Re: James A. Baker III

[Warren Mosler <mosler@xxxxxxxx>]

Warren Mosler wrote:

> >
>
> Henry,
>
> I enjoyed reading your political history.
> Let me again focus on the technical point I was
> trying to make, as illustrated by the statement below
> from your post:
>
> >  The
> > NY Fed notified the FOMC that it could continued to follow the new
> > operating method by injecting more reserves or to tighten up the
> > supply of banks reserves to get the FF rate back up to 13%, but it
> > could not do both.
>
> Clearly Tall Paul did not understand technically how the reserve system
> functioned, or he never would have acted as he did.  He did not realize
> that the Fed NY was the monopoly supplier of net reserves to the banking
> system and that the demand for reserves, for all practical purposes, is
> best
> considered 'fixed' during the settlement period.  It's really a nearly
> pure
> example straight from the micro books- a single supplier facing a fixed
> demand.  Additionally, when the demand does change, it is by and large
> due to what are best considered random changes in what are called
> 'operating factors.'  These operating factors include checks in the
> process
> of clearing, seasonal demands for cash, net changes in Tsy balances at the
>
> Fed, etc.  Also, compositional changes in deposits in the banking system
> cause
> changes in reserve requirements.  Not to mention that if a bank issues
> deposits
> to buy a tsy sec from the Fed it may incur a reserve requirement but if
> that
> same depositor buys the tsy sec directly from the Fed required reserves
> are
> unchanged.  Note that none of these factors have anything to do with the
> economy, inflation, etc. but are primarily technical.
>
> So when Tall Paul gave the order to the NY Fed to 'fix reserves' he was
> giving the order to let these technicalities/operating factors be the
> determinant
> of the fed funds rate.  Nothing could be more irresponsible, which is why
> I
> am certain he did not understand how the system actually functioned.
>
> Meanwhile, the NY Fed was stuck with this, might I say, idiotic set of
> instructions.
> At the end of the day it had to decide the fed funds rate via its policy
> of either
> forcing the banks into the window which meant the fed funds rate would be
> a
> function of pain and penalties of said borrowing in the case of a shortage
> of reserves,
> or letting the rate fall to 0 when operating factors were adding reserves
> and resulting
> in a position of excess net reserves in the banking system.
>
> I consider that era a disgrace to the US.
>
> (snip)
>
> >
>
> > You are correct Warren that the NY Fed open market desk, driven by
> > market forces, could not follow the auhorized target of the FOMC, and
> > for a brief period, the Fed actually lost control to the market, until
> > it lifted credit control.
> >
>
> Yes, it let 'operating factors' determine the fed funds rate.
>
> w
>
> >
> > Henry
> >