Re: Fed vs White House - LT interest rate targetting; response to

["Niggle, Christopher" <Christopher_Niggle@xxxxxxxxxxxx>]

 Paul: In response to your remarks toward the end of your post, I DON'T
think that it would be a bad thing for the Fed to target LT interest rates
and I WOULDN'T  worry if that resulted in bank Reserves and the monetary
aggregates getting larger....I just made that remark because it is the one
usually advanced in debates over whether or not central banks can control LT
rates in an environment in which inflationary expectations might be linked
to growth in the monetary aggregates.  If the Fed had to purchase say $30
billion worth of long bonds to keep the price up, and rates down, then
reserves would grow by about the same amount and that would probably trigger
speculators to sell bonds anticipating inflationary expectations increasing.

I agree that an increase in R or M's are probably a false signal re
inflation and expectations but that is the usual mind set of those
discussing the issue of LT rate targetting, so I mentioned it.

Chris

-----Original Message-----
From: pdavidso
To: Niggle, Christopher
Cc: pkt@xxxxxxxxxxxxxxxx
Sent: 4/26/03 2:33 PM
Subject: RE: Fed vs White House - LT interest rate targetting

>===== 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