Saturday, March 26, 2016

Kocherlakota's article on "helicopter money" is bizarre

Narayana "orange juice" Kocherlakota wrote some bizarre article on Bloomberg about helicopter money.

He says this crazy shit:

To understand helicopter money, consider two ways that the government can raise $100 billion to fund new spending (or a tax cut).

First, let me backtrack, here's how he defines helicopter money:

"helicopter money," a policy that entails creating money and giving it directly to people or the government to spend.

"Creating money and giving it to the government to spend???"

Are you kidding?

Then this...

The Treasury can sell $100 billion in bonds to investors.
The Treasury can issue $100 billion in bonds to the Fed, which pays for them by creating new money.

"Raise money."

How do you "raise money" when it's your own freakin' currency? You have to fucking put it there first and you're the sovereign, the monopolist, the "maker."

And by the way, the sale of Treasuries is a reserve drain. He should know that. How do you do a reserve drain without first doing a reserve ADD??? The government is not raising money.

And since when does the Treasury sell bonds directly to the Fed as he suggests? The Fed buys in the secondary market. The money to buy bonds comes from government spending itself.

This guy's comments are bizarre.

The Fed is totally f**ked up. These people who work there are hopeless. They should close it down. I think I am for that now. I think I am in Rand Paul's camp now.

By the way, Stephanie Kelton praises this guy for "getting the monetary operations right."



I'm floored. Maybe he got the monetary operations right, but he got so much wrong. Fundamentally wrong.

34 comments:

Michael Norman said...

How did we "raise" $2 trillion for war? Did the government borrow it from the Fed? Come on. Congress decides and it's done. Oh, the debt ceiling? Yeah, Congress raises it. Every time. No Fed. What the hell is this guy talking about?

Matt Franko said...

Mike, He's probably supporting Bernie so therefore Kelton thinks he's a genius....

elwoods said...

It sounds like he thinks the Fed is the sovereign, not the government of the people. The way we've turned the whole economic crisis over to the Fed, maybe he's right.

Michael Norman said...

Right, Elwoods.

Edward Delzio said...

To be fair, the Fed gets some stuff wrong, especially the out-of-paradigm parts, and it's important to be critical of that, but they get a lot right, so any mention of 'End the Fed' is kinda kooky talk. There was one line in his article that was spot-on MMT, so like everything else in life, I just take the good with the bad.

That said, after I read this article, I emailed Narayana Kocherlakota, I ran my 'Quantitative Redemption' idea by him (that instead of more 'QE' the Fed should simply do a 'QR' and announce that those Treasury bonds impounded on their balance sheet are, effective immediately, considered 'redeemed'. The decrease in supply would pressure rates downward, the partial removal of federal 'debt' would put to rest any near-future 'debt' ceiling kabuki shows, and furthermore, give Americans now with less fear of the specter of gov't 'debt' more confidence to spend / give fiscal policymakers more latitude to spend. He actually replied (he politely said he was skeptical). Anyway, here's another bizarre thing that the former president of the Minneapolis Federal Reserve Bank thinks:

"The Fed's Treasuries...are promises from Treasury to help fund the Fed as it raises IOR (or buys back reserves). Suppose the Fed forgives all of this debt. Then the only change is that it will need to go into debt to Congress to fund increases in IOR."

He thinks the Treasury has to fund the Fed or else the Fed will go into debt to Congress.

I thanked him for his public service and then I reminded him that AFTER paying interest on overnight reserves, the Fed sent a record $97.7 billion in profits to the U.S. Treasury in January, that the 2015 profits sent to the Treasury exceeded the record set the previous year of $96.9 billion, and that since the 2008 credit crisis, total Fed ‘profits’ sent to the Treasury have totaled about $565 billion.

Hopefully that 'helicopter drop' works.

Ralph Musgrave said...

Another mistake he makes is this. His BASIC POINT is that helicoptering is not needed assuming government does enough fiscal stimulus, and the Fed does enough monetary stimulus. Well of course! But the whole need for helicoptering arises from the fact that politicians AREN'T doing enough fiscal stimulus: they're are more interested in slagging each other off than in doing anything useful

In that scenario, helicoptering makes sense.

Matt Franko said...

Edward they probably get the $97b mostly from MBS which is from US homeowners so the whole thing here is a moron fest....

Matt Franko said...

Edward this is not bizarre: ""The Fed's Treasuries...are promises from Treasury to help fund the Fed as it raises IOR (or buys back reserves). "

That is how it works for them they are FACTORING ....

They use the interest flows to operate the Fed including the ior....

https://en.m.wikipedia.org/wiki/Factoring_(finance)

Otherwise they would consider themselves bankrupt...

UST rates are near zero, that is why they need the 4% on the MBS as the USTs don't yield enough for them to be able to operate...

Edward Delzio said...

Matt, the interest rates of the approx $2T of the Treasury securities (lots of them of long duration) that the Fed has on their balance sheet is low, but they are not yielding lower than 00.5% which is the current IORR rate (00.25% prior to 12/17/15 'liftoff').

Edward Delzio said...

Matt, the Fed program to purchase agency mortgage-backed securities began on January 5, 2009... Let's pretend the USTs didn't yield enough to cover paying IORR, if you think that the Fed 'needs' the 4% interest flows on those MBSs to be able 'to operate' then how did the Fed 'operate' before 2009?

Here are the actual figures (not including MBS):

The Federal Reserve’s holdings of Treasury securities in the System Open Market Account (SOMA Treasury Holdings) are $2.4T in Treasury securities, with a combined 120 month duration, and the Weighted Average Coupon of SOMA Treasury holdings was 3% in 2015...

https://www.federalreserve.gov/releases/h41/current/

$2,461,283,000,000 X 3% is approx $74 billion/yr int inc from only Treasury securities,

https://www.federalreserve.gov/releases/h41/current/

Minus
$2,448,797,000,000 in reserves as of Feb 2016 X 00.5% IORR is approx $12 billion IORR paid,
Equals
approx $62 billion Fed ‘profit’ after paying IORR.

(Thus without MBS the Fed is able to ...‘operate’)


http://www.ijcb.org/journal/ijcb15q2a7.pdf
https://www.federalreserve.gov/releases/h41/current/
https://www.federalreserve.gov/releases/h41/current/
https://www.federalreserve.gov/releases/h3/current/









Jose Guilherme said...

instead of more 'QE' the Fed should simply do a 'QR' and announce that those Treasury bonds impounded on their balance sheet are, effective immediately, considered 'redeemed'

How would the double-entry accounting on that work - would the Fed's equity take a hit?

Jose Guilherme said...

Kocherlakota's last paragraph is pure MMT. It's the deficit spending that counts, not the method of its "financing". Scott Fullwiler has been making the same point (plus the detailed accounting tables proving it) for years.

The Rombach Report said...

"I ran my 'Quantitative Redemption' idea by him (that instead of more 'QE' the Fed should simply do a 'QR' and announce that those Treasury bonds impounded on their balance sheet are, effective immediately, considered 'redeemed'."

Thank you Edward Delzio for that post. I like your term for it, 'Quantitative Redemption'. Moreover, it kind of dovetails with the 50 year Jubilee cycle tradition of forgiving debt, which perhaps could capture the imagination of Evangelical segments in the population. Mike Norman did a video on this topic sometime back in 2011, and economist Dean Baker wrote an article about this same subject in July of 2011, 'Ron Paul’s Surprisingly Lucid Solution to the Debt Ceiling' Impassehttps://newrepublic.com/article/91224/ron-paul-debt-ceiling-federal-reserve

Jose Guilherme said...
This comment has been removed by the author.
Jose Guilherme said...
This comment has been removed by the author.
Jose Guilherme said...

Yes, the QR proposal is great and so is Dean Baker's 2011 article.

But the question remains: how to account for that "bond destruction" on the Fed's books?

Because - in case QR on the left-hand side of the balance sheet requires a hit on equity on the right-hand side - we may have the usual suspects hysterically screaming that the Fed's equity is now "negative" and that the Fed is thus "broke" etc.

We know such a claim would be absurd - but public opinion doesn't.

Tom Hickey said...

Right. It's a wash on the consolidated balance sheet, but the US doesn't consolidate it balance sheet and treats the Fed as a quasi-private group of banks. So the Fed takes a write down with a charge to equity while the Treasury writes off debt.

Probably not going to fly politically in the US even though it makes perfect sense.

There will be a cry from some that the "taxpayers" will take a hit if the Fed hits negative equity and needs public recapitalization.

Matt Franko said...

Edward there was no ior before 2009 and we didn't have zirp....

If they had 6 month or less duration on their UST portfolio today, they are bankrupt (to them)... The MBS at $1T at 4% gets them 40b that they only owe about 15b on at 0.5% on the whole 3T so they have it covered plus their expenses.....

So they won't get rid of the MBS and won't raise rates too fast or very high otherwise they can't pay the ior....

Brian Romanchuk said...

The argument against allowing Fed negative equity is that if it does happen, the Fed would be forced to go to Congress for a capital infusion. And given the tendency for Americans to elect loons to Congress, that poses a real problem.

The need for a capital infusion is statutory, not economic. I do not know the statutes, so I have no idea whether that argument is true. It sounds plausible - Congress needs means to discipline an out-of-control Fed.

Matt Franko said...

Right Brian from an evolutionary perspective they got all the bonobo genes.....

They just won't do it for political reasons the shit would really hit the fan if the Fed ever was out of munnie...

So they will keep the MBS and hold ior below the MBS yields.... they'll say something like "we have to support homeownership for working families!" Or some other shit.... Blah,blah....

But you might be able to sell some sort of derivative rights that would make munnie as long as the FFR stayed below
MBS.... I think that would be low risk.... They need the positive spread between MBS and FFR see the wiki on how a Factor makes munnie in the comment above..... If FFR ever goes above MBS they are toast.....

Edward Delzio said...

Negative equity (?) The Fed would be merely unwinding their Treasury holdings purchased for LSAP, and simply reverting back to pre-crisis equity levels (plenty of bonds still left over to conduct routine open market operations as before), but agreed that the Fed would need something from Congress: Authorization for the Fed to immediately declare previously approved 'debt' redeemed...

Admittedly, that may be untenable, and circling back to the point of this article, would it or any other unconventional ideas now being deployed at central banks around the world be crazier than 'helicopter drops'? Or would just the mention of something like an imminent 'QR' be a catalyst for what the economy really needs: For fiscal policyymakers to stop 'slagging each other off' (well put Ralph) and just enact productive, counter-cyclical stimulus measures?

P.S. I love the 'Jubilee' angle. That plus the present 'anti-political establishment' could help push the 'QR' pig over the political fence.

Matt Franko said...

Edward no way in hell they will ever do that... they like where they are....


They will keep the mbs and let US homeowners keep footing the bill for the whole thing..... Congress is too stupid to figure out what the fed is really doing...

Edward Delzio said...

Matt, you seem fixated on those MBSs, so no matter what I say, you hear 'redeem MBS'. Let me try one last time, and please, to paraphrase 'Aurthur', try to just forget about the MBS for a moment...

I never mentioned redeeming MBSs in this 'QR' idea, only redeeming Treasury securities. When I suggest the Fed should declare Treasury securities redeemed, I only mean the Treasury bonds, notes, & bills on their balance sheet, not MBSs. There are 2 separate types of bonds on the Fed's balance sheet with 2 completely separate distinctions (quantitative v. qualitative). One are the Treasurys issued by one arm of the federal govt (the Treasury), and other, your favorite, MBS issued by another (GNMA or a Govt Sponsored Enterprise like FNMA). So to make it absolutely clear to everyone, how about we'll include a 'Matt Franko clause' in the QR legislation that specifically spells out that the Fed is only allowed to declare Treasury securities redeemed and not any of your MBSs, okay?

Furthermore, if you think the Fed will ever have 6 months or less duration on their UST portfolio +/or go bankrupt paying IORR with only UST interest income, let me get you up to speed on how LSAP works:

Of the $2.4T of the SOMA Treasury holdings (UST on the Fed balance sheet), 92% have a 10-year maturity or more. When any of those T-notes or T-bonds mature, the Fed automatically re-invests the proceeds in new Treasury securities of the same maturity. The duration of the Fed's UST portfolio hasn't changed much...

The average weighted coupon of the Fed's UST portfolio, however, does go down with the prevailing interest rates, but the 10-year UST notes are yielding 1.91% right now. The IORR is 0.50 right now. 1.91 is bigger than 0.50. No problem paying IORR with UST interest income.







Matt Franko said...

well what if the yield curve were to invert?

iow, lets say things start to get going and they think they have to raise rates....

Duration reported here at 6.5 years (2013):

https://guggenheimpartners.com/perspectives/macroview/the-fed%E2%80%99s-balance-sheet

"Since 2008, the assets on the Fed’s balance sheet have ballooned to $3.5 trillion from $480 billion, and its portfolio duration has extended to about 6.5 years from 2.5 years."

So current UST 7-yr yield is 1.70%

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

So lets say they think they have to increase the policy rate to 3% over the next 12 months, so they would have a portfolio yielding 1.7% for 7 years and have to pay ior at 3% today ... how is that going to work?

They would need about 3% of 3T (assuming no MBS and all USTs) or 90B and at 1.7% would only get about 50B ie bankrupt..... so the MBS is where they will get their munnie in this type of scenario as the MBS probably gets them 40B or so annually and covers their nut and the short term MBS stays ahead of the policy rate so they can rollover redemptions and stay ahead of their own yield curve via the MBS...

In any case they wont get rid of their MBS (will use political cover of "doing it for the stressed US homeowner!... blah, blah...) and have an upside limit to any policy interest rate response they can make as if they raise too fast they could bankrupt themselves...

Matt Franko said...

"The duration of a portfolio equals the weighted average maturity of all of the cash flows in the portfolio."

https://en.wikipedia.org/wiki/Bond_duration

So its probably gone up since 2013 at 6.5 years so maybe 7 years? if so, then 1.7%...

To your point 1.7 > 0.5 so they are not in trouble YET but also cannot raise above about 1.5% for 7 years ... unless they have the MBS to work off of in the portfolio...

this is why they have the MBS in the first place... its important ... they think that part of the portfolio will stay ahead of the FFR for them as they raise... as long as they keep about a third in MBS they think they should be ok... but if MBS spreads narrow they could still be in big trouble...

Matt Franko said...

MMT top enders should be happy about this policy as it will keep a lid on rates and screw savers and old people who rely on savings for income in retirement...

Maybe the MMT top end people are invested in dog food companies?

Edward Delzio said...

Matt, fantastic, even though you are still stuck on MBS, you can quote the 7yr yield, and you went from thinking <6 months Fed balance sheet portfolio duration, to realizing 6.5 years...Small steps.

So, which scenario do you want me to walk you through, either the sudden need for the Fed to tighten to 3% in less than a year, OR, the inverted yield curve (because, well, you see, it gets a little complicated, because one is kinda the opposite of the other).

I like the intellectual curiosity though, you are going to make a great MMT proponent some day.





Matt Franko said...

Well they are NOT going to tighten that much this is my point... they CANT...

Here this is from just today you can see the rationalization:

http://finance.yahoo.com/news/feds-williams-us-doing-fine-110845729.html

"A member of the U.S. central bank's monetary policy committee told CNBC he believed global developments are preventing the world's largest economy from returning to normalized interest rates."

They are now making shit up out of whole cloth and blaming it on "global developments" ????

Were not going to return to normalized rates because the Fed would risk bankrupting itself... this is my larger point...

If things start to get going this year they will be in big trouble as they wont be able to raise at a rate greater than what their portfolio will yield...

If you want to walk me through something, walk me through the process whereby they can raise FASTER than the rate at which their portfolio yield can exceed their ior payments...

All of this is a NEW phenom as they NEVER have had to raise before when they owed ior... they are in uncharted waters...

And savers are suffering because of it...

Edward Delzio said...

Matt, a main contributor to an MMT website thinks the Fed risks running out of dollars...Do you not see the irony there?

Tom Hickey said...

I think his point is that they think they can run out of dollars.

I suspect that in the end it is about preserving central bank independence. They are not going to do anything they think could jeopardize that, and incurring negative equity might.

Edward Delzio said...

Tom, Agreed that the Fed does not want to jeopardize independence, but the lender of last resort, the same guys that provided currency swap lines to the world's central banks, a single Fed program during the crisis that reached $600T at its peak, thinks it will run out of dollars making an annual $12 billion IORR payment(?) The Federal Reserve Bank, the central banking agent of the United States Treasury thinks it could ever incur 'negative equity' of US Treasury bonds(??)

His point, in his words, is that the Fed "would risk bankrupting itself", and also, in his words, that "US homeowners are footing the bill" for the Fed "to operate" (Taxpayers are financing the gov't)...

Now, if that was coming from anywhere else, I wouldn't waste my time, but from an MMT website contributor?

I know you're trying help...me too actually...I like the website too.

Neil Wilson said...

Generally you would do an in-specie dividend payment. Transfer the bonds to the Treasury, which wipes them out and then simply do a QE expansion to repair the balance sheet.

So where you had $2T of Treasuries you now have $2T of 'Other Assets' - which is just the contingent asset a central bank is endowed with - the source of liquidity.

I can't see how getting rid of them puts downward pressure on rates. They are already out of circulation and largely inert. Unless you think the 'debt-ceiling' nonsense has such an effect on expectations.

Edward Delzio said...

Neil, That's a great idea, a simple transfer to Treasury and in one fell swoop the Treasury double entry (write-down) for the UST bonds is done...

Meanwhile, over at the Fed, I may be wrong, but I strongly feel we don't need to 'put back' $2T in UST bonds to repair anything because we are only redeeming the LSAP excess, and not the pre-crisis level (which was plenty sufficient for routine open market operations, 'endowed liquidity', etc). Besides, you'll still have plenty of MBSs ($1.8T) lying around to dump on the market in case of emergency (too much economic growth). My vote this should be like a Fed-first, sped-up normalization, starting with UST bonds, and we want those UST bonds on the Fed balance sheet to get back to pre-crisis levels (part of the perception to Americans and the world sitting on piles of cash that all systems here are a go).

Finally, you're right, rates won't go down in this 'QR'. I was just guessing an initial buy the rumor (on the announcement of a sudden decrease in supply) but next they'll sell the news and rates will head up sharply (realization that several birds are killed with one 'QR' and the US economy is in a countdown for launch).

Thank You...Much Appreciated

Edward Delzio said...

Neil, I just got what you meant by a $2T balance sheet repair. Yes, we need another $2T asset on the Fed's balance sheet to replace the redeemed $2T UST, but instead of a QE expansion (bad optics IMO), how about: Treasury will create and transfer $2T 'other assets' to balance the Fed's books and to note for the record that it was the Treasury, after Congressional authorization, that 'printed' the money to pay for this redemption which offsets the reserves that the Fed printed without Congressional authorization to pay for LSAP to contain the financial crisis.

(?)