Sunday, July 3, 2011

A proposal by Ron Paul that even Dean Baker likes

Read Dean Baker' analysis here.

An excerpt: "Unlike the debt held by Social Security, the debt held by the Fed is not tied to any specific obligations. The bonds held by the Fed are assets of the Fed. It has no obligations that it must use these assets to meet. There is no one who loses their retirement income if the Fed doesn’t have its bonds. In fact, there is no direct loss of income to anyone associated with the Fed’s destruction of its bonds. This means that if Congress told the Fed to burn the bonds, it would in effect just be destroying a liability that the government had to itself, but it would still reduce the debt subject to the debt ceiling by $1.6 trillion. This would buy the country considerable breathing room before the debt ceiling had to be raised again. President Obama and the Republican congressional leadership could have close to two years to talk about potential spending cuts or tax increases. Maybe they could even talk a little about jobs".


Tom Hickey said...

Getting closer to realizing that bonds are operationally unnecessary and that the interest payments constitute a subsidy for occupying a risk-free parking place, courtesy of government largesse. Such a deal.

wh10 said...

It's mind-boggling to me that they can be this close to understanding it, as you say, but STILL not get it. How is that possible?

The amount of flawed, neoliberal thinking regarding reserves and loan potential is so frustrating in that article.

Wish I could leave a response without paying.

beowulf said...

That is a very good idea. It does have me thinking about another way for Tsy to recapture seigniorage from banks while still leaving Fed free to set policy rate above 0.

Since the Fed already refundsthe debt service paid on Fed-held Treasuries, simply widen their duty (whether by a one line amendment to the FRA or “voluntary” Tsy-Fed agreement) for the Fed to refund ALL debt service, that is, current Tsy rebate PLUS current net interest… might as well throw in IOR as well (which is currently charged back to Tsy by reducing interest rebate).

Whether the Fed levies a bank asset tax, locks interest rates at 0, hikes transaction fees, issues Fed bonds and/or simply “prints” the money is up to the Board of Governors. They can arrange it however they like as long as every year the Fed transfers to TGF an amount equal to debt service cost.

Craig Austin said...

"Getting closer to realizing that bonds are operationally unnecessary and that the interest payments constitute a subsidy for occupying a risk-free parking place"

sure it's a free lunch but the populace is still left with the fear that the issuer debt is a burden. the anxiety and stress that "debt" conjures up in peoples mind causes all rational thought to go out the window.

until the bubble is popped everyone is running scared and and willingly submits to all the fear mongering of the right.

2 paradigm within the physical world just like there are 2 paradigms with in the monetary world. issuer debt vs. user debt.

MMT needs to connect the dots for people

Calgacus said...

Yes, fine idea, interesting comments at TNR too. Topic will probably show up at Beat the Press, so us cheapskate commenters can respond there. The blog seems to be eating all my comments, hope this goes through.

Craig Austin said...


i had the same problem last night. couldn't get my comments to post...although i was trying to cut and past. i cleared my cache and it sorted everything out.

MamMoTh said...

Could the Fed wipe out its assets in government bonds with no corresponding decrease in its liabilities?

paul meli said...

"Could the Fed wipe out its assets in government bonds with no corresponding decrease in its liabilities?"

Could the Fed print money (via keystrokes) without a corresponding increase in debt via Treasuries?

I mean this in an operational or accounting sense, current law notwithstanding.

MamMoTh said...

Keystroke operations by the Fed leave its balance sheet balanced as far as I understand.

Wiping out its government debt assets is the same as having provided an overdraft to the Treasury when that debt was issued right? Although it is the Fed's balance sheet that takes the hit.

paul meli said...

Seems to me the Fed Balance Sheet has no real-world meaning.

It's just a way to keep score of the private-sector economic game.

The powers that be have invented fairy-tale constructs to make the Fed's operations look like a household balance sheet.

That way the taxpayer is always on the hook to repay money that wasn't really borrowed in the first place.

The game is rigged and I believe it's on purpose.

The Administration can't be stupid, so that leaves the alternative.

Tom Hickey said...

I recall reading, don't remember where, that when Nixon unilaterally shut the gold window, effectively putting the US on a fiat regime, there was a deal brokered with the financial sector that deficits would be offset with tsy issuance and tsys would auctioned into the private sector, allowing bond vigilantes to control yields and therefore the inflation premium. As a result the no Treasury overdraft at the Fed rule was established, along with the Fed being prohibited to trade reserves to the Treasury in exchange for tsys.

That system is still in place and it is a reason that Bill Gross, for instance, is so upset by the Fed's grabbing the reins to influence the yield curve through QE. He is especially upset at the idea that the Fed would target price and let quantity adjust, which is what QE3 expected to look like if it comes to pass. This essentially short-circuits the purpose of bonds in the minds of bond vigilantes.

beowulf said...

"The game is rigged and I believe it's on purpose.
The Administration can't be stupid, so that leaves the alternative."

Nah, they're stupid AND corrupt. Its like William S. Burroughs said, "The rulers of this most insecure of all worlds are rulers by accident. Inept, frightened pilots at the controls of a vast machine they cannot understand, calling in experts to tell them which buttons to push."

beowulf said...
This comment has been removed by the author.
beowulf said...

You know on second thought, this is a really dumb idea. How exactly are the banks supposed to back FRN with assets if said assets are ordered burned?

I understood why Ron Paul would think dramatically disrupting a longstanding banking practice for the sake of an unconstitutional debt ceiling law a good idea (heightening the contradictions and all that) but Deano, not so much. If Congress wants to take action, it could simply exclude Fed-held debt from the ceiling.

Of course Geithner could just mint jumbo platinum coins and buy back the debt (the coins would then be held as the necessary assets) but I fear that solution, as JK Galbraith would say, is so simple it repels the mind.

Tom Hickey said...

The asset backing for FRN (paper) now is tsys (paper). What sense does that make? These are just tokens for fictitious accounting. Soon it will all be digital anyway and then both currency and its backing will be "in the clouds" somewhere, where much of it already is. Maybe platinum coins as token assets would make some people feel safer fro some strange reason.

Ryan Harris said...
This comment has been removed by the author.
googleheim said...

Yes, coins in the hands of real people and not digits in the clouds would make people feel much better especially since the digits in the clouds and "don't worry about it, it's all in the MMT clouds" or what have you, are not very tangible since we have a 2 party system. The party not in power always feels insecure and the coins are more democratically tangible since they have their check N balance to the regime du jour.

Finally, having a second tax form which allows you to indicate and delegated where your tax funds go would be the ultimate in democracy.

The problems of all these economic titrations is the unfairness of the political system in 4 or 2 year intervals between opposing parties.

googleheim said...

and Ron Paul evidently likes the Fed afterall as well as mmt maneuvres ?

Senexx said...

Bill Mitchell discusses it here:

wh10 said...

How does the Fed acquire treasuries to engage in repos and other OMOs with banks? It obviously acquired a lot from QE but that is not normal policy. It seems extinguishing this debt would deplete Fed holdings of tsys in which to engage OMOs to defend the target rate. I am probably not realizing something though...

Of course they could just pay IOR to control rates, but they still have one less tool to control rates. Also, when they pay interest on reserves, what is the accounting entry?