Re: Fed vs White House - LT interest rate targetting

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

 Greenspan and other Fed officials have recently insisted that even if
the overnight Fed funds rate is lowered to zero, they still have other
tools to stimulate the economy. The Fed can buy longer-term Treasury
securities, such as two-year or five-year or even ten-year securities.
By paying cash for such securities, the Fed would essentially be pumping
money into the economy and pushing long-term interest rates even lower
from the current 4 percent to 2.5 percent. But that would be virgin
territory for the Fed in recent decades, and officials have acknowledged
that the precise impact would be unpredictable.

There are other issues as well. The Fed's easy-money policies have
already stimulated home buying and refinancing, prompting consumers to
convert the appreciated equity in their homes to cash by so-called
cash-out refinancing, to buy big-ticket consumer goods. But this easy
money has done nothing to rejuvenate business spending, which had been
held down by overcapacity and poor earnings, as well as war jitters.
Furthermore, abrupt changes in interest rates, particularly long-term
rates, does violence to structured finance (derivatives) which is
already exceedingly precarious. The Fed may fall into the trap of
setting off an implosions of derivative defaults, what Warren Buffet has
called "financial weapons of mass destruction".

The fact is that the economy has gone way past any possibility of being
cured by interst rate policy.
You cannot be half Keynesian any more than half pragnant. Go all the way
with full employment or accept a prolong recession.

Henry C.K. Liu


pdavidso wrote:
> > ===== Original Message From "Niggle, Christopher"
>
> <Christopher_Niggle@xxxxxxxxxxxx> =====
>
> > Gary, others interested.  I think that central banks such as the Fed could
> > set long term rates directly if they purchased-sold longer Treasury
> > securities with open market operations instead of dealing exclusively in
> > short term securities as they usually do.  If inflationary expectations then
> > caused speculators to sell off long term bonds the Fed could still keep the
> > long rates low if they were willing to purchase as many as necessary, right?
> > This was Keynes's view in the GT, I think, but I'll defer to the experts on
> > that point.
>
> Not only was it the message of the GT -- but, for those who do not study
> history, until the "Accord of 1951" -- the Fed kept long term interest rates
> very low -- so that Roosevelt financed the SEcond World War record deficits
> --as high as over 40 per cent of GNP in one year [in those days it was GNP not
> GDP]--- at interest rates of 4 per cent or below.
>
> When I bought my first house in the 1950s I financed it at with a 4 per cent
> mortgage and zero down payment!!
>
>
> > Such a policy stance could lead to a very large increase in commercial bank
> > reserves of course, and a potential large increase in bank lending and the
> > monetary aggregates,
>
>
> whats wrong with that -- in an economy that has LOST 2 million jobs since
> 2000?
>
>  if the Fed had to buy a lot of bonds to keep their
>
> > price up and rates low, but I think that the Fed could set long rates
> > wherever they want them if they ignored the effects on reserves and
> > potential bank lending.
>
>
> I can't  believe that people on the pkt net  --esepcially people like Chris--
> seem to implicitly accept the mainstream drivel about large increases in the
> money supply and bank reserves is any threat  -no matter what the4
> circumstances.
>
> Paul Davidson
> Editor, Journal of Post Keynesian Economics
> University of Tennessee
> SMC 503
> Knoxville, Tennessee 37996-0550
> office phone #;(865)974-4221; office fax# (865)974-1686 or (865)974-4601
> home phone and fax # (865)692-0802
> email pdavidson@xxxxxxx
> http://econ.bus.utk.edu/davidsonextra/Davidson.html