. As a result, they have been able to determine the yield of Treasuries without the need of buying all the bonds that are for sale.

    Bonds like the 10 year bond influence many other rates. Prominent are the tax-free municipals. They will always be priced to yield a bit less than the 10-year bond. So this isn’t just a question of the $3T that the Treasury sold to the “public” … meaning $2T to the Fed and another $1T to guaranteed bids. These rates drill into the economy like termites into an old home. On one hand, they really discourage saving, but they also force retirees to spend their savings to supplement the interest income they have lost. These practices scare the heck out the people who bother to pay attention.

    This could change in a flash if the quantity of guaranteed bids gets smaller. The Fed isn’t buying all the bonds in any auction, and if the Treasury has to work its way up the yield curve to complete their sale, then all heck could break loose. The first sign of a problem probably won’t be a failed auction (not enough bidders to cover the quantity for sale,) but the absence of the needed go-along-to-get-along bids will indicate that the natives are getting restless, and this will trigger a stampede. At least that’s one way that I can see the next black swan arriving. This happened to money market ETF’s in the last crash.

    bobathome (ef0d3a)

  51. #6 Paying taxes is not voluntary taking medicare is voluntary you have to sign up for it. Do as I say not as I do is always hypocritical. That is why ayn rand libertarian ism is so phony. Ayn rand taking medicare while she rails against it is the ultimate hypocrite. What do you expect from who is john galt turns out to be william edward hickman!

    truther (7f9aea)

  52. has herr Krugman gotten anything intentionally right, in the last dozen years

    narciso (ee1f88)

  53. FYI, Ayn Rand viewed government sponsored social welfare programs (SWP) like Social Security and Medicare as legalized plunder – Big Brother had his hand in her pocketbook and she wanted her money back. The morality of her position becomes clear in light of the distinction between voluntary participation and coercion under color of law. Moreover, Rand considered only those who opposed SWPs retained the moral right to recover the property taken against their will.

    According to Rand, the economic injustice inflicted on opponents of SWPs would only be compounded if their legitimate efforts toward restitution were misrepresented as evidence of hypocrisy. Unfortunately, hypocritically distorting Rand’s positions has become the standard tactic of her detractors – since they have no hope of refuting her actual positions in open debate.

    ropelight (96f678)

  54. The imbalance is just a result of different net supply and net demand among people. People just won’t be all interested in going out the same number of hours, or even value the hours the same, as you say. To some who demand it very little, joining a co-op would be uninteresting to begin with. But to those who would sign up, the little imbalances in demand for the single service would add up, unless they had a way to cash in and out. Maybe they could cash out, but it wasn’t mentioned. Yes, you might get scrip-strapped couples who decide to supply more for a while and are willing to do it cheap to get their hands on scrip. But you’d be assuming that would compel the couples who only went out once a month, to now be interested in going out more often to take advantage of cheap labor. Maybe they would, maybe not. But we can ask ourselves: why did any couple build up scrip in the first place? Were they waiting for just the right price or time to spend it?  Surely not price, probably not time. They simply didn’t demand the service as much as others, and after supplying for a few months would have realized this. I’m just saying there’s a comparative advantage dynamic that the single service scrip currency would reward — it would benefit those with more natural supply than demand (natural in the sense of their value of the service) of that particular good or service. As opposed to a general currency that you can transfer across goods and services to get paid for the things you are better at producing.

    By the way, don’t be alarmed at my controlled currency phrase. It’s just a reflection of the reality of the need to monitor the math of any currency system. Even something as simple as maintaining a level supply, never printing another net dollar, is “controlling the currency”. Stopping counterfeiting is controlling the currency.

    But yes, respectfully, I do think you have it wrong on deflationary economics. Not by a mile, but it causes more problems than you mention. I did of course, in my post, talk about a more proactive currency control. Namely, a fair system will issue (or retract) currency to account for population growth (or decline). A fair system will issue currency to account for productivity growth — to reward it (if you improve your good or service, you should expect to charge more). A smart system, imo, will issue currency to drive an expectation of growth. A smart system, imo, will inflate at a modest 2% or so to compel people to (re)invest rather than save over the long run. And, definitely imho, a smart system will issue, at a consistent proportion to its supply, only what’s needed to directly to pay for its management (rather than taxing people). This last one hasn’t quite made it into government mainstream, but I think (hope) private currencies will probably operate on such a principle eventually.

    A reasonable response to most of that is your own — that most of the pricing dynamics will resolve themselves either way, and better to see prices fall than rise. But this isn’t true for a simple reason: prices (namely, cost structures) tend to lag in the direction of the supply chain. In deflation, you buy the parts to make a thing, and by the time it’s manufactured it must be sold for fewer dollars than before. Take any supply chain and this would happen. Margins get squeezed down, inventory and supply get squeezed down… everyone’s expectation is that they’ll take in fewer dollars tomorrow than today. This is a huge disincentive to deal in the currency in the first place. It works great mainly for those who can afford to delay consumption and wish to postpone investment. That doesn’t make for a robust economy. In inflation, consumers and investors can sleep at night knowing nominal costs today are less than they’ll be tomorrow.

    It’s a fairly subtle distinction, but enormous in the direction of its spiral. In an economy built even on a fixed money supply, as population grows and “savers” save, people are left to scrap, even fight, for the dwindling dollars in circulation. If they even value them at all.

    Joseph D (8bc5c1)

  55. A last point… the money that’s been printed hasn’t all (or even mostly) gone to banks.  It’s been used mainly to buy Treasuries, to finance the debt, to fund programs, including unemployment and food stamps, to spur consumption, to make up for the continuing decline in money velocity.  People don’t know this (the velocity side) because it’s rarely talked about, but it’s currently our single biggest unsustainable trend.  It’s like I said — everything is built around velocity more or less.  GDP is just Velocity × Supply.  The Gov’t NEEDS the GDP number to climb, but they don’t control the velocity directly.  Thus, they boost supply to make up the shortfall.

    Our inflation picture isn’t because banks aren’t lending.  It’s because the Fed is targeting the printing to go directly to whatever will help keep consumption and investment as stable and growing as they can manage, for better or worse.  We’re not over inflating yet, at leas not obviously, because the natural velocity has been dropping ever since ’07 — prices would have come down, and businesses gone under, but for the money supply having been just enough to balance and keep it all afloat.

    Btw, we shouldn’t believe most of what we hear about quantitative easing and money printing in the media.  It’s a lot of smoke and mirrors — the Fed will do whatever they have to to keep the GDP number growing, and they don’t purposely misdirect, but my sense is they don’t want to be completely transparent about the constraints they’re under (or lack thereof).  And in turn, most of the media doesn’t seem to be aware of what it really is they’re reacting to.

    Also, a not perfect but pretty solid take on money supply from Milton Friedman:

    http://www.econlib.org/library/Columns/y2006/Friedmantranscript.html

    Joseph D (8bc5c1)

  56. Just maintain the cycle of 5-year plans until you run out of kids.

    Colonel Haiku (2601c0)

  57. The natural response when there is too much supply and not enough demand is to cut the price. In this case to require say only .5 coupon for a night of baby sitting. However handling out one new coupon to every holder of an existing coupon is exactly equivalent. Handing out new coupons devalues existing coupons and acts as a price cut. Of course if you cut the price too much (hand out too many new coupons) then there will be more demand than supply and you will have the opposite problem as noted.

    Written without looking at the extended entry or other comments as requested.

    James B. Shearer (6d3959)

  58. The Krugman article was written in 1998 but references the babysitters’ club story he claims to have heard 20 years before, which would have been 1978. The population of Washington DC peaked in the 1950’s but civil unrest in the 1960’s led middle class families to move to the suburbs. By 1970, 7 out of 10 DC residents was black and DC was on its way to becoming “one of the most polarized cities, by income and education, in the country.”

    Why do I mention this? Because when I read Patterico’s post, it struck me that the babysitters’ club could be an example of DC’s march toward class, race and income gentrification. By 1978, most of the white and black middle class families with teenagers had moved to the suburbs, leaving primarily black teens from poorer families as potential babysitters. Perhaps these young, probably white, probably college-educated Congressional staffers established the babysitters’ club because they didn’t have much money, but it could also be they wanted another pool of babysitters.

    DRJ (e80d46)

  59. Here’s why I was thinking about this: How does Krugman know why couples didn’t use their coupons? He says it’s because they were saving them for special occasions and maybe they were. It makes sense and apparently issuing more coupons resulted in more babysitter jobs, suggesting a cause-effect relationship. But isn’t it also possible that the reason the club didn’t work is that some/many of the babysitter club couples didn’t want to be babysitters, they just wanted to find a pool of people like themselves who would babysit?

    DRJ (e80d46)

  60. A last point… the money that’s been printed hasn’t all (or even mostly) gone to banks. It’s been used mainly to buy Treasuries, to finance the debt, to fund programs, including unemployment and food stamps, to spur consumption, to make up for the continuing decline in money velocity.

    Are you sure about that?

    Take a listen to this podcast starting around 3:30:

    It’s where a Princeton economist and former Fed official says that the $3T in quantitative easing went almost entirely to “idle cash in the banks.”

    Do you have evidence to contradict this evidence? If so, I’d love to hear it.

    Patterico (15be32)

  61. The natural response when there is too much supply and not enough demand is to cut the price. In this case to require say only .5 coupon for a night of baby sitting. However handling out one new coupon to every holder of an existing coupon is exactly equivalent. Handing out new coupons devalues existing coupons and acts as a price cut. Of course if you cut the price too much (hand out too many new coupons) then there will be more demand than supply and you will have the opposite problem as noted.

    The key insight is that this can’t be decided by a centralized entity.

    Patterico (15be32)

  62. #53 libertarian free loaders want the benefits of society ;but want others to pay that is why so many libertarians were vietnam war draft dodgers. That is why they first got rid of state militia for national guard and then the draft so they didn’t have to defend their country. Free loaders all of the way like ayn rands wet dream william edward hickman!

    truther (7f9aea)

  63. Why do I mention this? Because when I read Patterico’s post, it struck me that the babysitters’ club could be an example of DC’s march toward class, race and income gentrification. By 1978, most of the white and black middle class families with teenagers had moved to the suburbs, leaving primarily black teens from poorer families as potential babysitters. Perhaps these young, probably white, probably college-educated Congressional staffers established the babysitters’ club because they didn’t have much money, but it could also be they wanted another pool of babysitters.

    I think this is an important insight. The reason the supply was so high was because the commodity (babysitting by their peers) was valued so highly compared to the alternatives. Think about it: if you have a crop of highly qualified teenagers whom you trust who are willing to do the job, the attractiveness of babysitting services by other co-op members dwindles. But if you worry that your alternatives are unacceptable, then the value of the babysitting services by the co-op is going to seem very high, and seem like a great trade at first.

    There are some aspects of the market that aren’t clear to me, though, like the extent to which one can demand babysitting services from another — at any time, with no chance of being refused — by virtue of holding certificates.

    Patterico (15be32)

  64. no comandante krugman, the parallel to the Shining path leader isn’t incidental, goes off on the wrong premise, and it’s off to the races

    narciso (ee1f88)

  65. #59, DRJ, I like your take on this. After all, they were Congressional staffers so the idea of getting somebody else to do the work must have appealed to them. It would be like the grasshopper saying that the ants have been hoarding all the food after the grasshopper spent the summer singing and playing (and probably not very well at either undertaking.) Being staffers, the natural solution is to define the problem (hoarding,) target the scapegoat (people who worked more than others,) and write a law to “fix” the uneven distribution of coupons, which means confiscate, by one means or another, the tokens that represent the work performed by those who chose to babysit.

    There is another reason for deflation, technological advances (the obsolescence of buggy whips if you like.) I’ve always wondered why there hasn’t been more written about the technological revolution that was transforming American agriculture in the 1930s. The use of electricity and gasoline- and diesel powered equipment changed everything. It began in the 1920s and by the 1930s these innovations were widespread. The small family farms that didn’t adapt couldn’t hope to compete. And the railroad net allowed regions that produced at low cost to sell their goods in any market in America, even after paying the monopolistic freight rates charged by the railroads. This should have been embraced, but again the left exploited the public’s ignorance and misplaced compassion to reverse and diminish the benefits that the country could have enjoyed.

    bobathome (ef0d3a)

  66. It seems to me that the problem is the use of script, an artifical ocontrol that was noe needed. IOUs would have sufficed, and could have been created and destroyed as needed.

    I’m almost sure thisis too simple ….

    htom (4ca1fa)

  67. Perry, when you had lunch with Hoagie, Dana, and Hube (#16) – did you pay for your own meal or did you stick Hoagie with the tab?

    ropelight (96f678)

  68. 61

    The key insight is that this can’t be decided by a centralized entity.

    I think you mean “shouldn’t be” rather than “can’t be”. You certainly can set things up so that it is decided by a centralized entity (as was the case with the baby sitting coop). And given that you have set things up that way it seems reasonable to ask how the centralized entity can do as good a job as is possible.

    James B. Shearer (6d3959)

  69. … It allows people to adjust for the fact that Mrs. Smith does a better job than Mrs. Jones. …

    Negotiating and haggling over this sort of thing increases transaction costs (especially for people who find it distasteful). Every barrel of oil or bushel of wheat is slightly different but commodities traders have found it expedient to ignore this and agree on a few standardized types.

    James B. Shearer (6d3959)

  70. I can’t get the podcast to play on my phone. But this is probably a distinction on where the money ends up. Most people talk about this by focusing M2. But the Fed starts with issuing M1 in the system (in this case, largely through treasury and other asset purchases), and (in theory) hopes that translates (multiplies) into M2 by banks who end up with the money. In a normal environment you could argue the banks have been tight with lending… but in reality, the reserve ratios are just reverting to the historical mean. It’s only because banks increased lending so much from ’02 to ’07, that the mean reversion is portrayed as tight lending. The Fed purchased trillions in Treasuries as its primary method of increasing supply (M1). Banks have increased their reserve ratios, which makes M2 increase at a slower rate than the base money stock. It acts as a kind of drag, so it makes a good scapegoat, but it’s not accurate to believe the Fed issued money directly to banks to use and they’ve sat on it instead.

    Joseph D (8bc5c1)

  71. Is this relevant to the discussion?

    There is a massive misconception about where the Bernanke Fed’s stimulus landed. Although the Bernanke Fed has disbursed $2.284 trillion in new money (the monetary base) since August 1, 2008, one month before the 2008 financial crisis, 81.5 percent now sits idle as excess reserves in private banks. The banks are not required to hold excess reserves. The excess reserves exploded from $831 billion in August 2008 to $1.863 trillion on June 14, 2013. The excess reserves of the nation’s private banks had previously stayed at nearly zero since 1959 as seen on the St. Louis Fed’s chart. The banks did not leave money idle in excess reserves at zero interest because they were investing in income earning assets, including loans to consumers and businesses.

    This 81.5 percent explosion in idle excess reserves means that the Bernanke Fed’s new money issues of $85 billion each month have never been a big stimulus. Approximately 81.5 percent (or $69.27 billion) is either bought by banks or deposited into banks where it sits idle as excess reserves. The rest of the $85 billion, approximately 18.5 percent (or $15.72 billion) continues to circulate or is held as required reserves on banks’ deposit accounts (unlike unrequired excess reserves).

    One reason that the excess reserves grew to an extraordinary level is that in October 2008, one month after the financial crisis when Lehman Brothers went bankrupt, the Bernanke Fed began paying interest on bank reserves. Although it has been 1/4 of 1 percent interest, this risk free rate was not low compared to the Fed’s policy of keeping short-term market rates near zero. The interest banks received was and is an incentive to hold the excess reserves rather than lend to consumers and businesses in the risky environment of the major recession and the slow recovery.

    It includes a link to a St Louis Fed Reserve report that shows a surge in excess reserves after 2008.

    DRJ (e80d46)

  72. I think you mean “shouldn’t be” rather than “can’t be”. You certainly can set things up so that it is decided by a centralized entity (as was the case with the baby sitting coop). And given that you have set things up that way it seems reasonable to ask how the centralized entity can do as good a job as is possible.

    I mean “can’t be” obviously meaning “shouldn’t be.” Anyone but a querulous pedant will understand and not say a word.

    And the best way for the centralized entity to do as good a job as is possible, is for them to leave prices to be set by the members, rather than by the centralized entity. That is the point. Care to respond to the actual point?

    Patterico (15be32)

  73. From: http://fee.org/freeman/detail/48-resource-poor-countries-need-strong-central-planning-to-develop

    The late Milton Friedman explained in a 1997 tribute to Cowperthwaite how remarkable his economic legacy is: “Compare Britain — the birthplace of the Industrial Revolution, the nineteenth-century economic superpower on whose empire the sun never set — with Hong Kong, a spit of land, overcrowded, with no resources except for a great harbor. Yet within four decades the residents of this spit of overcrowded land had achieved a level of income one-third higher than that enjoyed by the residents of its former mother country.”
    A Scot by birth, Cowperthwaite attended Merchiston Castle School in Edinburgh and then studied classics at St. Andrews University and at Christ’s College at Cambridge. He served in the British Colonial Administrative Service in HK during the early 1940s. After the war he was asked to come up with plans for the government to boost economic growth. To his credit, he had his eyes open and noticed that the economy was already recovering quite nicely without government direction. So while the mother country lurched in a socialist direction at home under Clement Attlee, Cowperthwaite became an advocate of what he called “positive non-interventionism” in HK. Later as the colony’s Financial Secretary from 1961 to 1971, he personally administered it.
    “Over a wide field of our economy it is still the better course to rely on the nineteenth century’s ‘hidden hand’ than to thrust clumsy bureaucratic fingers into its sensitive mechanism,” Cowperthwaite declared in 1962. “In particular, we cannot afford to damage its mainspring, freedom of competitive enterprise.” He didn’t like protectionism or subsidies even for new, so-called “infant” industries: “An infant industry, if coddled, tends to remain an infant industry and never grows up or expands.” He believed firmly that “in the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster.”
    Ever since the days of John Maynard Keynes, economics has been cursed by the notion that human action should be distilled into numbers, which then become a “pretense to knowledge” for central planner types. In many collegiate economics courses, it’s hard to tell where the math leaves off and the actual economics begins. To Cowperthwaite, the planner’s quest for statistics was anathema. So he refused to compile them. When Friedman asked him in 1963 about the “paucity of statistics,” Cowperthwaite answered, “If I let them compute those statistics, they’ll want to use them for planning.”

    Otto Maddox (990b3b)

  74. maybe i’ve had too hard a day or something, but i don’t understand why the recession hit.
    FamilyA was given 10 scipts. They went out 10 times in a couple of months without babysitting.
    So they have no scripts available in order to pay coop providers. But why wouldn’t they have the opportunity to earn scripts from the other families, especially Family1 and Family2 to whom they handed over the ten scripts?
    And even with the lack of scripts, they could have paid cash for non-coop sitters.

    seeRpea (c1462d)

  75. nothing good happens in this town after 10 anyways

    happyfeet (831175)

  76. 72

    And the best way for the centralized entity to do as good a job as is possible, is for them to leave prices to be set by the members, rather than by the centralized entity. That is the point. Care to respond to the actual point?

    This sort of advice tends not to be terribly helpful. The coop members had reasons for setting things up the way they did. They are unlikely to agree to drastic changes but might be more amenable to incremental improvements.

    The Federal Reserve isn’t going away any time soon. So perhaps it would be more productive to think about how they could do their job (as currently defined) better.

    James B. Shearer (6d3959)

  77. Again: let me remind you what the problem was: too much supply and not enough demand.

    Can you imagine a possible solution to this incredibly difficult conundrum?

    It’s clearly not a free market, but a fixed-unitary system, whereby you earn one unit of work in exchange for one unit of work.

    Several option are suggested:
    1) Do away with the scrip all together, and replace it with money, and let people charge what the market will bear.

    2) Allow people to BUY scrip rather than to only offer to exchange it for work 1:1. What you do with the “bank”s money is another question. Perhaps refund all of it on a monthly or quarterly basis to everyone in the coop.

    IGotBupkis, "Si tacuisses, philosophus mansisses." (225d0d)

  78. I know how he feels When I found out about ayn rand taking medicare when she publicly opposed it for everyone else I realized I was on the wrong side!

    There’s nothing hypocritical in taking a benefit others take, when you oppose it, if you’re already getting dunned (i.e., taxed) for it… If you’re forced into paying for a benefit and you refuse to take advantage of that benefit, you’re not being principled, you’re being stupid.

    What would be hypocritical would be to oppose it when you can’t get it, but to support it when you CAN. Kinda like much of the GOP in Congress these days.

    IGotBupkis, "Si tacuisses, philosophus mansisses." (225d0d)

  79. BTW, there’s one major flaw with this whole coop scheme, nowadays, and it is literally hilarious to think of attorneys involved in it, since they’re a major reason it’s now untenable.

    A friend of mine has a teaching degree, as does his wife. She also has experience in “babysitting”, since she also ran her church’s childcare setup during church hours. So, once they had their own children, she thought — hey, I can stay home, and make extra money caring for others’ kids… and offer a learning experience as a teacher as a perk to my takers, even as I care for my own kids. They owned their own house, with a big, fenced-in back yard.

    So what could go wrong?

    Simple: Modern Nanny-State Child Protection Services is what can go wrong.

    One of the parents noted some bruising on their child. Nothing untoward, simply the kind of thing that kids get all the time when playing out of doors. Instead of simply complaining to my friend’s wife about it, or just taking their kid out of her care, they complained directly to the state’s child welfare agency, who came by to investigate.

    No, no questions asked or defense allowed. Clearly, this was only something that CPS could be trusted to deal with.

    The downside? Not only could she/they get into trouble directly, but also CPS could come in and take away their **own** children.

    She stopped doing it very quickly after that, pretty much just as fast as she could get the other parents to find another place to keep their children.

    IGotBupkis, "Si tacuisses, philosophus mansisses." (225d0d)

  80. truther, every time you post you lower our IQ. Please stop.

    Naw. truther couldn’t touch my IQ with a 100 IQ pole.

    He makes people laugh.

    Truther, have you ever gone by “Benny” over on Carpe Diem? You seem just as much a victim of CRIS as he is.

    IGotBupkis, "Si tacuisses, philosophus mansisses." (225d0d)

  81. Medicare drove affordable health care for old people out of the market, the way Obamacare is doing it for young people now. It’s like the government breaking your leg and expecting a “thank you” for the crutch*. And Perry/truther is a demented troll.

    *Credit Patterico.

    nk (dbc370)

  82. This is what I know. Apparently I have terrible allergies despite living in the state of my birth for most of my entire life. I have a rescue dog prone to bladder stones and she is costing me a lot of money.

    Paul Krugman matters less in my life than my dog’s bladder stones. My dog is a sweet, happy pup who brings joy to everyone she meets. Krugman is exactly the opposite.

    Sure, Daisy does not have a national platform to insult the people who take care of her. She is not an intellectual, but she is a smart dog. She knows who feeds her and keeps her and she never would show loyalty to anyone who might abuse her. I know because I know where she came from.

    Krugman and his ilk don’t care about the people they pretend to care about. All they want are the votes to force their will on people who matter as much as the cur they kick to the side of the road. As long as the curs licks their boots, they are happy.

    People are not curs. The boot-licking should stop.

    Ag80 (eb6ffa)

  83. The chart I saw at the St. Louis Fed showed velocity dropping off a cliff. From a quick review over there, it looks like money gets pushed out into circulation and then stops. It seems like if there was high demand for more immediate M1 cash than the $85B a month shoved into the system then the M2 number would drop and velocity would pick up. I’d guess there are not too many good opportunities to earn a high(er) rate of return or people would be pushing money flow out towards them.

    I’ve seen the argument that the banks are sitting on the money, fat safe and happy, refusing to let to people (corporations and individuals) to buy the goods and services that would push cash through the system and I’m sure some institutions are playing it very safe (no one wants to fail a “stress test and get repo’ed by the feds again) but I see a lack of clear dynamic opportunities in the American markets…. maybe no one wants to take the plunge only to find oneself in a 90% tax bracket or maybe the absolute cluster going on in the middle east is a restraint, or maybe domestic policies EPA, Wage manipulation etc stifle innovations that would fall outside the “rules”.

    steveg (794291)

  84. 71 I actually didn’t know they were paying interest on reserves, but it explains the excess. The notion of excess reserve as a category is a bit misleading… but more interesting to me is to ask what paying interest achieves. It achieves many interesting things, but encouraging lending is not one of them. So it reinforces every understanding I’ve had, that more bank lending isn’t their real objective.

    83 I’ve long suspected the objective has always been to pump up assets into 2020 or thereabout. Long enough for people to doubt their doubts about the prospects for positive, sustained growth, and embrace the markets again. There are other benefits that come along with that, plus it gives us a chance to cool off after the frenzy of the 15 year Internet and housing bubbles (with record high velocity).

    I think by knowing what the Fed can’t control, and deducing how the Fed will react to get 3-5% GDP growth, you can anticipate the logical extensions to the economy. I think the major banks are all on the memo. I’ve invested accordingly.

    Joseph D (8bc5c1)

  85. Joseph D,

    DRJ has provided a second piece of evidence that the vast majority of QE ended up as excess reserves in the banks. First I provided a podcast — which you claim to be unable to play and seemingly have no interest in trying to find (it’s Planet Money Podcast #612 — but I assure you that in the first four minutes it has a Princeton economist and former Federal Reserve official saying that trillions of QE ended up as idle funds in banks. Then DRJ provided a quote from 2013 saying that of about $2.2 billion in QE at that point (more like $3T at this point), “81.5 percent now sits idle as excess reserves in private banks.”

    Yet you assured us that “the money that’s been printed hasn’t all (or even mostly) gone to banks.” Yes, it has, and it would be nice if you would admit that or provide contrary evidence. All you said is that the Fed bought treasuries — but what you seemingly fail to recognize is that they bought them from the banks.

    The vast majority of QE money is sitting in the banks.

    Patterico (15be32)

  86. This sort of advice tends not to be terribly helpful. The coop members had reasons for setting things up the way they did. They are unlikely to agree to drastic changes but might be more amenable to incremental improvements.

    That’s absurd. They simply wanted a system that worked — and with central planning and price-fixing, the system could not work on a regular basis. The article proves it — they went from fixed prices that were too hight to a brief “golden age” (where the prices happened to be OK by coincidence) and then to fixed prices that were too low, and it ended in failure. Allowing the price to adjust would allow people to make their own decisions about how much an hour of babysitting time was really worth to them. But oh, no! Even though it would work, it’s “too extreme” for the likes of James B. Shearer!!

    You’re like a Communist who says that we can’t do away with Communism and allow people to enjoy the fruits of their labors, even if millions are starving, because it’s too extreme a solution.

    The Federal Reserve isn’t going away any time soon. So perhaps it would be more productive to think about how they could do their job (as currently defined) better.

    Your brand of “moderation” accepts every government program and entity as a given, rather than engaging in arguments about whether they should exist. You can’t mount a logical argument in their defense, but you love being a contrarian, so you just say “this is the way it is and you’ll never change it.” Your placid acceptance of government that you can’t defend is the sort of mindset that has made this country an increasingly less free place. You’d make a great follower of any totalitarian regime, though; your refusal to think for yourself or change the status quo are precisely the sort of sheeplike characteristics that totalitarian rulers love to see in their docile citizenry.

    Patterico (15be32)

  87. Also, Joseph D, you have talked a lot about this “velocity” of money. I don’t want to get in a big side discussion about it, but I want to note that for the benefit of people following this discussion that Austrian economists (the folks who predicted the Great Depression and the recent financial crisis), velocity of money is a distraction and meaningless. There’s a discussion about it here.

    But before you come on and give us a big lecture about how velocity of money is supposedly so critically important, I’d really appreciate it if you would directly address the evidence I and others have provided showing that you were incorrect to deny that QE mostly went to idle cash in the banks. That assertion was part of your campaign to come on here and “correct” me about x, y, and z, and it appears to be wrong. Could you please address that, head on?

    Patterico (15be32)

  88. When you finish addressing the QE question, I would like you to address my response below to this assertion of yours:

    In deflation, you buy the parts to make a thing, and by the time it’s manufactured it must be sold for fewer dollars than before. Take any supply chain and this would happen. Margins get squeezed down, inventory and supply get squeezed down… everyone’s expectation is that they’ll take in fewer dollars tomorrow than today. This is a huge disincentive to deal in the currency in the first place. It works great mainly for those who can afford to delay consumption and wish to postpone investment. That doesn’t make for a robust economy. In inflation, consumers and investors can sleep at night knowing nominal costs today are less than they’ll be tomorrow.

    Your argument is not very clear. You go wrong at the very beginning with this “must be sold” assertion. You seem to think that because there is a phenomenon called “deflation” there is some kind of rule that products “must be sold” for less money, driving down profit margins and supply.

    Not so. Businesses don’t make money based on the general price level, but on the difference between their costs and what they can sell for. If their costs become lower, they can either sell for less, or pocket higher profits. If they do the latter, that will encourage competition to come in. If they sell for less, and tomorrow their costs of production are even lower, where is the problem?

    Why would people sleep better at night knowing the value of their money is going down at every moment?

    It’s a fairly subtle distinction, but enormous in the direction of its spiral. In an economy built even on a fixed money supply, as population grows and “savers” save, people are left to scrap, even fight, for the dwindling dollars in circulation. If they even value them at all.

    I’m repeating myself, but accumulating money is the result of a high demand for cash reserves relative to other products. As people accumulate money, the value of the dwindling amount of money becomes greater relative to goods and services, which become cheaper — prices are getting lower. This in turn encourages people to spend. Imagine that a plane flight to the country of your dreams, luxury accomodations at a hotel of your choice, and two weeks’ dining at the best restaurants cost only fifty bucks. Might you be inclined to spend some of those dwindling dollars? My point is that, left to its own devices, the market balances all these things out, as long as you don’t get carried away by fallacies that cause one to believe that it’s necessary to have inflation all the time.

    Inflation is a result of fiat currency and the cutting of ties to gold or some other “hard” money (I don’t care what it is), but that’s another discussion.

    Patterico (15be32)

  89. 86

    … Even though it would work, it’s “too extreme” for the likes of James B. Shearer!!

    Not for the likes of me, for the likes of the kind of people who set up the cooperative in the first place.

    Your brand of “moderation” accepts every government program and entity as a given, rather than engaging in arguments about whether they should exist. …

    After a while you get tired of tilting at windmills. Anyway I have different windmills to tilt at (banning immigration).

    James B. Shearer (6d3959)

  90. it used to be so fun to tilt at the windmills but then the fun becomes tedious and you grow weary of the tilting motions and stances and getting out there and putting your tilting game face on just starts taking something from you and one day you realize you want to focus more on stuff what provides you more gratification

    i totally get you

    happyfeet (831175)

  91. Your placid acceptance of government that you can’t defend is the sort of mindset that has made this country an increasingly less free place.

    Patterico, I totally understand and agree with where you’re coming from, but you have to recall your post from several days ago where you said (to paraphrase) that people have differing opinions, that we need to remember and accept that, and that just because an opinion is different doesn’t necessarily mean it’s a wrong one.

    I’m still astounded by what prompted that (even more so in the 21st century–in 2015) because such a reaction easily leads to the absurdity of today’s political correctness run amok, moral relativism gone berserk, and “I’m okay, you’re okay” off the deep end. “All opinions are equal and they all count” is a big reason the US (and Western World too) is more corrupted and oddly feckless today than ever before.

    Anyway I have different windmills to tilt at (banning immigration).

    When a socio-political system is more permissive or unhinged than ever before, the non-govermental aspects of a society take on even greater importance and meaning. IOW, with socialist- or do-gooder-leaning sentiments so pervasive in today’s era — and folks like Obama being given far more benefit of the doubt than they deserve (ie, opinion polls) — the issue of demographics starts to loom larger.

    If Paul Krugman’s example of a babysitting co-op involves a group of people who are generally all well-educated and resourceful (IOW, few to no ne’er-do-wells), then the eventual exhausted inner-workings of the economics of that co-op won’t be quite as harmful or noticeable compared with a co-op managed by a group of people full of high-school drop-outs and the aforementioned ne’er-do-wells.

    Mark (c160ec)

  92. Patterico, I am not interested in hostility I assure you. My “correcting” is so readers avoid misconceptions or understand better. Ok?

    As I never denied the money ended up in banks, and already just ‘admitted’ it did end up there, that’s an easy request. I only denied the Fed was sending money to banks, as though a purpose of printing was to spur bank lending — they weren’t and it wasn’t. I’ll “admit” most the money has ended up in the banks. Key term is “ended up”… I indicated this was the distinction your podcast would be making. Are you disputing that the Fed didn’t first buy treasuries? Will you admit they did buy trillions in treasuries? I don’t feel like providing evidence to something you can Google in seconds and is common knowledge.

    So the cash ended up in banks… but why is the Fed perfectly fine with this arrangement, and why did they fast-track a provision to pay interest on bank reserves? It is NOT because they’ve been wanting banks to lend money. So the whole distinction is academic. The purpose of increasing money supply was to spur consumption through treasuries and deficit spending, like I said, and the lack of velocity and low market interest rates has meant there was an overflow of cash once it ended up in banks. The banks are getting paid to hold it with the Fed risk free rather than lend it out to other banks, which is what they were doing before. The Fed never wanted to increase the total credit in the system to the same degree they wanted to spur consumption and investment. You don’t have to believe me, I don’t care.

    I do find it interesting you dismiss the basic physics of money. On the one hand, you point to an argument that velocity is meaningless. On the other hand, I say it’s everything. If you found the Mises column convincing, we might be at an impasse there.

    The deflation argument is really simple.  How would private lending operate in a deflationary environment? Break the logic of that down and it might go a long way.

    It’s not comllicated. If you want a shrinking money supply, prices, consumption, and investment, deflation is the answer. If you want growing prices, consumption, and investment, inflation is the answer. One just has to overcome the qualms about one’s dollar being worth slightly less tomorrow than today, to accept that reality. But if you disagree, it would be helpful to have an example of where deflation is working to point to.

    And before one rolls their eyes at that request, consider that it’s not just because governments prefer an easy way to make new money that you don’t find it anywhere. It’s because it doesn’t actually work for people. You’d have to radically reorient everything around an expectation of earning fewer nominal dollars yoy, no system of credit (unless the cost to hold cash became high or, more likely, dangerous), less inventory, etc. It *could* work, in theory, but in practice it breaks down because it goes against human nature. Like socialism. I would love to see private currencies try… my brother is big into BitCoin. And I recently “admitted” — conceded, really — to him that it could work as a side store of value, like gold, but you’ll never have a dynamic currency that is fixed or deflationary system-wide. It would be like setting up an amount of scrip for the good and services that exist, not building in room to reward new innovation without simultaneously dwindling the remaining scrip available to the commodity producer who took a loan to upgrade his equipment. It tends to suffocate expansion and investment. Again like socialism.

    Gradually devaluing currency maybe feels unfair or destructive to you. But look at it this way: when properly managed, it encourages risk-taking.

    Joseph D (8bc5c1)

  93. #86, Patterico,

    All you said is that the Fed bought treasuries — but what you seemingly fail to recognize is that they bought them from the banks.

    I’m fairly certain the Fed “buys” their treasuries from the Treasury. That is how money is created. I think the banks have large reserves because they control a lot of money (in the form of deposits, between the deposit and the withdrawal, and from the sale of CDs) and reserves are where they put it. I don’t think a lot of people are pounding on their door to borrow money because they have little confidence in the management of the country’s finances. In addition, I wouldn’t be surprised if a lot of foreign money ends up deposited here as the U. S. is seen as a relatively safe haven. When you think of investments that are easy to make, say stocks or real estate, the transaction is a form of a zero sum game as far as bank deposits are concerned, since what the buyer spends, the seller deposits. And relatively few such transactions actually stimulate innovation. Water front property is nice, but it is just water front property. And there are certainly no projects to create more of it. In fact, most States have commissions that are trying to eliminate the private ownership of such resources. These zero sums appear to be investments while we are in the middle of a bubble, as we’ve seen in 2000 and 2009. At best they are speculations, so for example, the inventory of water front property is likely to decrease with time, thus increasing the value of those parcels that survive the state commissions. What’s missing are expenditures in activities that increase productivity, which is where real GDP growth occurs. Such investments are inherently risky since they haven’t been done before, and the controls that are put on banks may make them undesirable. Between our lack of confidence in the Krugmans who control our financial affairs and the Dodd-Frank “reforms” we may have created a financial suicide pact. But not to worry, this flirtation with death is the least of our worries what with the administration stirring up racial divisions, and the Iranians seeking world domination using insurgencies and Kerry-approved fissile materials.

    bobathome (ef0d3a)

  94. Materials fissile
    Atop long pointy missiles
    Obama’s solution
    To western pollution
    By means sacrificial

    bobathome (ef0d3a)

  95. I take it then that you don’t think global warming will get us first, bobathome?

    elissa (4fe992)

  96. This is OT, although it is very indirectly related to the topic of economics, since the dynamics of a co-op (or any financial operation) can be impacted by the phenomenon of people voting not with their ballot, but with their feet and the moving van. (And also because I know forumers like Elissa and nk are residents of the Windy City.)

    nymag.com, March 27, 2015: The location of Obama’s presidential library — and of the Obamas themselves, post-presidency — has always been understood to be a competition between New York and Chicago, with Chicago heavily favored given the president’s history there. But today brings the latest in a series of reports teasing the possibility that Obama and his library really might come to New York, and, according to BuzzFeed, unnamed White House sources, and Representative Peter King — because who would know Obama’s plans better than King? — it’s more likely than ever before.

    The shift is supposedly because of “messy Chicago politics and a personal craving for a new beginning” — the library location was supposed to be announced at the end of March, but that was recently pushed back until after the April 7 runoff for Chicago mayor. Rahm Emanuel, Obama’s old chief of staff, has had an unexpectedly tough reelection race and his opponent, Jesus “Chuy” Garcia, at one point opposed using public land for the library, although he backtracked on that. There have also been protests and threats of legal action against the library in Chicago.

    Columbia University, meanwhile. has been quietly making its case with the support of Mayor Bill de Blasio. And Malia Obama, now a junior at Sidwell Friends in D.C., was recently spotted touring Columbia and NYU. Plus, Columbia is her dad’s alma mater.

    Personally, if I disliked a city, I’d do everything possible to see it land — and end up stuck with — Obama’s Library. Or sort of a variation of a backhanded compliment.

    Mark (c160ec)

  97. yup both sleazy corrupt rahm and filthy union thug chuy wanna steal park land and give it to food stamp for his library

    probably my favorite picnic spot is the one they want to steal

    a-holes

    happyfeet (831175)

  98. It should cost $15 to stay in Ghana, except with all these trillions floating around in the vault the politicians say “hey you big bad discriminitory bank, why don’t you lend some of those nearly free billions Uncle Sam is printing for you to Ghana and Bolivia?” Of course the money goes for Mercedes Benz and luxury Villas in France and Switzerland and floods into the economy of the small country and accomplishes nothing except making things more expensive.
    There is no plan to… lets say, build a road through the rainforest to open up a vast territory of untapped natural resources providing a nice ROI, jobs in mining, gas, etc. Nope. That may be the dog and pony show, but the road won’t get built, the Enviromentalists will pitch a fit at the UN and divert money earmarked for roadbuilding into their protest fund.

    Someone mentioned windmills and idealism can be quixotic
    Idealists want to control the economy. Reign it in. Stop. Throttle down, until they restore the economy to their ideal.
    Over there throttle, over here hands off, over there let it die.
    In order to reimpose the free market one would have to work for decades to slowly unravel the mess the world market is today. Or alternatively let inflation run its viral course and see Greece crater, Bolivia and Argentina fail, maybe repossess Venezuelas oil industry, let subsaharan africa, Mexico, our inner cities and poor rural areas, and SW Asia redescend into chaos. At least then it would be done and smouldering in 8 years rather than 80…. and then the do-gooders would jump in to try to fix or help those innocents within the borders of failed nations and they’d need to be stopped. Everyone wants control, even if it is the control over others needed to let the market control itself, control needed to keep hands off until the economy starts working according to the ideal.

    Right now the Fed is “easing” the economy along on the fiat currency it issues, trying to pace the printing presses to the growth of the economy so inflation doesn’t run hot. It is like managing Ebola to just kill 2.2% a year and never blow out of control until we find the “cure” or magic Krugman control.

    steveg (794291)

  99. probably my favorite picnic spot is the one they want to steal

    Oops. Forgot to include you, happyfeet, as one of forumers who’s also a resident of the city on the shores of Lake Michigan. I still think of all the times you’ve mentioned your travails in the LA area.

    Mark (c160ec)

  100. They should build a Presidential golf course. The library can be a virtual magazine rack in the locker room over by the toilets. You pick a magazine from your stall and the stall door can double as a teleprompter. Obama’s voice comes on and reads your magazine to you

    steveg (794291)

  101. In order to reimpose the free market one would have to work for decades to slowly unravel the mess the world market is today.

    Very odd, unsettling times we’re living in right now, although exactly how unsettling I’m not totally sure. I did theorize the stock market was going to crash back in 2014, and I also believed the US electorate would never be dumb enough to vote for someone like Obama, and not just once, but twice. So I’m 0 for 2, or 0 for 3.

    Mark (c160ec)

  102. The library can be a virtual magazine rack in the locker room over by the toilets.

    …located in a bathhouse in Chicago.

    Mark (c160ec)

  103. Joseph D, 3/29/2015 @ 9:30 am:

    As I never denied the money ended up in banks

    Joseph D, 3/28/2015 @ 1:59 pm

    A last point… the money that’s been printed hasn’t all (or even mostly) gone to banks

    It seems your point is that the Fed didn’t buy the Treasuries from the banks. You seem to think the Fed bought the Treasuries elsewhere, and that the money just somehow ended up in banks. You say:

    Will you admit they did buy trillions in treasuries? I don’t feel like providing evidence to something you can Google in seconds and is common knowledge.

    Why don’t you amuse us all and tell us, with a link to a reputable source, from whom the Fed bought those Treasuries during QE?

    I’ll start, using Reuters:

    To buy bonds, the Fed essentially creates money from nothing, paying for its purchases by crediting the accounts of banks from which it buys the bonds.

    That, to me, suggests the banks engage in quantitative easing by buying financial instruments like Treasuries from the banks, using money created out of nothing, for the purpose of increasing bank reserves and hopefully spurring banks to spend. You apparently have a different story. Let’s hear it, then — but I am not interested in your unsupported assertions. I want links. And why do I want to make sure that you have support for what you say? I will quote you again:

    Patterico, I am not interested in hostility I assure you. My “correcting” is so readers avoid misconceptions or understand better. Ok?

    Same here. So, the Fed bought Treasures from where during QE? Link, please.

    Patterico (15be32)

  104. #95: Elissa, I’ve gotten back into the AGW issue with Steyn’s account of his pending court battle with Mann. I just reread McMc’s articles (Energy Environment, 2003 and 2005, and GRL 2005, links available in Shollenberger’s kindle ebook) and I continue to be amazed that Mann, et al, have had such a profound effect on the world. Using multivariate techniques to identify and isolate correlated phenomena is useful, but it should lead to theories as to why they are (or are not) dependent upon one another, and that should lead to experiments with additional data that hasn’t been used to “train” the researcher. The theory is essential as it identifies which phenomena is the cause and which is the effect. Most of the Mann stuff is dependent upon bristlecone pine “cores”, and in all likelihood in my opinion, the growth experienced by these scruffy little trees in the 20th century is due to sheep grazing made economic by railroad communication in the West, which is to say they are not simple proxies of temperature. And Mann never gets beyond the “training” step. His latest foray links circulation in the Atlantic Ocean to these trees.

    This is a long winded way to say that I will be very surprised if anything the Global Warming cultists believe is true. And I really question their motives.

    And Obola’s concern about Western “pollution” includes the intrusion of ideas like the Rule of Law and the inherent rights of individuals upon the beauteous world of islam. He apparently finds such concepts offensive and inimicable to those who aspire to become tyrants.

    bobathome (ef0d3a)

  105. i’m still confused about the OT.

    seeRpea (c1462d)

  106. #103: Patterico, it is becoming clear to me where the confusion lies (on my part at least.) There is a kind of time warp in the whole Fed/Treasury process. The banks have an account with the Fed, and the Fed credits their accounts with fiat-dollars when the banks tender the Treasury Bonds that they “purchased”. The banks do not have $80B to invest in treasuries every month, so their purchase of the treasuries and the Feds crediting their account must occur nearly simultaneously. Additionally, the purchase of the treasuries is controlled by the Fed insofar as the yield and principal amount purchased by the banks. Meanwhile the Treasury can immediately draw funds out of the Treasury’s account at the banks to pay the bills that the bonds were intended to finance. But the money the Treasury spends is ultimately drawn from the banks’ Fed account(s). So the banks are a mechanism, but not a repository. When all is said and done, the Fed has a treasury note, and the funds have been distributed across the country to those exercising their “entitlement”, and to a few others who provided goods and services to the government. The banks are right back where they started.

    bobathome (ef0d3a)

  107. If I’m reading this correctly, the Federal Reserve website says banks only earn interest on required and excess reserves if they are held at a Federal Reserve Bank:

    The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve Banks to pay interest on balances held by or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011. The effective date of this authority was advanced to October 1, 2008 by the Emergency Economic Stabilization Act of 2008.

    It also links a report entitled Aggregate Reserves of Depository Institutions and the Monetary Base released March 26, 2015. It appears all the excess reserves are bearing interest, which means (if I’m reading the rules correctly) that all or virtually all reserves are held by the Fed.

    DRJ (e80d46)

  108. I think I may have misread the excerpt. It could also be read as saying the reserve balances can be held at the depository institutions (banks) OR by the Fed on behalf of the banks.

    DRJ (e80d46)

  109. This Cleveland Fed publication about reserves, the Fed policy, etc., is interesting and has more detail about the law and the history of Fed reserve policies.

    Also, this New York Fed report (footnote 1, page 1) says reserves are “either held as balances on deposit at the Federal Reserve or as cash in the bank’s vault or ATMs.”

    DRJ (e80d46)

  110. Here is a summary of the quantitative easing program from the federal reserve website:

    Large-Scale Asset Purchase Programs

    The Federal Reserve’s approach to the implementation of monetary policy has evolved considerably since 2007, and particularly so since late 2008 when the FOMC established a near-zero target range for the federal funds rate. Since late 2008, the Federal Reserve has greatly expanded its holding of longer-term securities via a series of asset purchase programs with the goal of putting downward pressure on longer-term interest rates and thus supporting economic activity and job creation by making financial conditions more accommodative.

    From December 2008 to August 2010, to help reduce the cost and increase the availability of credit for the purchase of houses, the Federal Reserve purchased $175 billion in direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, from January 2009 to August 2010, the Federal Reserve purchased $1.25 trillion in mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Detailed transaction level information for the MBS purchase program is available at the link below.
    Agency MBS Purchase Program, January 2009 – August 2010
    From March 2009 to October 2009, the Federal Reserve purchased $300 billion of longer-term Treasury securities to help improve conditions in private credit markets.
    From November 2010 to June 2011, the Federal Reserve further expanded its holdings by purchasing an additional $600 billion of longer-term Treasury securities.
    Starting in September 2012, the Federal Reserve further increased policy accommodation by purchasing additional MBS at a pace of $40 billion per month.
    Starting in January 2013, the Federal Reserve began purchasing longer-term Treasury securities at a pace of $45 billion per month, following the completion of the maturity extension program in December 2012.
    In December 2013, the Federal Reserve announced that it would modestly slow the pace of additional MBS and longer-term Treasury securities purchases and would likely further reduce the pace of asset purchases in measured steps if incoming information broadly shows ongoing improvement in labor market conditions and inflation moving back toward the FOMC’s 2 percent longer-run objective. Over subsequent months, the FOMC further reduced the pace of asset purchases in measured steps, and concluded the purchases in October 2014.
    Currently, the Federal Reserve also purchases MBS under a policy announced on September 21, 2011, in which principal payments from its holdings of agency debt and agency MBS are reinvested
    in agency MBS.

    The Federal Reserve’s outright holdings of Treasury securities, agency securities, and agency MBS are reported in tables 1, 5, and 6 of the H.4.1 statistical release. Table 3 of the H.4.1 release provides more detail on MBS holdings, including the Federal Reserve’s commitments to purchase and sell these securities, along with information related to cash and cash equivalents associated with the MBS purchase program.

    http://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm

    daleyrocks (bf33e9)

  111. teh weasel krugman
    PROTECT ALL BABYSITTERS!
    already screwed pooch

    Colonel Haiku (2601c0)

  112. “Businesses don’t make money based on the general price level, but on the difference between their costs and what they can sell for. If their costs become lower, they can either sell for less, or pocket higher profits. If they do the latter, that will encourage competition to come in. If they sell for less, and tomorrow their costs of production are even lower, where is the problem?”

    Patterico – The above is from your comment at 7:47 this morning and applies well to companies or enterprises for whom a significant function is to lend or invest money. As I described in my comments earlier on the thread and as you describe immediately above, if they can make more money than than cost of funds, they can earn a profit. The cost of some of those funds may be determined by a central bank because that is their source, reserve ratios, capital ratios and other costs of our regulatory framework have an implied cost on money, but those costs can be priced into rate which business attempts to negotiate with its customers, which the government does not set, which again is why I prefer the word influence over manipulate.

    daleyrocks (bf33e9)

  113. “That, to me, suggests the banks engage in quantitative easing by buying financial instruments like Treasuries from the banks, using money created out of nothing”

    Patterico – The whole “money created out of nothing” is just an inflammatory way to describe Banking 101. The Fed is doing the same thing your local bank does when it gets a deposit. They both use double entry accounting. There is nothing mysterious going on. Think through three transactions:

    First a deposit at your local bank. Your banker debits his balance sheet for cash and credits his balance sheet for liability to pay you back when you want to withdraw funds. The size of his balance sheets has gone up, however, so he might be able to lend out more money. The money supply has increased, but not out of nothing.

    Second, the Fed purchase of a treasury. The Fed is exchanging an asset, the treasury, for a promise to pay the seller of the treasury either directly if it’s a bank or through an intermediary clearing for the seller. The Fed debits its balance sheet for the value of the asset, the treasury, and credits a liability for the payable to the account of the bank or seller of the treasury for the equivalent amount.

    Third, the Fed sells a treasury. Reverse the entries in the second example. The money supply does not get shrunk out of thin air just because entries are electronic.

    daleyrocks (bf33e9)

  114. holy moly it’s worse than i thought

    happyfeet (831175)

  115. Meanwhile, on the other side of the world…

    nzherald.co.nz, March 30, 2015: Greece’s Government is prepared for a “rupture” with creditors in its bailout talks and is being deliberately vague about its intentions as a negotiating tactic, says a Cabinet minister.

    Separately, a Government official said Greece has made clear during negotiations with the eurozone and International Monetary Fund that the country “will not continue servicing its public debt through its own means, if the creditors don’t proceed directly with the disbursement of [bailout] instalments delayed since 2014″. The official spoke only on condition of anonymity.

    Greece has been unable to borrow on international markets since 2010 due to high borrowing rates that reflect a lack of investor confidence in the country. It has since relied on funds from a €240 billion ($345 billion) bailout from other eurozone countries and the International Monetary Fund.

    But its creditors are refusing to release the latest instalment, worth more than €7 billion, unless the Government produces an acceptable list of reforms aiming to restore the country’s tattered economy – by tomorrow. And the country faces a credit crunch, with estimates it will run out of cash sometime in April.

    Mark (c160ec)

  116. #113: daleyrocks, when the Fed sells a treasury note/bond, the dollars it receives from the buyers (the public, say) are destroyed. Ditto when the Treasury pays off a bond that the Fed holds. That is the mechanism for removing dollars from the economy, reducing the money supply. Except I believe the Fed is no longer selling any of their holdings, they are rolling over those payments and using that to buy the next round of Treasuries. In fact, they have been exchanging short term maturities for long term maturities which is doubling down on the bet that they are doing the right thing. Short or long, this maintains the money supply at its current level. But it also allows the Fed to constrain interest rates since they are a major buyer with the reinvested money. Which makes the welfare state more affordable. Until it isn’t.

    bobathome (ef0d3a)

  117. re #115: lets say Greece does run out of money. So? Is Greece no longer be a political entity?

    seeRpea (c1462d)

  118. Too much supply chasing not enough demand? The obvious answer is to drop your prices. Offer to babysit for 1 hour now, in return for 50 minutes of future babysitting. Or even put it on a scale where the longer the voucher is kept the less it’s worth.

    Milhouse (ab48bd)

  119. First a deposit at your local bank. Your banker debits his balance sheet for cash and credits his balance sheet for liability to pay you back when you want to withdraw funds. The size of his balance sheets has gone up, however, so he might be able to lend out more money. The money supply has increased, but not out of nothing.

    We’ve had this discussion before. If the bank can lend out more money, then it creates money when it lends some of your money, but tells you at the same time that you can withdraw 100% of your money.

    Think through this transaction: I deposit $100 today at my local bank. The bank lends $90 of that to Joe and tells him he can pay it back in a year. Tomorrow I withdraw my money. Now there is $190 in circulation where previously there was $100. $90 has been created out of thin air.

    Patterico (15be32)

  120. well in the past, when certain countries either defaulted, Khedive Egypt, or threatened to default, this was prologue to invasion, as with Britain in 1882, I imagine in Greece’s case, it would just spark greater instability, although not along ethnic or sectarian lines like Yugoslavia,

    narciso (ee1f88)

  121. Pat

    the Bank has a note for 90 and 10 on hand

    if all the customers withdraw their money from the Bank of Pattericoo 90 dollars of it will be missing

    EPWJ (9dacda)

  122. Here is a summary of the quantitative easing program from the federal reserve website:

    The summary does not say where the Treasury securities are purchased from. However, I have read numerous descriptions of QE, including the Reuters one above, saying that the purchase comes from financial institutions.

    On a separate note, bobathome argues that the banks don’t possess enough securities on hand to sell at the volume the Fed is buying them. I confess that this argument sounds plausible, and I don’t know how to reconcile that with the numerous descriptions i have seen over time that say that the Fed is crediting the money to the banks, as a way to spur more lending. But the Reuters link above, and dozens of others, describe QE as a central bank purchasing financial instruments from banks. I am still waiting for Joseph D to dispute that with a link.

    Patterico (15be32)

  123. the Bank has a note for 90 and 10 on hand

    If I go and ask for my $100 they will not tell me they have only $10 on hand. They will give me my $100.

    If all customers do it, the effect is the same: FDIC will step in and make depositors whole (unless they were foolish enough to deposit above the astronomically high insured limit).

    I won’t re-argue all this again. I have presented plenty of evidence in past threads of bankers saying with their own lips that creating money out of thin air is exactly what they do when they lend.

    Patterico (15be32)

  124. Pat

    Yes they will, I routinely have funds unavailable for clients for 24 48 72 hours due to local liquidity when they transfer large sums of monies

    FDIC does not AUTOMATICALLY step in in fact they will determine and usually make offers – not everyone is made whole even on deposit minimums

    You have studied this in depth but if banks were truly creating money out of thin air trillions upon quadrillions would be created overnight

    EPWJ (9dacda)

  125. FYI

    https://www.fdic.gov/bank/analytical/quarterly/2010_vol4_2/claims.html

    if your bank fails, there is a lengthy process, it will take many many years in cases of fraud to get your money back, even if the bank goes into receivership voluntarily which they almost never do.

    EPWJ (9dacda)

  126. I also agree with 90% of what you are saying and 200% that Kruger is an idiot

    EPWJ (9dacda)

  127. At this point, either you don’t follow what the asset purchasing was or you’re not arguing in good faith. Implying that banks’ processing treasury and other asset purchases, is equal to “pumping three trillion dollars into banks”, doesn’t even rise to quibbling over semantics. It’s mistaking the flow of what’s happening and the reason why.

    I only brought it up to clarify the common misconception that banks got direct loans / payments and such for the purpose of re-lending, but instead they sat on the money. That’s not what has happened. There are things we could debate, but this really isn’t one. Some Princeton economists might wish the banks would lend, but that wasn’t the main point of QE. If that was the point, the Fed would have stopped when it became clear 80+% was ending up in reserves, as it has done for years. And the Fed wouldn’t be paying interest to the banks to hold the reserves. There’s nothing to argue about here.

    Joseph D (8bc5c1)

  128. The Fed’s “cash” account is infinite in the sense that they can issue more at will. Presumably they only create enough money to keep the economy rolling along. They are the only ones who are allowed to do this. So for QE, they take in a Treasury note from a bank and credit that bank with the value of the note. The treasury simultaneously pays its bills drawing on its account in the bank which is now flush with the proceeds from selling the note to the Fed which are available to it in their Fed account.

    So the bank is left with enough Fed credits to pay off the Treasury’s needs. The Treasury has exchanged a note for the cash to pay its bills. And the Fed has made a note in its “cash” account that it is depleted by the amount it put in the banks Fed account, and that is balanced by the value of the Treasury note it now holds. Everything balances out, but the “cash” account is a fiction. The Fed can ignore this. If it sells the Treasury note, the cash it receives can disappear back into the “cash” account, or it can be used to buy more Treasuries which will maintain the money supply. And this is true whether the banks had enough cash on hand to purchase the Treasury or not. After the Fed credits their account, they will be in exactly the same place as before. They would use the Fed credit to replenish their cash account.

    bobathome (ef0d3a)

  129. 119

    Think through this transaction: I deposit $100 today at my local bank. The bank lends $90 of that to Joe and tells him he can pay it back in a year. Tomorrow I withdraw my money. Now there is $190 in circulation where previously there was $100. $90 has been created out of thin air.

    This isn’t quite right. $90 is created when the bank loans out your deposit but if you then withdraw your deposit the process is reversed and $90 is destroyed. What creates money is that you can write checks on your account and have people accept then like cash. The new money remains in existence as long as the checks just move it from one account to another.

    James B. Shearer (da3f60)

  130. I don’t know how to reconcile that with the numerous descriptions i have seen over time that say that the Fed is crediting the money to the banks, as a way to spur more lending.

    I agree here. There are a lot of rhetorical smokescreens — or, to interpret generously, misunderstandings — relayed in the media. The Fed says a lot of things, but they don’t necessarily do them, nor can they. Targeting unemployment is one. They can’t really do this, but it sells better than targeting a GDP number. I think the spurring lending idea has been put out there as a way to make people believe the Fed is on the case of ‘tightening’ credit. But they don’t really control it, and their actions and policies betray their primary motives. So when I raised the point it was in no way to contradict you, it was just to set the record straight in the hope that everyone can be aware of what has really been happening. Namely, the Fed has directly been propping up the social welfare deficit system first and foremost. The greedy banks hoarding money just makes a convenient diversion, politically, for some. And I don’t want our side to fall for it.

    Joseph D (8bc5c1)

  131. Well, I was going to say change the price. I didn’t read below the fold, but so many other commenters said that too.

    OK, they had dues and time. I guess there’s two ways to handle this:

    Give up the idea that “one hour” of babysitting time is worth one actual hour. Easier to not put this on the scrip in the first place, call it “babysitting bux” or whatever, and when you pay dues you get more as well as when you babysit.

    But wouldn’t it just be easier to go back to paying cash for babysitting? It’s a medium of exchange everyone already agrees on what it’s worth.

    Ok, I read the rest of the post now. At any time, any of these couples could have demanded two or five “hours” scrip in exchange for babysitting, and if the other couple took it, that would have set the price, and there would be no consequences for doing so. There was no “price-fixing” in the sense that a central authority was enforcing prices–when the government sets prices it enforces them by fines, prison, or executions. So Patterico is wrong about that part.

    Re; Krugman–he’s not stupid, he’s dishonest. His textbooks contradict his columns and he knows it.

    Gabriel Hanna (c17820)

  132. One thing to bear in mind about free markets–they bring supply and demand back into balance, but sometimes by restricting supply and some times by restricting demand. They “satisfy” demand by either increasing supply or reducing demand, but they don’t magically produce more stuff for everybody.

    There are very, very few people who care about supply and demand being “in balance”. People want “stuff”, they don’t want balance.

    Let’s go to the ever-popular example of those hoarders and wreckers who raise prices in a disaster area. Let’s say it’s gas.

    Ok, we allow the free market to do its magic and they charge $100 per gallon. What they have done is brought supply and demand back into balance by sharply reducing demand–but they have not summoned gasoline out of thin air. Yes, everyone who wants gas bad enough to pay $100 for it can have it, and so “demand is satisfied”–but the number of people who want gasoline and are not getting it is very high, and they direct their envy at the “rich” people who can get all the gas they want with their piles of gold doubloons, and at the “profiteering” gas stations. Everyone who can’t fork over the $100 feels hard done by, and the gas station owner looks like a ghoul.

    Ok, so we set the maximum price of gasoline and it all disappears in short order and gets hoarded. Are more people going without than if the prices had been allowed to change? I’d guess it’s likely not, but it’s a different set of people. It’s not the “rich” who can enjoy it, it’s whoever got there first. There’s no obvious target for the envy–until you find out who’s been hoarding gas and they get robbed.

    Ok, so instead of that we ration it. Are more people going without than if the prices had been allowed to change? Again, probably not. But usually this solution feels more fair to people. There isn’t the profiteering aspect or the luck of the draw aspect.

    Are peoples’ feels the right thing on which to base economic policy? I’m sympathetic to those who would impose rationing in an emergency of short duration, like Hurricane Sandy, but only for the sake of social peace. I don’t want to see gas stations looted or their owners ostracized.

    When it’s not an emergency of short duration, price controls or rationing are guaranteed to make things worse. The reason there’s a gas emergency during the hurricane is because there isn’t any more gas until it’s over. In normal life this is not true, more supplies come in, in the short term, and production increases, in the long term. If they are allowed to. Which price controls and rationing usually impede.

    Gabriel Hanna (c17820)

  133. At this point, either you don’t follow what the asset purchasing was or you’re not arguing in good faith. Implying that banks’ processing treasury and other asset purchases, is equal to “pumping three trillion dollars into banks”, doesn’t even rise to quibbling over semantics. It’s mistaking the flow of what’s happening and the reason why.

    I only brought it up to clarify the common misconception that banks got direct loans / payments and such for the purpose of re-lending, but instead they sat on the money. That’s not what has happened. There are things we could debate, but this really isn’t one. Some Princeton economists might wish the banks would lend, but that wasn’t the main point of QE. If that was the point, the Fed would have stopped when it became clear 80+% was ending up in reserves, as it has done for years. And the Fed wouldn’t be paying interest to the banks to hold the reserves. There’s nothing to argue about here.

    I searched in vain for a link or any proof whatsoever in those two paragraphs of what you have been saying: the Fed did not credit the banks’ accounts directly during QE.

    I am Patterico’s total lack of surprise.

    You seem to be laying the groundwork for running away without providing said evidence.

    Patterico (8834d2)

  134. Ok, I read the rest of the post now. At any time, any of these couples could have demanded two or five “hours” scrip in exchange for babysitting, and if the other couple took it, that would have set the price, and there would be no consequences for doing so. There was no “price-fixing” in the sense that a central authority was enforcing prices–when the government sets prices it enforces them by fines, prison, or executions. So Patterico is wrong about that part.

    No, I’m not. Do you think that if the government mandated that one of its issued pieces of paper — let’s call it a “dollar” — was now equivalent to one potato, the government would not be setting the price of potatoes?

    Neither you nor I have read the language of the rules of the co-op, but we know from the behavior of the members that they believed they could not alter the purchasing power of one unit of scrip, which the co-op had fixed at one hour of babysitting. If they felt free to float prices as I have suggested, there would have been no chronic shortages or surpluses.

    It does not take executions to give teeth to a co-op’s rules.

    Patterico (8834d2)

  135. ‘blimey I didn’t expect the spanish inquisition’ this has become the argument sketch, with the guest coming in for abuse, rather than argument,

    narciso (ee1f88)

  136. I agree here. There are a lot of rhetorical smokescreens — or, to interpret generously, misunderstandings — relayed in the media. The Fed says a lot of things, but they don’t necessarily do them, nor can they. Targeting unemployment is one. They can’t really do this, but it sells better than targeting a GDP number. I think the spurring lending idea has been put out there as a way to make people believe the Fed is on the case of ‘tightening’ credit. But they don’t really control it, and their actions and policies betray their primary motives. So when I raised the point it was in no way to contradict you, it was just to set the record straight in the hope that everyone can be aware of what has really been happening. Namely, the Fed has directly been propping up the social welfare deficit system first and foremost. The greedy banks hoarding money just makes a convenient diversion, politically, for some. And I don’t want our side to fall for it.

    Joseph D (8bc5c1) — 3/29/2015 @ 5:31 pm

    Joseph D: if you are correct, and QE money has been going to government coffers rather than banks, then it should be child’s play for you to provide a link and a quote from a reliable source to back it up. Hint: a source that says the Fed bought Treasuries without saying from where is not the proof you have promised. I gave a link and a quote saying the Fed bought them from banks. Please stop pretending that you can convince me with attitude, and give me a link and a quote.

    Patterico (8834d2)

  137. blimey I didn’t expect the spanish inquisition’ this has become the argument sketch, with the guest coming in for abuse, rather than argument,

    An argument is a series of connected statements intended to establish a proposition. (I might have the quote slightly wrong; going from memory.) I am just getting assertion and attitude. There’s a lot of “you’re wrong” and precious little logic or evidence to back it up.

    Patterico (8834d2)

  138. i was illustrating the ‘public execution’ squirrel,

    narciso (ee1f88)

  139. i was illustrating the ‘public execution’ squirrel,

    narciso (ee1f88) — 3/29/2015 @ 7:04 pm

    So who is heaping the abuse here, in your eyes? Me, or the guy who brought up executions? I maybe misunderstood you?

    Patterico (8834d2)

  140. It takes a village for this kind of system to work. With all that implies. A small, tightly-knit, insular community, tied to the land for generations past and future. With no one having anywhere to go and nobody new coming in except through marriage into one of the village families. And most important of all, a stable birth rate with a predictable number of children and new parents. Even then, some people’s “scrip” will have more value than others’ because everybody’s reputation for dependability and trustworthiness will be known. All this is missing from Krugman’s hypothetical, and an actual village with this system is a model for a national economy as a glass of water is a model for Lake Meade.

    nk (dbc370)

  141. I thought it was clear, free markets don’t operate by coercion, this scheme of Buffett’s I think, has made the rich immeasurably rich, and made basic staples more expensive,

    narciso (ee1f88)

  142. One thing to bear in mind about free markets–they bring supply and demand back into balance, but sometimes by restricting supply and some times by restricting demand. They “satisfy” demand by either increasing supply or reducing demand, but they don’t magically produce more stuff for everybody.

    Not “magically” — but higher prices attract more supply through the “magic” of the market — a fact that your natural disaster discussion totally ignores. There are stories I have discussed right here on this blog of the potential for profit spurring people into action to bring ice to regions that have a sudden need for it due to electricity outages.

    Patterico (8834d2)

  143. you would think, but it doesn’t even work in a microcosm, we can’t forget that Krugman argued for a property bubble, once upon a time,

    narciso (ee1f88)

  144. #136: Patterico, here is a link that will be familiar to you (#103):

    I’ll start, using Reuters:

    To buy bonds, the Fed essentially creates money from nothing, paying for its purchases by crediting the accounts of banks from which it buys the bonds.

    That, to me, suggests the banks engage in quantitative easing by buying financial instruments like Treasuries from the banks, using money created out of nothing, for the purpose of increasing bank reserves and hopefully spurring banks to spend.

    The article goes on, incorrectly in my view, to say:

    as money piles up in their Fed accounts, earning the paltry quarter-of-a-percentage point in interest that the Fed pays

    The money doesn’t pile up in that bank’s Fed account. The bank purchased the bond, and it needs to pay the Treasury, which it does by honoring the checks the Treasury writes on their account at that bank. Or they need to send the money in a lump sum to the Treasury’s account in a different bank if the Treasury doesn’t use them.

    This isn’t to say that the banks don’t deposit money in reserve accounts, but that is money that they generate from their banking activities. In fact, the loans that banks negotiate with consumers are often sold to third parties, generating a small profit for the bank. The banks don’t want to be in the business of servicing loans, and this frees up their assets to generate more loans.

    bobathome (ef0d3a)

  145. “We’ve had this discussion before.”

    Patterico – Last June I believe and I believe you used a paper from a Bank of England economist which supports the accounting I suggest. The deposit of the funds in the bank, rather than sitting in somebody’s pocket, allowing a portion of them to be loaned out is what creates the increase in money supply in your example and the Bank of England paper.

    Treasury bonds, notes and bills are not part of the money supply. So when the Fed exchanges them for credits or debits in member accounts, the money supply understandably expands or contracts.

    daleyrocks (bf33e9)

  146. @Patterico:higher prices attract more supply through the “magic” of the market — a fact that your natural disaster discussion totally ignores.

    Except where I said that:

    “The reason there’s a gas emergency during the hurricane is because there isn’t any more gas until it’s over. In normal life this is not true, more supplies come in, in the short term, and production increases, in the long term. If they are allowed to.”

    So, no, I did not ignore it and I agree with you about it.

    Gabriel Hanna (c17820)

  147. bobathome,

    The link is indeed familiar, but the only thing you really cited it for, was to call it wrong, and then expound on your unsubstantiated theory of how you think this all works.

    I am the only one in this thread who has provided a link with evidence on this point (except Daley, whose link does not illuminate the critical question: from whom is the Fed buying the bonds?

    My link says from the banks. I have people telling me I am wrong (and Reuters is wrong) but zero evidence proving it.

    Patterico (8834d2)

  148. “In normal life” sounded to me as a contrast with “when a hurricane hits.” And your ultimate view was to squash the extra supplies during the hurricane, to pander to the idiots who don’t understand that increased prices increase supply “in normal life” and during a disaster.

    Patterico (8834d2)

  149. fwiw, this is the European example, but it is applicable in part,

    http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-5

    narciso (ee1f88)

  150. narciso, that link says precisely what I have been saying — although it is discussing European QE.

    Patterico (8834d2)

  151. It says in QE central banks buy securities like government bonds from banks, with money created from thin air.

    Patterico (8834d2)

  152. Meanwhile, the USA Today piece does not say who the Fed is buying bonds from, but implies it’s banks, saying: “The Fed hoped to drive up the supply of money available for loans, driving down long-term interest rates so more people would buy and build homes and invest in businesses.”

    Once again, this is 100% consistent with what I have said, and inconsistent with Joseph D’s story.

    Patterico (8834d2)

  153. seeing as he derived the wrong lesson, he came up with the wrong remedy:

    http://www.csmonitor.com/Business/The-Circle-Bastiat/2010/0407/Paul-Krugman-the-Fed-and-the-housing-bubble

    narciso (ee1f88)

  154. this one is the most muddled explanation,

    http://www.marketwatch.com/story/more-quantitative-easing-to-come-2014-08-14

    if they bought up the debt, why was there a backlog of foreclosures,

    narciso (ee1f88)

  155. 146.
    To illustrate Gabriel’s point, in the aftermath of Hurricane Wilma, the only real impediment to getting gas was the fact tgat most gas stations lacked electrical power, and therefore could not pump gas. Lack of gas was not the problem. Lack of means of distribution was the problem.

    kishnevi (adea75)

  156. kishnevi,

    Can you think of a way they could have gotten electrical power?

    If so, can you think of a reason they might have thought the solution wasn’t worth the cost?

    Patterico (8834d2)

  157. this one is the most muddled explanation,

    http://www.marketwatch.com/story/more-quantitative-easing-to-come-2014-08-14

    if they bought up the debt, why was there a backlog of foreclosures,

    narciso (ee1f88) — 3/29/2015 @ 8:04 pm

    Yes, this is (I believe) describing QE 1, where the Fed bought toxic assets — from whom, Joseph D?

    From the banks.

    Patterico (8834d2)

  158. @Patterico: And your ultimate view was to squash the extra supplies during the hurricane, to pander to the idiots who don’t understand that increased prices increase supply “in normal life” and during a disaster.

    Yes, because it’s an emergency, people don’t act rationally, and sometimes they get violent when they are mad and scared.

    Are you really saying that the free market is always and everywhere the best solution? I don’t think you are.

    If you don’t like my hurricane example, replace it with a lifeboat hundreds of miles out to sea. There’s ten people and one hundred cans of Spam, and that’s it. In the lifeboat, they’re not going to follow the free market. They’re probably going to be rationing and possibly shooting people who try to steal. And if some poor sucker was the actual owner of those cans of Spam before they set out, he’s going to get expropriated pretty quickly, and thrown overboard if he causes too much trouble about it.

    And in that case the free market is not going to bring any new supplies in. All it can do is piss off the people who don’t have anything to trade, and the “owners” have to sleep sometime.

    I think that short-term emergencies can get bad enough that considerations of social peace would have more utility than efficiently balancing supply and demand. You may disagree that Hurricane Sandy is one case, and you might even disagree about the lifeboat, but there will be some case where you will agree. Libertarianism is not a suicide compact.

    Gabriel Hanna (c17820)

  159. @Patterico: Anyway, as progressives tiresomely point out, the free market requires some preconditions for its operation. One is a non-violent method of settling contracts that is generally accepted as legitimate between strangers. You need some law and order, in other words.

    In an emergency law and order break down, so you end up shooting looters rather than arresting them and putting them through a proper trial, and sometimes people even end up eating each other. It’s not really realistic to say that free market principles should be followed even in short-term emergencies.

    Gabriel Hanna (c17820)

  160. @Patterico: Another case where you don’t think the free market should rule is in your own home, right? You treat your family as a single economic unit, unless your home life is very different from mine it’s a more or less benevolent communism where only two people have any executive authority.

    I don’t think it’s any sillier to say “we shouldn’t apply free market principles in a short-term emergency” than it is to say “we shouldn’t apply free market principles to our nuclear family”. The free market is not a floor wax or a dessert topping either.

    The thing I like about it is that it has limits, it’s not a substitute religion like Marxism or psychoanalysis that’s the cure-all for everything.

    Gabriel Hanna (c17820)

  161. @Patterico: I read your post when it came out. Fine, Hurricane Sandy is not a case where you think free market principles should have been suspended. Reasonable people can disagree.

    What about a lifeboat with ten people and one hundred cans of spam? There’s nothing people have to trade except services, nobody can make more spam. How are property rights going to be enforced? If one guy has too much spam the others can throw him overboard. Everything will need to be done by consensus or monopoly of force.

    If you still want to try to apply free market principles I can think of harder and harder cases, but eventually we’ll get to one where you will acknowledge it doesn’t work.

    All I’m saying is, at some level of societal disruption the free market is no longer the best thing to live under. You do agree with the principle, but you disagree over where that line is. Fine. Some people thing 75 mph is too high a speed limit and some think it’s just fine, but there is not a difference in principle, only in degree.

    Gabriel Hanna (c17820)

  162. Patterico, the bank aren’t given treasury bonds, they have to buy them. Now if all they want to do is put the money in their reserve account to earn 1/4%, then why bother to buy the bond?? Just deposit the money in their reserve account and be done with it. That is why I said the Reuters story was off the mark.

    And the banks that are doing the buying of bonds to be delivered to the Fed are probably the Regional banks. These banks will play the game of buying “x” amount of treasuries at the “z’ yield set by the Fed.

    I really think we’re saying almost the same thing, but you haven’t accounted for how the banks got their bonds in the first place. I’m just saying they act as intermediaries to the Fed.

    bobathome (ef0d3a)

  163. bobathome,

    Link?

    Patterico (8834d2)

  164. Patterico, some gas stations already had portable generators installed, and were able to operate. Most did not.
    After Wilma, a law was proposed making it mandatory for stations to have generators. I do not remember if it passed.

    Turning on the power involved FPL’s priorities. Those that got fixed first were either close to a hospital or firehouse, or were easily fixed. The further away you were from a facility that provided essential services and the more complicated the restoration was, the longer the wait. Which meant sometimes that one side of the street had power two weeks before the other side, if they ran off different lines.
    Gas stations thus got power restored based on geographical chance.

    Tangential thought. Remember when gas stations were called service stations?

    kishnevi (9c4b9c)

  165. You aren’t processing what I or anyone else is telling you. You’re stuck on not losing an argument, but nobody is trying to beat you.

    Joseph D (8bc5c1)

  166. I’m leaving the discussion. You might delete this. But I’m not even convinced you aren’t processing. I think you are but are pretending not to. And of all the ideas here, your focus boils down to essentially arguing that when I buy a $1m house, and I write a check to a holding bank rather than the seller directly, the bank is receiving $1m to do with as it pleases. This is nonsense and embarrassing. I never promised you a thing, I’m glad I didn’t waste time retrieving any links, and won’t be wasting any more time on this.

    Joseph D (8bc5c1)

  167. I’m leaving the discussion.

    Well of course you are. Bless your heart.

    As I predicted.

    No proof. No link. No evidence. Just “I’m right and it would have been a waste of time to prove that what I said was true! Um, even though you showed with a link and quote that I was full of it. I could have proved it if I wanted, but you’re just not worth my time, man!”

    Typical troll, proven wrong but won’t admit it, so he runs away.

    So predictable that I predicted it!

    Patterico (8834d2)

  168. Daleyrocks sez:

    Patterico – Last June I believe and I believe you used a paper from a Bank of England economist which supports the accounting I suggest. The deposit of the funds in the bank, rather than sitting in somebody’s pocket, allowing a portion of them to be loaned out is what creates the increase in money supply in your example and the Bank of England paper.

    The comment where I cited the Bank of England paper is here. Money quote (if you’ll pardon the pun):

    Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

    It’s cute that you remember the BoE paper as supporting your position. Back then, you fought them by saying maybe they do things differently in England.

    It gets worse, because one of the authors of the paper made a video where he explicitly said that banks create money when they lend it. I mentioned that here.

    Patterico (d2f86d)

  169. We discussed the fact before that if you want to claim the deposit does not create the money, then clearly a loan from that money does.

    As I explained, the creation of money stems from someone having loaned money based on an account that the bank says you can withdraw in its entirety. When exactly you claim the money is created is not important; the fact that the same money is both lent and withdrawable by the original depositor is the key.

    Patterico (d2f86d)

  170. “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

    It’s cute that you remember the BoE paper as supporting your position. Back then, you fought them by saying maybe they do things differently in England.”

    Patterico – I questioned the matching deposit idea, as I did here in the U.S. in loan creation. It is cute that no commenter could recall a deposit being made to their account when taking out a mortgage or car loan, so I think I was on the right track and maybe they do things differently in England or the economist was just making it up as he went along.

    In any event, a transaction, the loan, gave rise to the increase in money supply. It was not created out of thin air and the BofE paper supports my suggested accounting for the Fed purchase and sale of treasuries.

    daleyrocks (bf33e9)

  171. Patterico – Can you describe how the process would be different if we did not have fiat currency?

    daleyrocks (bf33e9)

  172. @daleyrocks: While a home mortgage and car loans are slightly different, as their collateral is the house or car, and without the purchase, the loan is null and void. However, home equity line of credit and personal loans are indeed loans that can be deposited in one’s account, if that is what you wish to do with the loan.

    prowlerguy (3af7ff)

  173. You’re only demonstrating how worthwhile it is to try to convince a troll, bless his heart, that:

    You: McDonald’s cooks millions of gallons of oil a day. What a waste.
    Us: They’re not really cooking oil though. They’re cooking fries.
    You: I have proof that they’re cooking oil!
    Us: Trust us, the point is fries are getting cooked. Oil’s not the point.
    You: Prove with links they aren’t cooking oil!

    Yeah. It’s a waste. Thanks for confirming that.

    Joseph D (8bc5c1)

  174. # : Patterico, a link you wanted, and a link you shall have.

    Minutes from the Jan. 27 2015 Open Market Committee

    On pages 3 and 4 under the heading “Authorization for Domestic Open Market Operations”:

    Item 1.C:

    C. To exchange, at market prices, in connection with a Treasury auction, maturing Eligible Securities in the SOMA with the Treasury, in the case of Eligible Securities that are direct obligations of the United States or that are fully guaranteed as to principal and interest by the United States;

    and Item 1.D:

    D. To exchange, at market prices, maturing Eligible Securities in the SOMA with an agency of the United States, in the case of Eligible Securities that are direct obligations of that agency or that are fully guaranteed as to principal and interest by that agency.

    SOMA is the “System Open Market Account” and it is maintained at the “Selected Bank”, meaning one of the twelve Federal Reserve District Banks.

    As I read this, the Selected Bank has a portfolio of Federal notes and bonds some of which have or are about to mature just before a Treasury auction. The Selected Bank contacts the Treasury (item C) or the agency (item D) and makes arrangements to roll over the matured notes/bonds. This is done at the market price which will be determined by the auction. The Treasury has already specified the interest rate for the obligation and if the bonds bought by the Fed plus the other non-competitive bids cover the amount at auction, the market price will be the face value of the bond.

    This is one way, at least, that the Fed can directly obtain Treasury and agency bonds. They can roll over bonds obtained using the credit facility.

    I’m still searching to get some details on the remaining open market transactions, particularly those that involve “credit” generation.

    One fascinating thing is that the payment of interest for “excess reserves” dates back to 2008, and this would seem to undermine the “multiplier” effect of the reserve requirement that the Fed has traditionally used to adjust the amount of money the banks can lend. Lower the reserve requirement, and more money is available for loans to bank customers, raise the reserve requirement and less will be available. By paying interest on “excess” reserves (amounts beyond the current requirement) the Fed eliminates the incentives associated with adjusting the requirement.

    It is also interesting to see that the statement released at the close of the meeting, page 20, included the following [prayer?]:

    This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

    This is a bit like the priest chanting “we throw this innocent virgin into the volcano or Great One because we know this will please you and we hope it will bring rain.”

    bobathome (ef0d3a)

  175. Make that #165 …

    bobathome (ef0d3a)

  176. Can somebody explain why the entities from whom the Fed buys the securities suddenly became critical to the discussion? Other than bailing out a specific failing institution, to me its a nonevent. The Fed has to buy them from people who have accounts with the Fed or will settle the trades with institutions who have accounts at the Fed. The Fed may not know the ultimate buyer or seller.

    daleyrocks (bf33e9)

  177. #178: daleyrocks: Well, for one thing, the Fed doesn’t have to but them “from people who have accounts with the Fed.” The “Selected Bank” can deal directly with the Treasury or the agencies. If their rollover equals the amount to be auctioned, then the Fed completely controls the interest rate. So the idea that the current situation is the result of an “open market” is a pretense. The only way a third party could buy a bond at one of these auctions is to pay a premium for the bond which would imply an even lower effective rate. So we truly have no idea what the true open market rate is.

    bobathome (ef0d3a)

  178. make that “buy” not “but” … Windows 8.1 and a touch pad can be very distracting. Even with Classic Shell, which I highly recommend.

    bobathome (ef0d3a)

  179. bobathome,

    Does all that describe quantitative easing? I see no reason to believe it does. It sounds like a description of the open market operations they do to manipulate the federal funds rate to its target level.

    I am still waiting for a single link from anyone that says that in quantitative easing, the Fed buys treasuries from the U.S. government and sends the money to the government rather than the banks. Every description I have ever seen of QE has them sending the money to the banks, to encourage lending. All I get is the increasingly desperate and clownish Joseph D jumping up and down claiming that it’s just OBVIOUS. He thinks his Big Attitude will make people overlook the fact that, somehow, I can provide links and evidence for my position, and he glaringly can provide none for his. He wants to save face by simply asserting that I am stupid and his position is obviously right, but he cannot save face because he cannot provide anything to support his supposedly clearly correct position.

    That is why he set the groundwork to run away, using supposed disgust with me as a cover for his embarrassing failure. Number of people fooled = zero.

    I am always happy to have people prove me wrong with evidence. I am wrong sometimes like any other human. But when someone flat-out claims I am misleading my readership, and I can find no evidence to support their position and much to support mine, and I ask them for evidence and get nothing but silly Internet troll style screaming and re-asserting, I feel compelled to take such people on, so that people are not misled.

    To be clear, I am not talking about bobathome here, but rather Joseph D. bobathome is having a discussion and trying to provide evidence, I am just not seeing a clear connection between the Fed statements he provided and QE.

    Patterico (a0ea2e)

  180. “If their rollover equals the amount to be auctioned, then the Fed completely controls the interest rate. So the idea that the current situation is the result of an “open market” is a pretense. The only way a third party could buy a bond at one of these auctions is to pay a premium for the bond which would imply an even lower effective rate.”

    bobathome – I completely disagree and think you need to brush up on how treasury auctions work. They are Dutch Auctions, although both competitive and noncompetitive bids can be submitted. The noncompetitive bids get filled at the auction clearing price and yield.

    Bidding

    When participating in an auction, there are two bidding options – competitive and noncompetitive.

    Competitive bidding is limited to 35% of the offering amount for each bidder, and a bidder specifies the rate, yield, or discount margin that is acceptable.
    Noncompetitive bidding is limited to purchases of $5 million per auction. With a noncompetitive bid, a bidder agrees to accept the rate, yield, or discount margin determined at auction.
    Bidding limits apply cumulatively to all methods that are used for bidding in a single auction.

    At the close of an auction, Treasury awards all noncompetitive bids that comply with the auction rules and then accepts competitive bids in ascending order of their rate, yield, or discount margin (lowest to highest) until the quantity of awarded bids reaches the offering amount. All bidders will receive the same rate, yield, or discount margin at the highest accepted bid.

    All auctions are open to the public. The following U.S. Treasury services are available:

    TreasuryDirect accounts: Individuals and various types of entities including trusts, estates, corporations, partnerships, etc. See Learn More about Entity Accounts for full information on the new registration types.
    TAAPS: Institutional Investors

    Read the relevant auction regulations and the Treasury Securities Offering Announcement Press Release to find out if your institution may participate.
    Issuance

    On issue day, Treasury delivers securities to bidders who were awarded securities in a particular auction. In exchange, Treasury charges the accounts of those bidders for payment of the securities.

    http://www.treasurydirect.gov/instit/auctfund/work/work.htm

    daleyrocks (bf33e9)

  181. All we’re really talking about here is: where does the QE money go? Joseph D says to the central government to help pay for welfare and other big government programs. If true, that’s horrifying. But I have never seen any description of QE that says Fed-created money is going to the central government. Every description I have ever seen, including the ones I cited and the ones narciso cited in this thread, says the money is going to member banks, to bolster reserves and encourage lending.

    Before QE, the Fed would try to encourage lending by manipulating interest rates lower. The idea is that the lending would spur growth, Keynesian style. But once interest rates are at zero, the Fed can no longer encourage lending by lowering interest rates. So the Fed moves to the next tool in its toolbox: QE, whereby it fills up the banks’ reserves with cash, again hoping to stimulate more lending.

    Now: when these descriptions say the bonds are being bought from the banks (as they always do), there is potentially a question of how the banks came to own the bonds to begin with. It had always been my understanding that they simply had bought them in the past and held them as a safe way to maintain reserves. By replacing the bonds with cash, presumably the banks would have to lend these reserves now to make interest. But then DRJ comes by with links to show the Fed is apparently paying the banks interest on these reserves (?) which seems counter to the plan. And bobathome raises a question whether banks already held enough bonds to sell in the amounts we saw in QE2 and QE3.

    But nevertheless, as best as I can glean from any description of QE I have ever seen not written by a commenter giving their unsupported opinion, QE consists of the Fed giving cash to banks in exchange for various financial instruments: mortgage-backed securities, bonds, etc.

    If someone can provide a reliable and plain English description of QE (not just standard open-market operations) that contradicts this understanding, I will read it. But there are a LOT of links out there saying exactly what I have been saying in this thread.

    Patterico (a0ea2e)

  182. If the roll-over of the Fed’s portfolio plus the non-competitive bids equals or exceeds the amount to be sold, then the only competitive bids that would be accepted would be for yields less than the agreed rate that the Fed is committed to. So you are right to the extent that if there are a few bids beneath that rate, then they would also be included in the sale. But the elephant in the room is the Fed rollover.

    bobathome (ef0d3a)

  183. This link says the money went to “primary broker-dealer” Wall Street banks like Goldman Sachs. But the whole presentation is designed to convince you that these firms would have invested the money in any number of their money-making businesses, while it seems well-accepted (see DRJ’s WaPo link) that most of the money ended up as bank reserves. So the explanation does not seem fully credible as its presentation seems designed to sell particular investments based on counterfactual scenarios.

    My kingdom for a clear and reliable explanation of all this.

    Patterico (a0ea2e)

  184. “All we’re really talking about here is: where does the QE money go? Joseph D says to the central government to help pay for welfare and other big government programs. If true, that’s horrifying. But I have never seen any description of QE that says Fed-created money is going to the central government. Every description I have ever seen, including the ones I cited and the ones narciso cited in this thread, says the money is going to member banks, to bolster reserves and encourage lending.”

    Patterico – I agree with the above. The quantitative easing is about aftermarket purchases, although the link I provided early in the thread from the Fed referencing purchases of asset-backed securities stated a desire to bolster prices of such assets I believe.

    I think it is common knowledge that the Fed has been purchasing a large percentage of treasury auctions in recent years, apart from the QE programs. I hope I am not excoriated for not immediately searching for a link to support that statement.

    daleyrocks (bf33e9)

  185. Planet Money explains quantitative easing:

    Enter quantitative easing, an idea the Fed is borrowing from Japan, which used it a decade ago when it had a similar problem.

    It works like this.

    A big bank — Bank of America, say — has $50 billion in government bonds. They’d sell those bonds if anyone would pay enough for them, but nobody is willing to pay that much. So the bank just holds on to them.

    With quantitative easing, the Fed comes along and says, “Hey, Bank of America, we’ll buy those bonds for a little more than anyone else is willing to pay.” Bank of America says, “OK, great, send us the money.”

    This is where the Fed gets to use central-bank magic. They pay for that $50 billion purchase in new money. They just invent it. That’s what the Fed — but nobody else — gets to do.

    So now Bank of America has $50 billion they need to do something with. The Fed is hoping that Bank of America will decide to lend that $50 billion to companies and people to invest or spend. That stimulates the whole economy.

    It sounds great. Create new money, get it out there, everyone wins. But — of course there’s a but.

    Nobody really knows if this works. It’s still really controversial among economists. It’s only been tried a few times and, as in the case of Japan, hasn’t had the greatest results.

    There you have it. A clear, plain English explanation that validates everything I have said on this thread and demolishes Joseph D’s attempts to mislead the readers.

    If we see Joseph D after this, I will be very, very surprised.

    Patterico (a0ea2e)

  186. “This link says the money went to “primary broker-dealer” Wall Street banks like Goldman Sachs. But the whole presentation is designed to convince you that these firms would have invested the money in any number of their money-making businesses, while it seems well-accepted (see DRJ’s WaPo link) that most of the money ended up as bank reserves. So the explanation does not seem fully credible as its presentation seems designed to sell particular investments based on counterfactual scenarios.”

    I found a list of 22 primary dealers as of 2014:
    Bank of Nova Scotia, New York Agency
    BMO Capital Markets Corp.
    BNP Paribas Securities Corp.
    Barclays Capital Inc.
    Cantor Fitzgerald & Co.
    Citigroup Global Markets Inc.
    Credit Suisse Securities (USA) LLC
    Daiwa Capital Markets America Inc.
    Deutsche Bank Securities Inc.
    Goldman, Sachs & Co.
    HSBC Securities (USA) Inc.
    Jefferies LLC
    J.P. Morgan Securities LLC
    Merrill Lynch, Pierce, Fenner & Smith Incorporated
    Mizuho Securities USA Inc.
    Morgan Stanley & Co. LLC
    Nomura Securities International, Inc.
    RBC Capital Markets, LLC
    RBS Securities Inc.
    SG Americas Securities, LLC
    TD Securities (USA) LLC
    UBS Securities LLC.

    http://www.newyorkfed.org/markets/pridealers_current.html

    As you can see they include banks/securities firms and securities firms. I have no problem with the link you provided in #185, but I have tried to be deliberate in the language I’ve used in this thread. Just because a treasury security is sold to the Fed through say Morgan Stanley, to pick a non-bank, that does not mean Morgan Stanley is the ultimate customer. Morgan Stanley may be executing or clearing that trade on behalf of a bank, mutual fund, hedge fund, insurance company or other owner of the treasury security.

    daleyrocks (bf33e9)

  187. daley,

    If you directly contradict me on a factual point, and I think you are wrong, and I provide a link to back up my factual assertion, and repeatedly ask you for evidence of your own, and you refuse to provide it while mocking me all the way, I will excoriate you then.

    Because then you will be Joseph D.

    (I don’t feel that way about the “money creation” argument because I see that as a disagreement about the interpretation of facts, rather than about the facts themselves.)

    Note that I have never said he was wrong. I just said that what he asserted contradicted every description I had ever seen.
    So I repeatedly asked him for evidence. All I got was re-assertion and increasingly trollish mockery.

    Patterico (a0ea2e)

  188. As you can see they include banks/securities firms and securities firms. I have no problem with the link you provided in #185, but I have tried to be deliberate in the language I’ve used in this thread. Just because a treasury security is sold to the Fed through say Morgan Stanley, to pick a non-bank, that does not mean Morgan Stanley is the ultimate customer. Morgan Stanley may be executing or clearing that trade on behalf of a bank, mutual fund, hedge fund, insurance company or other owner of the treasury security.

    I agree with this, but again I don’t have complete confidence in the link at 185.

    Patterico (a0ea2e)

  189. “If you directly contradict me on a factual point, and I think you are wrong, and I provide a link to back up my factual assertion, and repeatedly ask you for evidence of your own, and you refuse to provide it while mocking me all the way, I will excoriate you then.”

    Patterico – Got it. I don’t think I’ve completely disagreed on this thread and have provided links when I believed necessary.

    daleyrocks (bf33e9)

  190. I know. I have no problem with the way you have defended your views on this thread. To the extent that your comment could be read as chiding me for excoriating Joseph D, I hope the reasons for my excoriation have been made clear.

    Patterico (a0ea2e)

  191. Below is a link to a page on the website of the New York Fed which has downloadable quarterly spreadsheets from 2010 through 2012 which have a column listing the counterparty (who they purchased the security from) should anybody be interested. It appears to be the primary dealers, the composition of whom does change over time.

    Scroll down the page until you get to the downloadable tables.

    http://www.newyorkfed.org/markets/omo_transaction_data.html

    daleyrocks (bf33e9)

  192. If only there were a way we could each individually assign a color scheme to each poster’s IP. So for me, our gracious host would continue black on yellow, truther would be black on black, sammmy white on white, and so forth.

    phunctor (8520c6)

  193. I think it’s hilarious that the Fed has driven interest rates to nothing and now pay banks to hold reserves and they’re surprised banks don’t want to lend.

    Yes, lower interest rates may stimulate demand for borrowed funds. But it will also discourage supply of borrowed funds, since the lenders make less. It seems the problem at this point is a lack of incentive on the part of the banks to lend, not a lack of demand on the part of potential borrowers. The Fed’s actions in giving banks risk-free interest on their reserves virtually guarantees that banks will continue to keep lending levels low.

    Patterico (15be32)

  194. “I think it’s hilarious that the Fed has driven interest rates to nothing and now pay banks to hold reserves and they’re surprised banks don’t want to lend.”

    Patterico – Part of the problem was early on in the Obama Administration bank auditors were fly specking every loan banks actually did make and criticizing them for their decision-making and processes. It got a lot easier to lazily arbitrage spreads on borrowing from the fed than to make loans and take abuse from your regulators for doing it.

    daleyrocks (bf33e9)

  195. That’s true as well. I just refinanced and there were a lot of silly obstacles put up by Dodd Frank. Meanwhile my sister and her husband can’t refinance despite good income and excellent credit — and despite the bank wanting to extend them credit — because of some obscure new regulation about W-2s.

    If you can make .25% on millions, guaranteed, without lifting a finger, and with zero risk, why the hell wouldn’t you do that?

    Patterico (15be32)

  196. and they’re surprised banks don’t want to lend

    This….. they aren’t.

    I’m going to try to apologize. One thing is clear. You reacted to my posts as though I was trying to make you look bad. You were mistaken.

    But I’ll concede that perhaps on another thing I was mistaken. As I read back through your posts, and looked into what research you were likely encountering, one of two things happened on your side:

    1) you either got what I was saying, felt “corrected”, and thought you’d save face by trapping me into a position that is essentially like trying to show McDonald’s doesn’t cook oil. I assumed you knew that was the kind of debate you were trying to establish. The Fed buys treasuries from banks. McDonald’s cooks oil. So what? All of my reactions (or non-reactions) have been because of what I saw as the stunning bad faith of the question. But if I consider:

    2) you have looked into this and everything you’re seeing is telling you QE is definitely to give money to banks to lend out. I have to say, I tried to be very upfront about the need to not buy into what most media descriptions of QE are, and I was open about the nature of this as being a common misconception. But even still, I am completely surprised by the level of misunderstanding — or misinformation — I see out there in professional, widely circulated publications. I took a quick look at some descriptions of QE and indeed most of them talk about it as you say, giving little hint to the true motives of the operation, and even masking it. You could think, from most of the descriptions, that banks were sitting around with treasury assets that they sold off (and the Fed bought) strictly to build up cash, presumably for lending. And then when you hear Princeton economists bemoan that cash is sitting idle, you’d believe the Fed is surprised and distraught about this. So I apologize if I misunderstood you.

    We might have a massive Dunning-Kruger situation. I work on these questions privately, for a living, and I’ve thought through much of the logic and implications, the big picture, the hidden picture, the things that can and can’t be controlled, and the likely reactions to different circumstances by various bodies. Separately, I do a lot of work involving logic, so I know I’m good with calculation and I apply that to my study of this. I also respect your abilities on this, fwiw. It’s apparent to me that I have thought through these issues at a far higher level, and better understand the game that is being played, than the professional commentary on QE I’ve just read. It’s also impressive and humbling to see some of the ignorance about what QE is pulling off, because it seems to me it must be intentional (but that might be Dunning-Kruger).

    I have long looked at certain testimony the Fed has made in Congress, knowing the game that is being played; seeing some Congressmen probably understood it, some definitely did not. I tend to compile my own data and do my own analysis, so I don’t rely much on what media and others say, especially when I know better. But I apologize, because it wouldn’t be possible to know better if you don’t spend the time I do examining these things, at the level I do. I look at what is actually being done, and where the incentives lie. What is merely said is, apparently, almost meaningless, or at least highly misleading.

    So what has been done and what were the incentives since ’08 —

    The US Govt wanted expansionary fiscal and monetary policy to inflate us out of the credit bubble. They allowed the bubble to burst (or couldn’t stop it, whatever one wants to believe), and they knew the easiest solution would be inflate the currency to make all debt less costly. This, generally, would require increasing the money supply. First step: buy up MBS and Treasuries to clear the deck and offset the immediate panic and distress to the GDP, as the shock caused the velocity to lock up.

    The gov’ts and the nation’s accounts, balance sheets, budgets etc all have been built on the expectation of 3-5% nominal GDP growth. A slowdown messes that up, and consumption was diving, so they wanted to get cash in the hands of people who would have to spend it — unemployment benefits and food stamps, shovel ready jobs, here we go.

    Treasury had over $1 trillion in deficits they needed to issue bonds for every year. Here came the Fed, promising to boost their Treasury purchasing to buy up about 25% of what would be issued, along with China and everyone else. It was reassuring. Those new bonds were issued and sold, cash came in. Foreign gov’ts, banks, and other buyers — including the Fed — bought. The Fed has generally maintained control of about 25% or so of the public debt and has always wanted (and it is by law required) to keep these operations in the open market. The Fed also issued some debt in dollars to banking institutions here and abroad, but not in the same massive amounts as they purchased assets.

    So the Treasury has gotten, all told, $8-10 trillion or so from bond issues. At least $2 trillion of that has come from the Fed creating the money. The gov’t has definitely been spending it all — on you name it. The people getting checks from the gov’t then spend it as they please. That money then circulates back into banks where they have little incentive to lend it. Funny enough. But this what the Fed wants. The whole idea is to draw credit down from its highs, from where it was out of whack. The idea is to boost consumption by those who spend at the highest proportions (the low-income), to boost corporate earnings, to inflate assets. Everyone “says” we need to spur credit and lending, but the Fed knows it needed to return to normal levels. And, apparently, they’ve helped ensure that by keeping rates low and paying to hold reserves. It makes for a lovely political diversion to blame tight-fisted banks for not doing their part, if one wants to.

    The deficit is most certainly being financed in part by the Fed. The increase in base money stock is roughly equal to everything the Fed has purchased in assets. Along the way, I’ve watched and listened as they’ve pretended that they can target unemployment — they can’t. I’ve watched and listened as Chuck Schumer tells Bernanke to get to work (on unemployment) before the 2012 election, everyone knowing full well the Fed’s policy has been solidly behind the expansionary, Keynesian policy of the Gov’t. I’ve keyed in on the framework they operate under of ~5% growth above all. I’ve deduced the sustained reactions we’ll have to continually falling velocity, the effects of the explosion in base stock, and watched as velocity is ignored in virtually every discussion on the economy I see. In listening to most discussions where professionals (and particularly political partisans) get it wrong, it’s difficult to figure out whether smart people just don’t know, or whether they’re in on the game and misdirecting on what’s happening.

    So I never come at this with some kind of idea that it’s all obvious and one is an idiot for not seeing it. I assume there’s a lot of misunderstanding out there. I just assume, probably wrongly (Dunning Kruger), that people, once told of the reality, will understand the logic of it and match it to what has been happening. I didn’t expect the picture that’s presented to most people, or understood by many, to be so muddied that reality could seem wrong somehow.

    Joseph D (8bc5c1)

  197. Naturally, one wonders why script is needed at all. The essence of the system is to make pseudo-money for services. Why not simply use real money?

    If they had exchanged real money, then there would be no such thing as an “excess” of anything – the extra money would be soaked up into the larger economy. I get they don’t want to pay teenagers, but why couldn’t they pay each other?

    The essential problem is that the pseudo-money (script) is not convertible into anything other than more babysitting services. It’s as if my company decided to pay me exclusively in olives. I like olives, but such an action would probably result in numerous problems with a non-easily convertible currency.

    Of course, your answer is equally valid – price fixing by a central authority creates innumerable instabilities in the marketplace.

    Eramus (8c487b)

  198. Have someone act as a “market maker” who is willing to buy the script at a stated price, or sell it at another stated price. Then as Eramus says, the script now has actual value rather than the nebulous “I can use this to get babysitting some day”.

    Ken in Camarillo (061845)

  199. I typed a long response to Joseph D on the computer and then our currently unreliable Internet crapped out. I am now stuck on a phone and unwilling to replicate the whole comment. Here is the tl;dr version:

    For the love of God, Joseph D, give us a link.

    Patterico (ed63ab)

  200. I honestly can’t believe that is your tl;dr reaction. You see the lending situation doesn’t add up with the descriptions you’ve found, you wanted a clear explanation of QE, which I just gave. I can’t tell you the banks don’t process the purchases, just as I can’t tell you fries aren’t cooked in oil. The money for the purchases went to the Treasury. The fries are what’s eaten. It’s unarguable.

    Describe precisely what it is you want to know. Otherwise there’s nothing left but to assume circumstance #1 and that this whole discussion was in bad faith. I was really ready to believe #2.

    Joseph D (8bc5c1)

  201. Sorry your internet crapped out. Perhaps your reply was quite generous, and your dogged pursuit of links from yours truly is an honest one. But you must understand it feels to me like being asked to prove McDonald’s is really cooking fries below all that bubbling yellow stuff.

    Joseph D (8bc5c1)

  202. In QE, is the Fed buying financial instruments from banks, or from the U.S. Treasury? Did the $3T go straight into bank reserves, or make its way there eventually after being spent by the government?

    I know what your belief is. I don’t care to hear you express that opinion again. What I want is a link from a reliable source that answers the questions above.

    I have provided several links, and have sincr found even more, saying the Fed bought the financial instruments directly from the banks, meaning the trillions went straight to bank reserves.

    You have provided zero links to the contrary. I am increasingly confident you never will. But I’ll make the invitation again, for what? the twelfth time?

    Patterico (ed63ab)

  203. Joseph D,

    Your answer ahould take the following form:

    McDonald’s cooks fries.

    Note the presence of a hyperlink to an authoritative source that substantiates the assertion. (Note also the utter lack of any credible link disputing the assertion.) These are the ways that this comment differs from every comment you have left on this thread.

    Bonus points if you can provide a quote from the link that substantiates your argument. But I will settle for a link.

    Patterico (ed63ab)

  204. Describe precisely what it is you want to know.

    Folks: this is a fairly obvious troll, no?

    Patterico (ed63ab)

  205. Situation A: the bank already owned the assets before QE. Then the Fed bought them from the banks.

    Situation B: the bank did not own the assets before QE. At the time of purchase, the Fed bought the financial instruments from the U.S. Treasury, which received the Fed’s payment directly. Only later, after the money had circulated through the economy, did the cash end up in bank reserves.

    Every single description of QE I have ever seen says QE is Situation A. Yes, to the extent that the QE is purchase of long-term U.S. bonds (and that’s not all QE was), the government clearly got the money at some point in the past, from the banks. But in Situation A, banks get the cash at the time of QE.

    You are asserting Situation B. And we are at the point that I do not believe you will ever provide a link to substantiate Situation B. There will be more cooking oil and Dunning-Kruger references and requests for clarification and expounding on the unique combination of experience, intellect, and insight that is Joseph D.

    In other words: trolling.

    The one thing we know by now is: there will be no link.

    Patterico (ed63ab)

  206. #1. I’m sorry you reacted as you have to pretty much everything I’ve said. But at least I’m not confused.

    Joseph D (8bc5c1)

  207. Compelling link! I’m convinced!!

    Patterico (ed63ab)

  208. What does “#1″ mean?

    Situation A?

    Patterico (ed63ab)

  209. 199. Eramus (8c487b) — 3/30/2015 @ 5:28 pm

    Naturally, one wonders why script is needed at all. The essence of the system is to make pseudo-money for services. Why not simply use real money?

    Elementary.

    Income tax considerations.

    If they used real money, or even if there was anything but a 1-1 barter arrangement, the people doing the baby sitting would have to pay self-employment tax on the money of 15.3% plus federal income tax, which could amount to close to 40%, plus maybe local income tax, and maybe unincorporated business tax.

    The babysitting co-op is a tax loophole!!

    And then there’s extra cost maybe to file income taxes. Thy now all would have to file Schedule C-EZ, or maybe even Schedule C.

    If they had exchanged real money, then there would be no such thing as an “excess” of anything – the extra money would be soaked up into the larger economy. I get they don’t want to pay teenagers, but why couldn’t they pay each other?

    It would be taxable income to both parties.

    The essential problem is that the pseudo-money (script) is not convertible into anything other than more babysitting services. It’s as if my company decided to pay me exclusively in olives. I like olives, but such an action would probably result in numerous problems with a non-easily convertible currency.

    But you might be able to escape taxation!

    Standard barter arrangements, where X is exchanged for Y are taxable at the fair market value.
    But…

    If you exchange service with another person and you both have agreed ahead of time as to the value of the services, that value will be accepted as fair market value unless the value can be shown to be otherwise.

    – Publication 17, 2002, page 89.

    The co-op probably assigned a fair market value of $0 for the babysitting.

    I am not sure exactly if that is what it is, but these are lawyers – they probably know what they are doing. Perhaps what they are doing is pretty shaky, and any modification could tip the balance.

    Here’s a law review article about this issue:

    http://scholarship.law.edu/cgi/viewcontent.cgi?article=3208&context=lawreview

    Treas. Reg. § 1.451-1 (a) (2009) apparently says it is taxable, and at the time when the babysitting is done even if the babysitting that is done in return occurs only on the next calendar year.

    Maybe it’s a very vague area of law, and the IRS doesn’t want to define it too much. I very much suspect nobody’s paying any taxes on this. It makes no sense to do things this way, with thes limitations, unless the purpose is tax avoidance.

    Standard barter is taxable. In fact if if they are not both services – say if, in exchange for free rent on an apartment, an artist gives the landlord a painting, both wouldn’t use Schedule C. The artist must use Schedule C or Schedule C-EZ and report the fair market value of the use of the apartment – and pay self-employment tax as well – and the landlord must report the income on Schedule E.

    However, there might be a loophole. The landlord can hire the artist to do a painting for him, and have her live there for his convenience. Then the value of the rent is not taxable – she’s just like a super or a live-in maid, and the only charge is the wages and taxes he has to pay her, which might be set very very low.

    Sammy Finkelman (033fec)

  210. Because if you are conceding QE is Situation A then you are contradicting everything you have said in this thread, notably this:

    A last point… the money that’s been printed hasn’t all (or even mostly) gone to banks. It’s been used mainly to buy Treasuries, to finance the debt, to fund programs, including unemployment and food stamps, to spur consumption, to make up for the continuing decline in money velocity.

    If the QE money went to banks and stayed in their reserves then the QE money did not pay for any government programs.

    But let’s not get ahead of ourselves. Are you admitting QE is Situation A above?

    Patterico (ed63ab)

  211. I would think also the use of scrip, with no central registry or record-keeping, is in order to make impossible an IRS audit. You could not audit the co-op and send a bill to all the babysitters – each babysitter would have to be audited individually, and how does anybody tell how many babysitting credits they received? And, if you arrived at an estimate, how much was each night of babysitting worth? There’s no market – the babysitting credits cannot be transferred or sold to anyone else. It’s really too little money and too much effort for an IRS agent to bother about even if there already is audit going on. And maybe the courts won’t uphold the IRS.

    Sammy Finkelman (033fec)

  212. Patterico, Your insistence on a link has been helpful. In addition to the link I provided to the Jan. 2015 OMC minutes that confirmed that the Selected Bank can engage in direct purchase of new issues of treasuries to replace maturing treasuries, I also found a reference to direct purchase of Mortgage Backed Securities in QE1. This is in a Heritage “Backgrounder” by Norbert Michel and Stephen Moore.

    http://report.heritage.org/bg2938

    Their exact words:

    “QE1 (December 2008). In December 2008, the Fed started buying longer-term Treasury securities as well as the debt and the mortgage-backed securities (MBS) of Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs).[3] The Fed announced it would purchase up to $100 billion of the GSEs’ debt and up to $500 billion of their MBS from both banks and the GSEs themselves.”

    But I could find no reference to support my idea that the Fed was also purchasing treasuries direct from the Treasury prior to January of this year.

    The Michel-Moore report is a jewel.

    I have a few quibbles with their wording … for example (from page 3):

    “Instead of creating new money through additional lending, the Fed’s QE policies have greatly expanded the amount of excess reserves in the banking system. (See Chart 2.) In other words, banks have mostly decided to hold onto the cash that the Fed gave [my emphasis] them when it executed all those securities purchases. Consequently, it is rather difficult to argue that these Fed policies have done much to expand the economy.”

    I would have preferred “paid” instead of “gave”, but in their favor, many of the MBSs the Fed bought were garbage, so the Fed did “give” them a break by buying them.

    The report addresses the most important question of “so what”. It’s not a pretty picture. The administration is really doubling down on the world’s use of the dollar as its reserve currency, and if thing change, we will be in world of hurt. MM basically say that our economy is in such a sad state that currently the “depository banks” (my quotes, but to make clear who owns these reserves) find that the modest interest paid by the Fed is a more responsible investment than loaning the money. So we have $2.6T tied up in “excess reserves”, but this could change rapidly. If the banks change their minds about loaning the money, these funds would create about $26T of new loans (money) which would more than double the money supply. Doubling the money supply without doubling the amount of goods and services for sale would result in serious inflation, which would encourage everyone to dump the dollar. And of course, the Fed’s portfolio of long term bonds paying 2% would be worth much less than their face value. So if they sold them to absorb some of those inflated dollars, they’d only get a fraction of their dollars back. And the Treasury would have to pay real interest rates on its debt at the same time that the interest remitted to the Treasury by the Fed was declining. Disaster looms.

    My only comfort is that I think our foreign policy screw ups are likely to have consequences that are much more immediate and life threatening.

    bobathome (ef0d3a)

  213. bobathome,

    Thanks for yet another link that supports what I have been saying about QE and contradicts what Joseph D has said. The Heritage report says:

    Regardless of the true intent, the QE programs have been so controversial because they effectively exchanged cash—created out of thin air—for bank assets that had dramatically declined in value.

    What’s that? The Fed bought bank assets during QE? And in exchange for those assets, gave cash to the banks?!?!

    You don’t say!

    Joseph D, that’s how someone provides a link to support their assertions. Try it sometime!

    Patterico (ed63ab)

  214. The link is scary, too, because it shows the potential financial disaster that looms once the banks start lending again. No wonder the Fed is worried about raising interest rates even a smidgen. There is a shaky dam holding back an ocean of cash, and the Fed is unwilling to drain the ocean even though they know the dam will break.

    Patterico (ed63ab)

  215. Also note, from the Heritage report:

    Banks earn profits when they create new money through lending, but they lose money when they make bad loans.[9]

    . . . .

    Arguably, the most immediate risk from the Fed’s policies is that banks could use those newly created excess reserves too quickly. Banks now have an additional $2.6 trillion in excess reserves, which means that they can create up to approximately $26 trillion in new money.[21] In other words, banks now have the power to create more than twice the amount of money currently in the U.S. economy, thus heightening the risk of future inflation.[22]

    cc: daleyrocks.

    Patterico (ed63ab)

  216. “Banks earn profits when they create new money through lending, but they lose money when they make bad loans.[9]”

    Patterico – Thanks for noting that.

    daleyrocks (bf33e9)

  217. Oh, I never denied it. If you revert to our earlier discussions you will see that.

    Patterico (ed63ab)

  218. Now that I have *finally* clarified what I was asking Joseph D to prove, he’ll be toddling back here with that link just any. second. now.

    Trolls are funny.

    Patterico (ed63ab)

  219. I don’t understand this argument about the Fed.

    The Federal Reserve Board cannot legally purchase anything directly from the Treasury.

    It can, of course buy in the secondary market, and it can buy it from a bank that just purchased it the same day with borrowed money. Economists would say there’s no difference from whom the Fed buys it from.

    What’s there to argue about?

    Sammy Finkelman (033fec)

  220. About Joseph D’s point that the deficit is being financed in part by the Fed, I have the following thoughts.

    1. It is Congress that authorizes the deficit spending. And that is where responsibility mainly lies. Treasury is doing what it wants and is allowed to do, but this is independent of the Fed. The selling of addtional debt to raise the funds to pay for these expenditures would go on whether the Fed existed or not.

    2. In the absence of the Fed, money used to buy the new Treasury bonds would come (mainly) from deposit accounts in banks, and these withdrawals would reduce the banks’ ability to issue new loans. The money the Treasury receives for these bonds would be deposited directly in its accounts in Federal Reserve District Banks. From there, the funds would eventually show up in other accounts (see [3.],) but in general, the amount of money in circulation would be steady or decline a bit. This would have consequences that can only be speculated about, but our financial geniuses all believe that it would reduce employment and GDP, and make our financial circumstances much worse. They are no more likely to be right about this than anything else they are routinely wrong about. But that is the “intellectual” basis our of our current policy.

    3. If the Fed just purchased these bonds directly with fiat currency, then the newly minted dollars would be deposited in the accounts of the Treasury, which by law are held at the District Federal Reserve Banks, just like in [2.]. It would not show up at ordinary banks. However, the funds so deposited would quickly be sent by the Treasury to the intended recipients and they would spend, invest, hoard, or deposit the money. At this point the fiat dollars would begin to reappear, but now in the acounts of businesses that serve the recipients of the government’s largess (welfare clients, retirees, employees, etc.) across the country. This distribution of the new dollars would be the same no matter how the bonds were paid for, whether the source of the “money” was fiat dollars from the Fed, or sales that involved withdrawals from accounts at “depository institutions,” [2.], above. Option [3.] results in two sets of banks that could loan money, and thus, hopefully stimulate the economy: those that had it to begin with; and those that would benefit from the purchases made by the government’s clients. This is the kind of stimulus Krugman likes.

    4. There are several difference between [2.] and [3.]. In [2.] the Treasury bonds will be held by private entities, whereas in [3.] the bonds would be held by the Fed. Additionally, in [3.] the private deposit accounts would still have the funds that would have otherwise been expended in [2.]. More significantly, in [2.] the bonds are sold at auction, and so the interest that the bonds would pay would be decided by market forces. In [3.], the bonds would pay whatever Treasury and the Feds thought was right, or politically convenient, you choose. But it really wouldn’t matter since the Fed routinely turns over the interest payments to Treasury.

    5. QE for treasuries is just [3.] with a slight detour. Instead of buying directly from the Treasury, the Fed made open market purchases. In this case, the fiat money went to the accounts of the sellers of the bonds, but that fiat money was just replacing the money the sellers had originally spent buying the bonds. So the end result is essentially like [3.].

    So where has the Fed helped finance the deficit? They presently control about $2.3T of long term Treasuries and $1.7T in Government Supported Entities (MSBs.) The Fed holds 25% of all outstanding Treasuries, and 30% of MSBs. The Fed also manages foreign Treasury holding, and many of these countries are embarked on similar financial QE strategies, so they might be easily persuaded to abide by Fed dictates. In any event, by returning all the interest payments the Treasury makes to the Fed holdings, the Fed is able to reduce the total interest payments by about $100B each year. But more importantly, I think the Fed is able to keep the interest on bonds at ridiculously low levels because it controls such a large portion of the market. The proof is in the $2.6T that private investors have chosen to deposit in “excess reserves” for which the Fed pays just 1/4% interest. This amounts to about $6B dollars, but it is a remarkably miserly return for such a large amount of money. This alone suggests that safety and preservation of capital are foremost in these investors minds. It is an astonishing vote of no confidence. Which begs the question, what return would this money require for a “risky” loan, like a 10 year Treasury, which used to be the gold standard? It is obviously a lot more than 2%. The fact that the Fed is now using their interest receipts in addition to rolling over maturing Treasuries in their continuing purchase of Treasuries suggests to me that they find this activity effective. You have to ask how close are we to the point where the Fed funds effectively all the Treasury debt with fiat dollars. At that point there is no feedback, no apparent fiscal consequences for extraordinary indebtness. A Krugman paradise. We are riding the tiger. Perhaps this is Joseph D’s concern?

    bobathome (ef0d3a)

  221. Sammy, see my #176. The Fed can exchange at market prices, in connection with a Treasury auction, maturing securities with new securities. If they have a boat load of maturing options, this will surely affect the auction.

    bobathome (ef0d3a)

  222. make that “maturing securities” not “maturing options”.

    bobathome (ef0d3a)

  223. Sammy, correct. There’s nothing to argue about. I merely indicated the true purpose of QE (127, 130, maybe others) wasn’t to send money to banks to spur lending, Patterico has felt corrected and tried to turn it into a disagreement on where money transfers are made (122, and basically every post since 136). He pretends I did, but I never said otherwise, and didn’t take the bait. He’s pursued it ever since to stay on the offensive. It’s a zero sum discussion. I don’t care to go on the offensive about it, and am hopeful that people gain some insight from my posts. It’s why I came here in the first place.

    Joseph D (8bc5c1)

  224. bobathome, I know you get it. I’ve very much enjoyed your contributions.

    Joseph D (8bc5c1)

  225. Joseph D just now:

    Sammy, correct. There’s nothing to argue about. I merely indicated the true purpose of QE (127, 130, maybe others) wasn’t to send money to banks to spur lending, Patterico has felt corrected and tried to turn it into a disagreement on where money transfers are made (122, and basically every post since 136). He pretends I did, but I never said otherwise…

    Joseph D upthread:

    A last point… the money that’s been printed hasn’t all (or even mostly) gone to banks. It’s been used mainly to buy Treasuries, to finance the debt, to fund programs, including unemployment and food stamps, to spur consumption…

    Troll.

    Now Sammy comes along with his trademark asspull, theorizing with zero evidence that banks were used as a pass through. I have been challenging this Joseph D troll all thread, now he pretends he wasn’t saying why he was always saying, and Sammy is coming along to make up crap out of whole cloth.

    Challenge to Joseph D and now Sammy too:

    You have a choice. Your next published comment will do one of the following:

    1) Find me one link that says that in QE, banks were used as a pass through for the Fed to buy bonds from the Treasury, or

    2) Admit that you have no evidence for such a theory.

    No other comment by either of you will see the light of day. And since I doubt either of you can follow such simple instructions, you have likely left your last comments on this Web site. Should that be the case:

    Bye now.

    Patterico (ed63ab)

  226. bobathome, is Joseph D right or wrong?

    Patterico (ed63ab)

  227. Joseph D’s comment, shockingly, fulfilled neither requirement. Again: I am Patterico’s total lack of surprise.

    How about you, Sammy? Care to shoot for the full self-ban as well?

    Patterico (e2d5d0)

  228. Patterico, I can understand where Joseph D is coming from. For example in your quote immediately above:


    Joseph D upthread:

    A last point… the money that’s been printed hasn’t all (or even mostly) gone to banks. It’s been used mainly to buy Treasuries, to finance the debt, to fund programs, including unemployment and food stamps, to spur consumption

    He’s correct that the fiat money has been used to buy Treasuries. This is what QE was all about, with the understanding that the purchase was on the open market, meaning the Treasuries had already been purchased by a third party. But the consequences of that Treasury being sold in the first place, to finish the quote, to finance the debt, to fund programs, including unemployment and food stamps, to spur consumption were not the responsibility of the Federal Reserve. Congress [presumably] passed a budget that entailed borrowing money for these purposes. and the President signed off on the program. Treasury was just fulfilling the intent of Congress. So it’s a little like blaming the messenger. But it’s also the case that the Fed says don’t worry about what we’re doing, we’re doing this to stimulate the economy and spur employment and control inflation, yada yada yada … To that extent, they bear some responsibility for the public’s lack of concern. And they are playing with fire when they print so much fiat money that if it weren’t for the banks salting away $2.6T in excess reserves paying 1/4% we could have crushing inflation in a matter of months. The consequences of their folly could be economic collapse, not an expansion of the welfare state. So Joseph’s anger might be warranted, but I’d say it is misplaced.

    In #130 Joseph got a little beyond this with:

    Namely, the Fed has directly been propping up the social welfare deficit system first and foremost.

    Again, I would say that whatever propping up has been done is Congress’ responsibility. The social welfare system is the stepchild of many recent congresses and administrations, R & D, and combatting this isn’t in the Fed’s job description. One could wish for a Fed Chairman who could argue against these follies, but I rather doubt any recent candidates have had the interest. My concern about the Fed is that it certainly is prescribing the wrong medicine for what ails us, and the consequences stemming from their incompetence could lead to financial collapse, which certainly won’t advance the welfare state, nor free markets, nor personal liberty. The bankers and financial managers who have put $2.6T into excess reserves may be the only adults in the entire system.

    And finally, I personally fear that the Fed may have gone political using various tricks. But it isn’t evident that this has happened. But it certainly could happen, and if the Fed gets to the point where its size allows it to control the Treasury auctions, (if it hasn’t already,) and it wants to play politics, we will be in a world of hurt.

    bobathome (ef0d3a)

  229. Joseph D,

    That’s the sound of bobathome — who you say “gets it” — telling you he disagrees with your characterization of QE as funding unemployment or food stamps, or directly propping up the social welfare deficit system.

    I mean, he’s being polite. But he’s definitely not buying what you’re selling.

    So you were right about one thing, at least, Joseph D.

    Bobathome gets it.

    Patterico (95f2fb)

  230. I think a couple of things may be adding to the confusion above, which I and the financial media have not helped. Take a look at the following excerpts:

    Demand for U.S. Debt Is Not Limitless
    In 2011, the Fed purchased a stunning 61% of Treasury issuance. That can’t last.

    The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.

    Still, the outdated notion of never-ending buyers for U.S. debt is perpetuated by many. For instance, in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said, “If you look at the markets, they’re practically falling over themselves to lend money to the federal government.” Sadly, that’s no longer accurate.

    http://www.wsj.com/articles/SB10001424052702304450004577279754275393064

    Treasury Scarcity to Grow as Fed Buys 90% of New Bonds

    Dec. 3 (Bloomberg) — Even as U.S. government debt swells to more than $16 trillion, Treasuries and other dollar fixed-income securities will be in short supply next year as the Federal Reserve soaks up almost all the net new bonds.

    The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 ended Sept. 30, a survey of 18 primary dealers found. At the same time, the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co………

    “The shrinking amount of bonds in the market is lowering rates and not just benefiting the Treasury, but providing lower rates for private-sector decision-makers as well,” Zach Pandl, a senior interest-rate strategist in Minneapolis at Columbia Management Investment Advisers LLC, which oversees $340 billion, said in a Nov. 30 telephone interview. “The Fed is not creating this scarcity to help out the Treasury, it’s primarily to get the economy going.”

    http://www.bloomberg.com/news/articles/2012-12-03/treasury-scarcity-to-grow-as-fed-buys-90-of-new-bonds

    The Federal Reserve Act requires that the Fed only buy or sell Treasury or Agency securities on the “open market,” which I did not see as I defined term in the Act. While I could certainly make an argument that a public auction is an “open market,” the New York Fed claims under its disclosures for its Large Scale Asset Purchase program that it is not buying securities directly from the Treasury. That implies they are not directly funding the government deficit through the LSAP and the “net new issuance” language in the excerpts above.

    daleyrocks (bf33e9)

  231. Interesting links. What do you make of it all, daley?

    Patterico (157532)

  232. Patterico – I believe I was mistaken earlier when I flat out said it was common knowledge that the Fed was buying a large percentage of Treasury auctions. I was referring to articles like the two I linked immediately above which make it clear they are referring to “net new issuance.” Treasuries are used as benchmarks for pricing all sorts of other securities and if the Fed is creating an artificial scarcity of say “on the run” 2, 5, 7 and 10 treasuries by bidding up prices, coincidentally lowering yields, that potentially influences the pricing of other borrowing instruments, which I believe was the goal.

    Based on the articles I linked I see no evidence of deficit financing going on, although it should be noted that Fed net profits do get passed on to the U.S. Treasury and those have approached $100 billion in some recent years.

    I would also add that even though the Fed says they are not currently buying any Treasuries or Agencies directly under the LSAP, I would not put it past the bastards to do so because I don’t trust them.

    Most of the time I find it easiest for analytical purposes to think of the Fed as just another bank, accepting deposits from member institutions and recording liabilities to the same. The journal entries are equivalent. The only difference is that the Fed is at the beginning of the financial food chain and a lender of last resort. But if you consider it is just doing what other banks do, it is a lot less scary. What I don’t like is the moral hazard of conducting monetary policy outside the ordinary course of business.

    daleyrocks (bf33e9)

  233. Here is the comment I tried to leave yesterday:

    Joseph D,

    I am going to mostly ignore the backhanded insults in your comment with the repeated references to Dunning-Kruger. We get it: you are the superior intellect in knowledge, intelligence, and experience. We are the dummies, and you are finally deciding not to be angry at us because you now realize just how ignorant we really are (even though we think we know it all). Fine. None of that is really the issue. So we’ll move past that, starting now.

    You will note that, throughout this thread, I have never said you were wrong. I have merely said, repeatedly, that your version of QE is at odds with every description I have ever seen, and I have asked for some independent and reliable description of QE that says it is what you say it is. I asked for this information because, in fact, I realize the limits of my knowledge. It would be foolish for me to proclaim you are wrong because I am not an expert, my knowledge is limited, and all I know is what I have read.

    However, all that said, I am not stupid — and you are now at least admitting that there is a large volume of links out there which describe QE exactly as I have (you said: “I took a quick look at some descriptions of QE and indeed most of them talk about it as you say”). What I am looking for now, I will say once again, is a description not written by anonymous blog commenter Joseph D, which explains QE as you have. You said upthread that “I don’t feel like providing evidence to something you can Google in seconds and is common knowledge.” Honestly, Joseph D, if you can Google it in seconds and it is such common knowledge, it really should not be difficult for you to take a few seconds and provide us a link.

    Here is what I see as the difference between your position and mine (and on my side I will include every discussion I have ever read on the subject). In your version, the cash is going directly to the central government, and only later does it make its way into the banks. In my version — not based on expert knowledge, admittedly, but based on my reading on the subject — the Fed does indeed buy financial instruments that the banks already owned. You say: “You could think, from most of the descriptions, that banks were sitting around with treasury assets that they sold off (and the Fed bought) strictly to build up cash, presumably for lending.” That is indeed what I think, based on the descriptions I have read. Of course, QE has not only been a purchase of treasury assets, but also other financial instruments like mortgage-backed securities. But from the descriptions I have seen, it has absolutely been a purchase by the Fed from the banks (or, as I noted above, one unreliable link says from dealer-broker investment banks).

    It could be that all of the media’s description of QE has been totally misleading, and that the Fed is actually giving the money straight to the federal government. That QE is a stealth way of financing the welfare state that makes the bailouts look like a dollar handout to a street bum.

    And if that is really what is going on, it’s a pretty good story.

    But I am going to need more than the say-so of an anonymous blog commenter before I can feel comfortable that is the case. It doesn’t really matter to me how much the blog commenter claims to be right in the thick of things. It doesn’t matter how superior the blog commenter claims to have a superior skill-set, experience base, or intellect. Frankly, for all I know, you are a pimply-faced precocious teenager who has made it his hobby for a few days to come onto a conservative blog and sow confusion, for “the lulz.” Your assurances of your superior knowledge, in short — and I honestly mean no offense by this — mean nothing to me. Nothing at all. Zero.

    What would be worthwhile to me would be a reliable link that describes QE in the way you have. If you can’t find such a link, then I ask you to consider the possibility you may be wrong. If you can, then please, for the love of God, provide the link. Not more words. Just a link will be fine. Thanks.

    Patterico (15be32)

  234. Patterico – I already provided both an excerpt and a link way upthread describing the program and who the Fed was buying the securities from. I guess Joseph D missed them. :)

    daleyrocks (bf33e9)

  235. The Bloomberg article indicates that the Fed is acquiring 90% of the new treasuries. Since the Fed is focusing on longer term Treasuries their purchases could be 100% of these new, longer-maturing issues, and this would have a profound effect on bids at the Treasury auctions despite the Fed’s purchases being made on the “open market” after the event. Imagine a guy going into a farmers market and proclaiming “I’m buying every apple here!”. There would be a mad scramble at every stall to make sure their apples were priced no lower than anyone else’s. And the guys trying to sell bananas would resolve to pick up some apples for the next session of the market. So this is a manipulation of interest rates. Which is not good, unless you believe in Krugman economics. Such activities destroy the confidence of legitimate businesses and discourage investment. The Weimar Republic printed marks in order to buy gold which was used to pay their reparations. This worked for a brief period, and then the guys who had the marks noticed that they couldn’t use them to buy anything near the value of the gold they’d sold. In a matter of months no one would sell gold for marks. Eventually they ended up paying their reparations in manufactured goods, IIRC. Barter on an international scale.

    The article also mentions that banks are still anxious to buy quality assets, like treasuries, to improve their portfolios to satisfy Dodd-Frank and global settlement laws:

    Buyers range from central banks to financial institutions stocking up on high-quality assets to meet the Dodd-Frank financial-overhaul law and global regulations set by the Bank for International Settlements. They’re helping the Fed and the Obama administration keep borrowing costs at all-time lows for everyone from consumers to Walt Disney Co.

    Not said, but true, those low cost loans are remarkably hard to come by if you’re not Walt Disney Co. The $2.6T in excess reserves earning 1/4% are the preferred investment. And we should be grateful.

    One humorous aspect of this article is that the authors presume devaluing the currency and stimulating inflation is an obviously good thing. They’ve bought the Krugman story hook, line, and sinker. Not considered is that over half of the currency portion of our monetary base is held by foreigners who would not be pleased to see their stash devalued. Nor do they consider the happy coincidence that Europe has engaged in similar follies, and the euro has fallen to $1.05 per euro from $1.20 in January. U. S. dollars look good compared to the alternatives! We might be saved despite our best efforts otherwise.

    bobaathome (ef0d3a)

  236. The Bloomberg article indicates that the Fed is acquiring 90% of the new treasuries.

    bobaathome – The critical word is “net.” The point they are making is that Fed purchases are reducing the net new supply of outstanding Treasury securities of given maturities if I am interpreting it correctly. Fed purchases of existing treasuries on the open market offset the amounts newly auctioned.

    daleyrocks (bf33e9)

  237. Daley, let’s assume that you have a 10 year at 2.3%, maybe 3 years old? Just guessing, but priced at $105. I bought a new Treasuries at 2%. Priced at $100. Who would be in the better position to sell it to the Fed? Am I missing something?

    bobathome (ef0d3a)

  238. bobathome – If you are comparing two treasuries with seven years of life remaining, neither one of us would be in a good position to sell them to the Fed. We would sell them to an intermediary who might sell them to the Fed, although the Treasury does have a program for buying old issues.

    Am I missing something?

    daleyrocks (bf33e9)

  239. bobathome – I guess basically I don’t understand why you believe that two treasuries with the same maturity would have a 30 basis point differential in yield. Is there something I am missing?

    daleyrocks (bf33e9)

  240. daley, I’m assuming the Fed would work through a broker of some sort, and just say, buy $1B with maturities over 5 years. And in my example, I was suggesting that you bought yours 3 years ago, and I just bought a new issue (10 years to maturity.) If we both put our treasuries up for sale, I think the broker would pick the low hanging fruit and buy mine before he bought yours. But if he buys $1B every 6 hours ($45B/month,) he’ll be getting to you soon enough.

    bobathome (ef0d3a)

  241. Patterico – I already provided both an excerpt and a link way upthread describing the program and who the Fed was buying the securities from. I guess Joseph D missed them. :)

    It said who the Fed was buying the securities from? (Not the mortgage backed securities but the Treasuries.) Really? Could you direct me to that comment and give me the quote that says who the Fed bought the Treasuries from? I missed it, and I just looked again, too.

    I saw a long comment with a link to the Fed website (at the .gov URL because of how private they are) and a description of who they bought MBS from, and the fact that they bought Treasuries. But I didn’t see from whom. Could you pinpoint me to that part?

    I saw another one from the New York Fed with a bunch of downloadable spreadsheets. My computer doesn’t mesh well with spreadsheets. Is the New York Fed the one that does QE? Do the spreadsheets tell us whether the primary brokers are pass-throughs for the Treasury or not?

    As you know, I’m not a financial guy, so you have that over me. I’m looking for a plain-English description of what is going on, and it sure is hard to find one.

    Patterico (15be32)

  242. Sammy, correct. There’s nothing to argue about. I merely indicated the true purpose of QE (127, 130, maybe others) wasn’t to send money to banks to spur lending, Patterico has felt corrected and tried to turn it into a disagreement on where money transfers are made (122, and basically every post since 136). He pretends I did, but I never said otherwise, and didn’t take the bait. He’s pursued it ever since to stay on the offensive. It’s a zero sum discussion. I don’t care to go on the offensive about it, and am hopeful that people gain some insight from my posts. It’s why I came here in the first place.

    Place to one side the fact that Joseph D moved the goalposts from his initial claim, that QE was not going to banks (quote: “A last point… the money that’s been printed hasn’t all (or even mostly) gone to banks.”)

    After that was destroyed, he changed it to claiming that he never said the money hasn’t gone to banks (a lie) and now claims “I merely indicated the true purpose of QE (127, 130, maybe others) wasn’t to send money to banks to spur lending.” Yet this statement by Ben Bernanke says it was. (Note in this passage that he doesn’t like the phrase “quantitative easing” because of the connotations of the policy by the Bank of Japan, so he calls the Fed’s actions “credit easing”):

    Our approach–which could be described as “credit easing”–resembles quantitative easing in one respect: It involves an expansion of the central bank’s balance sheet. However, in a pure QE regime, the focus of policy is the quantity of bank reserves, which are liabilities of the central bank; the composition of loans and securities on the asset side of the central bank’s balance sheet is incidental. Indeed, although the Bank of Japan’s policy approach during the QE period was quite multifaceted, the overall stance of its policy was gauged primarily in terms of its target for bank reserves. In contrast, the Federal Reserve’s credit easing approach focuses on the mix of loans and securities that it holds and on how this composition of assets affects credit conditions for households and businesses. This difference does not reflect any doctrinal disagreement with the Japanese approach, but rather the differences in financial and economic conditions between the two episodes. In particular, credit spreads are much wider and credit markets more dysfunctional in the United States today than was the case during the Japanese experiment with quantitative easing. To stimulate aggregate demand in the current environment, the Federal Reserve must focus its policies on reducing those spreads and improving the functioning of private credit markets more generally.

    Joseph D could say Bernanke was lying, I guess, but his stated purpose was to stimulate demand in credit markets. Says so right there.

    It seems that no matter where Joseph D trots the goalposts to, I am still kicking the ball right though the center, with link after link.

    Patterico (15be32)

  243. “It said who the Fed was buying the securities from? (Not the mortgage backed securities but the Treasuries.) Really? Could you direct me to that comment and give me the quote that says who the Fed bought the Treasuries from? I missed it, and I just looked again, too.”

    Patterico – It’s the one with the link to the page with the downloadable spreadsheets where I indicated that there is a column in the spreadsheet indicating who the counterparty for each trade was. Sorry if your computer doesn’t like spreadsheets.

    daleyrocks (bf33e9)

  244. bobathome – What you are missing in your example is the assumed purpose of the Fed purchase program. What is it you believe they are trying to achieve? Without that, how is it even possible to form an answer?

    daleyrocks (bf33e9)

  245. Patterico (ed63ab) — 3/31/2015 @ 8:38 pm

    Challenge to Joseph D and now Sammy too:

    You have a choice. Your next published comment will do one of the following:

    1) Find me one link that says that in QE, banks were used as a pass through for the Fed to buy bonds from the Treasury, or

    2) Admit that you have no evidence for such a theory.

    I’ll do both.

    I never said such a thing – that buying bonds from the Treasury was the purpose of QE2, like Joseph D. says, or that only banks were a pass through.

    I said economists would say there’s no difference from whom the Fed buys it from.

    That would mean it could amount to being a pass through. And maybe mathematically it has to be identical to a pass through if the Treasury is selling at least as much debt as the Fed is buying.

    The purpose of QE2 was to keep long term interest rates low.

    Presumably so that banks wouldn’t hold on to cash, or make only short term loans, in the hopes that interest rates would be higher soon, or something like that. The Fed did not want a sharp yield curve. I could research what exactly was the idea of preventing a sharp yield curve.

    That’s number 2.

    Now for Number 1:

    I found a comment on Zero Hedge where somebody says something close to that. Not that banks per se, were a pass through, but that any buyer of the public debt was a pass through.

    I can probably find something better if I look more.

    http://www.zerohedge.com/article/tired-and-broke-all-qe-just-asset-swap-rhetoric-then-read

    Go down to comment number 979549 by cranky-old-geezer on Sunday 02/20/2011 at 12:35

    He says in part:

    What QE supporters and Bernokio himself fail to point out is the pass-through effect.

    When the Fed buys treasury debt, new money is passed from the Fed through the PD to the federal government where it is spent in the economy, increasing (inflatig) [sic] the “street-level” money supply, diluting the value of each dollar, resulting in rising prices for goods and services.

    It’s a two-step process rather than a one-step process if the Fed bought treasury debt directly from the Treasury, which the federal reserve act prohibits. The Fed gets around this prohibition by having PDs buy treasury debt then buying it from PDs.

    I am not sure what PD stands for here. My best guess is Public Debtholder (which doesn’t have to be a bank, and often is not.)

    And cranky-old-geezer is wrong there about the creation of money causing inflation. The fallacy there is, that assumes that there is afixed amount of goods and services available for sale. The whole idea of stimulating the economy is that there’s not a limitation on the amount of goods and services, but rather there is some slack, or even a lot of it. (although there is also the idea you might have to pay a small price in inflation to get more economic activity)

    Sammy Finkelman (033fec)

  246. Patterico – It’s the one with the link to the page with the downloadable spreadsheets where I indicated that there is a column in the spreadsheet indicating who the counterparty for each trade was. Sorry if your computer doesn’t like spreadsheets.

    OK, so, again:

    1) Do we know that reflects QE?

    2) Do we know whether the transactions on the spreadsheets reflect a pass-through? In other words, how long did the counterparties hold the securities? I’m guessing the spreadsheets don’t show that. But it’s important, no?

    Patterico (15be32)

  247. Patterico – 1. I believe so because it lists the open market activities of the NY Fed. I also think you can just open the spreadsheets. You don’t have to download them. Click on the link, the page describes what it is.

    2. The spreadsheets say nothing about pass throughs. The Fed only knows who it is settling a trade with unless it gets instructions to send or credit money elsewhere. I’m not sure why its so important. Fresh money enters the financial system through Fed open market activities. While interesting, who cares whether it winds up directly in a bank or takes a circuitous route?

    daleyrocks (bf33e9)

  248. Or Patterico, maybe when the Fed settles a trade with Cantor Fitzgerald, the Cantor Fitz account is at a bank, so the bank’s balance sheet gets pumped up that way.

    daleyrocks (bf33e9)

  249. Patterico – Take a look at the quarterly Treasury Bulletin and the second table under the Ownership of Federal Securities section which tracks the government estimate of which type of entity owns treasury securities over time. The deltas between ownership and outstanding should provide some clues as to where the changes have been occurring.

    http://www.fiscal.treasury.gov/fsreports/rpt/treasBulletin/current.htm

    daleyrocks (bf33e9)

  250. #246: daley,as I said in #230, the Fed is attempting “to stimulate the economy and spur employment and control inflation, yada yada yada … “. And they presume that lowering interests rates is the way to do this. This is Bernanke’s “credit easing” (#244 above,) or the celebratory “[t]hey’re [the banks buying treasuries] helping the Fed and the Obama administration keep borrowing costs at all-time lows for everyone …” (#237 above, from your Bloomberg article.)

    What I was trying to get at in my example, is that when the Fed buys a huge quantity of treasuries, it is able to affect the price of those treasuries. Basically, they are providing a large, predictable demand for treasuries, and this can be expected to increase the cost of those treasuries. And this works its way back to the sale of new treasuries even though the Fed doesn’t participate. The buyers of those treasuries know that there’s a guy [the Fed] standing outside the door who is anxious to buy a large amount of the those certificates. So this will affect their bids. They also know the existing inventory of treasuries have higher yields and thus will command higher prices than the current batch. And this also affects their bids. This is how the Fed lowers the interest rates these new bonds must pay. And this presumably is reflected in other interest rates charged for other loans. Which, to link back to the Fed’s goals, will stimulate the economy, yadda, yadda, yadds.

    My speculation on why this isn’t working is that a lot of financiers still remember the 1980s and they aren’t anxious to make loans at current rates knowing that these rates will double or triple once a recovery begins. The fixed rate loans they make today are tomorrow’s assets, and the value of today’s loans are going to take a hit once higher interest rates prevail. And this is likely to be true even for adjustable rate loans depending on the details. Individuals may also be constraining their credit card impulses recognizing that their credit card balances can result in horrendous liabilities with sky high rates. Even those banks that are presently burnishing their portfolios with 10 year Treasuries paying 2% will be disappointed to learn that their prized assets have lost 40% of their value once recovery hits.

    bobathome (ef0d3a)

  251. I’m not sure why its so important. Fresh money enters the financial system through Fed open market activities. While interesting, who cares whether it winds up directly in a bank or takes a circuitous route?

    One word: inflation. If it goes through the economy, it is expanding the money supply flowing through the economy. If it went straight to a bank and is sitting in reserves, it is potential inflation not yet realized.

    Patterico (9c670f)

  252. If the Fed is attempting to stimulate the economy, they sure are doing a piss-poor job of it –
    and here I thought they were supposed to be independent of the government.

    askeptic (efcf22)

  253. Clarification: Joseph D writes to say the “aggregate demand” term refers to demand through the entire economy, and not just credit markets, and he is right. However, it seems clear to me that Bernanke seems to stimulate aggregate demand through stimulating demand for credit in the then-“broken” credit markets.

    Patterico (9c670f)

  254. #254: Patterico,

    However, it seems clear to me that Bernanke see[k]s to stimulate aggregate demand through stimulating demand for credit in the then-”broken” credit markets.

    My take on this is the same, but I think Bernanke was mainly trying to keep interest rates low, which he knew QE could do, presuming that this would stimulate lending, which would presumably stimulate the economy. If the Fed hadn’t bought all those bonds with fiat money, that is, if the Treasury had been forced to sell their new bonds into a market that was anticipating the effect of the new “supply”, interest rates would have logically risen … or to put it another way, the bonds wouldn’t have sold at their intended value. The buyers would have wanted a discount on their purchase (excess supply should result in lower prices,) which would have increased their yield, putting upward pressure on other interest rates. But this isn’t a broken market, it is functioning as it is suppose to.

    Bernanke made the mistake of thinking he could sidestep the market. This is what Sowell calls “one stage thinking.” Bernanke forgot to include the response of the lenders. They can see the threat of future inflation posed by those $2.6T held in “excess reserve” accounts. So they aren’t going to lend at these crazy (manipulated) 1.65% rates for 10 year Treasuries. And even the adjustable rate loans will be subject to failure when today’s borrowers at 3% (say for an “Obama” home loan) see their adjustable loan ratchet up to 7%, well out of their capacity to pay. Or if they have a fixed rate “Obama” loan, they will watch in horror as the appraised value of their home plunges as new buyers are forced to pay higher rates.

    And the amount of bonds purchase under QE3 is quite extraordinary. $45B per month doesn’t sound like much (when we’re talking trillions,) but it works out to about $1B of open market purchases every three hours the market is open. Typical Treasury offerings of 10 year bonds run at about $20B per month (eg. $21B on 10/8/14, $24B on 11/12/14.) But these are just a fraction of the total offerings, but it does suggest the scale of QE3.

    bobathome (ef0d3a)

  255. “What I was trying to get at in my example, is that when the Fed buys a huge quantity of treasuries, it is able to affect the price of those treasuries. Basically, they are providing a large, predictable demand for treasuries, and this can be expected to increase the cost of those treasuries. And this works its way back to the sale of new treasuries even though the Fed doesn’t participate. The buyers of those treasuries know that there’s a guy [the Fed] standing outside the door who is anxious to buy a large amount of the those certificates.”

    bobathome – I understand all of the above, but I am operating under the assumption that the Fed is not just randomly hoovering up any and all Treasury securities of all maturities each and every month of the year unless you demonstrate otherwise. Typically they have a strategy, such as the range of maturities they are focused on, whether they are focused on more liquid, actively trading series, while your example had none, which is why it made no sense to me.

    daleyrocks (bf33e9)

  256. “One word: inflation. If it goes through the economy, it is expanding the money supply flowing through the economy. If it went straight to a bank and is sitting in reserves, it is potential inflation not yet realized.”

    Patterico – If you recall our discussion from last summer I suggested we had flawed definitions of money supply. To me the money the Fed injects into the system by purchasing Treasuries is the same whether initially resides in reserves for the benefit of a bank or a primary dealer, but only one gets counted as money I believe. That’s nuts for substantively the same transaction especially since both can leverage their balance sheets by huge multiples of capital.

    daleyrocks (bf33e9)

  257. daley, we know the Fed was (is?) buying $1B of bonds every three hours the exchanges are open ($45B per month.) The other thing we know is that they have been focused on longer term bonds. They are quite specific on that point. They have been “flipping” their short term notes as they mature, buying longer term bonds to replace them. From the bulletin you linked, we know “Private” holdings of treasuries are about $10T, the Fed is $2.7T, and foreign holdings are at $6T. But $7.2T of the “private” holdings are in bonds with maturities of less than 5 years (page 27, Table FD5 of the March Bulletin,) leaving about $2.9T of bonds with maturities over 5 years in private hands as of Dec. 2014. Looking at bonds with maturities 5 years and above, about $2.2T were in private hands at the end of fiscal year 2010, and this has increased to $2.7T at the end of fy 2014. So while private investors were buying $0.5T, the Fed was buying $2.7T. This sounds like a Hoover to me!

    bobathome (ef0d3a)

  258. The Fed has just $2.3T in treasuries, not $2.7T as in several places in #259. I got carried away. It still sounds like a Hoover.

    bobathome (ef0d3a)


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