Saturday, March 28, 2020

Congress Goes Big, States Play a Vital Part in Recovery, and a Dollar Crunch Takes Hold — Carl R. Tannenbaum, Ryan James Boyle, Vaibhav Tandon

In the medium term, the U.S. government has now joined other countries in putting Modern Monetary Theory into operation. The lines between fiscal and monetary policy have been blurred: the Department of the Treasury is providing $450 billion in seed capital for the Federal Reserve to use as leverage to buy loans and investments. These purchases will be designed to help the economy and the financial markets recover.
Reciprocally, the Fed will undertake open-ended quantitative easing, which will absorb a good fraction of the Treasury bonds that will be issued to pay for the congressional stimulus program. This will help interest rates remain in reasonable ranges.“Modern Monetary Theory has been made operational.”
Purists will certainly feel uneasy about this apparent compromise of central bank independence. But with interest rates at zero in most major markets, traditional levers of monetary policy have been exhausted. Financing fiscal efforts is the best way for central bankers to continue to pursue their mandates. And it is worth noting that central banks have historically played key roles in lending during periods of crisis.... 
Advisor Perspectives
Congress Goes Big, States Play a Vital Part in Recovery, and a Dollar Crunch Takes Hold
Carl R. Tannenbaum, Ryan James Boyle, Vaibhav Tandon of Northern Trust

4 comments:

Mike Norman said...

"Department of the Treasury is providing $450 billion in seed capital for the Federal Reserve to use as leverage to buy loans and investments."

This is absurd. What's the point of having a central bank when you treat it like an ordinary bank.

The Fed is not "capital constrained," and even if it were Congress could add a small change in the wording of the Federal Reserve act allowing the Fed to run with negative equity. As it is there is no stipulation in the Act as to the amount of capital the Fed must have anyway.

This is total bullshit. That $450 bln (Kudlow's brilliant idea) could have been used to send $1500 checks to ever person in the US.

Matt Franko said...

“ As it is there is no stipulation in the Act as to the amount of capital the Fed must have anyway. ”

Yes there is mike it is 6.8b...

Peter Pan said...

At least they're not calling it "socialism"...

Matt Franko said...

Here:

"Limitations On Surplus Funds.
In General. The aggregate amount of the surplus funds of the Federal reserve banks may not exceed $6,825,000,000.
Transfer To The General Fund. Any amounts of the surplus funds of the Federal reserve banks that exceed, or would exceed, the limitation under subparagraph (A) shall be transferred to the Board of Governors of the Federal Reserve System for transfer to the Secretary of the Treasury for deposit in the general fund of the Treasury."

they have to work to maintain their Residual (A-L) at +$6.8B...

If it gets much more than that they have to make periodic USD Asset transfers into the Treasury General Account...

And these journos are incorrect to call it "leveraging"... the 400B is a Treasury guarantee against loss...

iow Fed can go out and buy up to $4T of financial assets (at reasonable prices) and then if those assets drop in value by 10% the Treasury will cover it....

so Fed can maintain the +6.8B of Residual at all times...

In Accounting Science, the numbers for balances are positive numbers...

We dont have to screw up the whole Accounting Science Discipline because Liberal Art Economics Discipline thinks "were out of money!" and is too stupid to understand standard Accounting...

the Fed is charged by Law with maintaining their Residual at +$6.8B... so that is what they do...