ARNOLD KLING
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The Top Political Contributors
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Gender and the New Commanding Heights
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Jamie Galbraith Makes an Assumption
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Macroeconometrics: The Science of Hubris
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BRYAN CAPLAN
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The Effect of Thumb Sucking on Income
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Ability, Morality, and Prosperity: A Paper and a Report
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The Theory of Time and Frittering
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Male Variance and the Remnants of the Gender Gap
DAVID HENDERSON
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Hayek in "Unbroken", Part Two
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Hayek in "Unbroken"
August 5, 2011
James Bovard on the Peace Corps
August 4, 2011
Summers Way Off on FDR and 1941
August 3, 2011
The "Amazon" Tax
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Arnold,
Look at these transactions from the viewpoint of the Fed's balance sheet. On the asset side, anything that the Fed buys (from apples and gold to mortgages) indeed has an effect on its price. On the liability side, the Fed can finance its purchases by issuing currency or issuing bonds or borrowing from banks or someone else. The question is which of these liabilities are "perfect" substitutes of currency. The concept of monetary base assumes that currency and bank reserves with the Fed are "perfect" substitutes. Any reserves that pay interest are not "perfect" substitues of currency and any reserves that banks cannot use freely are not "perfect" substitutes of currency. So JH, GM and anyone else that analyze the supply of "money" using the monetary base and the multiplier are wrong. The inflationary impact of these special reservers that are NOT "perfect" substitutes of currency is quite different from what one may conclude from applying the quantity theory of money or any concept of nominal shock.
The fed can raise or lower interest rates at will, so I don't really understand your point. Could you clarify it please?
Traditionally the Fed has purchased assets which are of a liquid type. The most obvious examples are Treasuries, which made up the bulk of its sheet, and gold.
Its new actions of buying agency debt (eg, Fannie Mae) and MBSs which were illiquid even at the time they were purchased (which opens a line of question on their purchase price as well) is new.
Why it is doing this must have a political, not a monetary, component. There is no monetary policy reason the Fed would rather have X units of MBSs when it might have had Y units of Treasuries or Z ounces of gold. It is a basic principal of commodity money that one always wants to hold the commodity that everyone else wants to hold. Conversely, one does not want to hold the commodity that no one else wants to hold. Looking at those MBSs, agency debt, etc. as something like commodities behind the Fed notes, it is bizarre in the extreme to choose assets which no one else wants, and consequently cannot be easily disposed of and have very uncertain value. No central banker would do such a thing except for political reasons.