• Oh that Bernanke

    Yes the chairman of the Federal reserve is in fact the same Ben Bernanke of the work on credit intermediation with Mark Gertler, for example these pieces.

    I only bring it up because Stepen Williamson seems to think that the reason for Fed asset purchases is to increase the money supply.

    On the asset side, “securities held outright” has increased by about $300 billion, with an increase of about $230 billion in long-maturity Treasuries, and a net increase of about $70 billion in agency securities and mortgage-backed securities. However, on the liability side, the increase in outside money has been quite small, at about $15 billion ($54 billion increase in currency, $39 billion decrease in reserves). …Indeed, if we take the Fed seriously that it wants to “quantitatively ease,” it is not doing it, since the total quantity of Federal Reserve liabilities in the hands of the private sector declined in real terms during 2010

    I think this just reflects the fact that Bernanke knows what he’s doing and Williamson doesn’t.  It also appears to reflect the fact that Ben was telling the truth on the 60 minutes interview.  Here’s Williamson commenting on that interview:

    Further, [Bernanke] says that the notion that QE2 involves printing more money is “a myth.” What the Fed is really up to, according to him, is “lowering interest rates by buying Treasury securities.” Maybe these comments were lifted out of context, but of course this is not correct.

    Hmm, not correct?  Indeed.

    Sounds as though Bernanke was telling the truth, the Fed wants to lower the required real rate of return on assets, that is lower real interest rates, and is not expanding the money supply, just as Bernanke said.  Furthermore this is clearly a sensible thing to do, in a liquidity trap the supply of money over some minimum is entirely irrelevant and this works in both directions, so there is no harm in keeping the money supply stable or even contracting it slightly. 

    On the other hand anyone who is a believer in the Bernanke-Gertler work, such as yours truly, would think that higher asset prices will facilitate growth.  I’ve explained here that due to global imbalances the only way for the US to reach full employment is to induce the population to take on vastly increased leverage relative to their income, as they were in the bubble.  Higher asset prices facilitate this in two ways, it makes borrowers willing to accept a higher debt to income ratio because their asset holdings will cover the debt.  At the same time it makes lenders willing to lend to borrowers with high debt to income ratios for the same reason, the assets secure the debt.

    Finally, if you’re thinking that in QE2 has been a failure because interest rates on longer-term treasuries haven’t declined I respond in two ways.  Firstly, depending on what’s happening to inflation expectations (something we don’t observe) it may well be that the perceived real rates on treasuries has declined.  Second, and most importantly, equity prices have been reflated substantially.  On this you have to compare to equity prices prevailing when QE2 first began to be widely anticipated, not when it was actually announced, thus the relevant time to compare to is something like August 2010 if I recall correctly.  But higher prices is just another name for lower required real returns, that is a lower cost of capital for firms.  Thus real rates, broadly construed, have come down substantially.

    All in all then, I tend to think QE2 has been a success and I think it, and Bernanke, deserve credit for the moderate improvement in the recent data.  On the other hand, I think it’s still way too small in size.  I think higher inflation would be a big help and so would even higher prices of all assets, both treasuries and equities.  I also think Ben wants to do more but is perhaps being slightly held back by political considerations and so what I’d like most of all is for Ron Paul to shut up.

    Adam Purzitsky
    Adam Purzitsky
    Senior Quantitative Portfolio Manager, Co-Fund Manager
    Jan 7, 2011 at 8:56am


1 comment in total
  • Hmmmm. I think you have not been reading my blog carefully.

    1. Bernanke-Gertler (or my related work) does not have much to say about the effects of QE2.
    2. A key part of what is going on with the liabilities side of the Fed's balance sheet has to do with what the Treasury has been doing with its transactions accounts. Again, see my blog posts
    3. As measured by movements in TIPS yields, real Treasury yields have actually increased since the beginning of the QE2 program. Is that a measure of success for you?
    4. You're a bit of a wuss for remaining anonymous and stating in public that I don't know what I'm talking about.

    Steve Williamson

    Posted by: Stephen Williamson
    Jan 17, 2011 at 1:52 pm

     
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