Re: Fed vs White House - LT interest rate targetting

[Warren Mosler <mosler@xxxxxxxxxxxxxx>]

--- "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx> wrote:
>   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.

Right, two possibilities.

1.  They are mistaken
2.  They are being less than truthful

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.

Note that the tsy stopped issuing 30 year bonds.  This
is the same as if the tsy were issuing them and
the fed were buying them.  And we know what that
does-lower 30 year rates than otherwise.

So if the Fed starts buying 10 year secs 10 year rates
will be lower than otherwise.  Just like in Japan
where the BOJ buys 10 year jgb's.  There's heaps of
data on all this.  No mystery, and no major economic
ramifications.

'pumping cash into the economy' has nothing to do with
anything here.

>
> 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.

Yes, it has allowed debt to be somewhat more
sustainable for some.  But it has more than equally
reduced personal income of interest earners, reducing
their ability to consume, service debt, etc.

And note that housing starts peaked at over 2.5
million in the 70's, over 2mm in the 80's, and now at
1.7 mm are 'gangbusters'...

 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.

This would have been the case starting in 98 if not
for speculative debt to fund 'doubtful' business plans
and y2k panic spending.  Without sufficient govt
deficits there's not enough agg demand in 'normal'
times do to all the demand leakages.
(Bill Vickery used to point this out at PK conferences
till asked to sit down.)

> 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".

We can host a walk-a-thon over the Brooklyn Bridge to
help them out...
>
> The fact is that the economy has gone way past any
> possibility of being
> cured by interst rate policy.

Yes, by 1998 it was long past that.

> You cannot be half Keynesian any more than half
> pragnant. Go all the way
> with full employment

Of course that implies you can get anyone to agree on
the definition of full employment.

Warren

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
> >
> >
>
>
>


=====
Warren Mosler, www.mosler.org
c/o James River Capital Corp
5007 Chandler's Wharf, Suite 201/202
Christiansted, USVI  00820
340-719-8813 office phone
340-719-8804 Fax
Primary email contact:  mosler@xxxxxxxxxxxxxx

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