Re: Fed vs White House - LT interest rate targetting

[Warren Mosler <mosler@xxxxxxxxxxxxxx>]

When the Fed buys secs it's as if the tsy had never
issued them, as far as govt balance sheet type of
stuff/risk, etc. is concerned.

> >
> 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.

Under a gold standard targeting interest rates is
problematic, and usually leads to 'pressure' on the
gold reserves.  Therefore, as in WWII other controls
were instituted as well.  With a floating fx policy
there are no operational constraints in meeting
interest rate targets.

>
> When I bought my first house in the 1950s I financed
> it at with a 4 per cent
> mortgage and zero down payment!!

And you can refi it now with an adjustable rate
mtg and lower your payment!!!  Maybe even take out
some equity!!!???

>
> >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,
>
With today's floating fx policy banking is not
'reserve constrained' in the US, causation
runs from the economy to 'money' etc. so there
is no transmission mechanism from reserves to the
macro economy.  In fact, more reserves is just
a bank tax as taught in money and banking.

> 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.

Under current Fed operations, where reserves don't pay
interest, excess reserves coincide with a 0 fed funds
rate, as in Japan.  By paying interest on excess
reserves (functionally a one day security) the Fed
could support a higher interest rate target if it
wished and have excess reserves.

Warren

>
> 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

__________________________________
Do you Yahoo!?
The New Yahoo! Search - Faster. Easier. Bingo.
http://search.yahoo.com