Tuesday, May 7, 2013

Michael Stephens — Kocherlakota on Low Interest Rates and Instability

Narayana Kocherlakota is the head of the Federal Reserve Bank of Minneapolis and is known for an uncommon feat in high-level policy circles: he changed his mind.
Multiplier Effect
Kocherlakota on Low Interest Rates and Instability
Michael Stephens

7 comments:

Matt Franko said...

"On the one hand, raising the real interest rate will definitely lead to lower employment and prices. "

Negatory.... the govt is a net payer of interest... this is a supportive flow of $NFA....

rsp

F. Beard said...

But credit creation is (sadly) a much bigger price and employment driver than net interest payments by the Federal Government, I'd bet.

It appears the Fed has painted itself in a corner (again?)

But there is an honest solution:

1) Place a temporary ban on new credit creation; all new lending to be 100% backed by reserves

2) Distribute new fiat equally to the entire population metered to replace existing credit as it is repaid plus a little more if necessary should interest rates get too high. Continue at least until all deposits are 100% covered by reserves.

With the above, reserves would increase at a rate sufficient to allow 100% reserve lending without deflation and create a vast amount of savings for ordinary Americans. And since the interest would largely go to the American population at large, the damage higher interest rates might do to their job prospects would be offset by those interest payments.

paul said...

"But credit creation is (sadly) a much bigger price and employment driver than net interest payments by the Federal Government, I'd bet."

Was not is. That ship has sailed. Household credit is saturated with little headroom...and headroom can only be raised by deficit spending (assuming net exports isn't goings to change anytime soon).

Who's going to borrow to finance consumption in this environment?

Net interest payments likely have a negligible affect on demand...straight to savings or at least accumulation of financial wealth for the top 0.1%.

Read this for a good perspective...

http://www.nakedcapitalism.com/2013/05/how-class-works-richard-wolff-examines-class.html

Matt Franko said...

"Was not is"

Right. I should have typed 'govt WAS a net payer of interest'...

A key thing is if the Fed ever stops net purchasing assets, but leaves rates where they are... then rates could really collapse... right now they are holding them up and keeping the curve positive so they are ending up with a surplus "profit" to return to Treasury after expenses...

If they exit the market but hold rates at near zero, we could possibly get to the condition where the Feds portfolio income becomes insufficient for them to pay IOR and still have enough leftover to pay their expenses ....

That would be an interesting scenario...

rsp,

paul said...

Got a kick out of this...

http://larspsyll.files.wordpress.com/2012/07/multiplier.gif

y said...

Here's the Minsky conference page, with full audio:

http://www.levyinstitute.org/news/?event=45

Jonf said...

Interest rates seem like a double edged sword to me. Yes, higher rates put money in the economy but if they also raise mortgage and consumer rates, that will slow things down. Plus those who live on treasuries probably don't spend a lot of it.