« Assorted links | Main | How did Nazi fiscal policy work? »
Tyrone runs monetary policy
Tyrone barely knows enough technical macroeconomics to bark out an opinion, much less defend it or specify coherent policies. Nonetheless he suggested that I pass the following along to Ben Bernanke:
It seems there is not enough lending. People would lend more if interest rates were higher or at least I think I learned that in Econ 101. So let's raise interest rates. I've also heard we have banks buying T-Bills and the Fed and government buying claims to real businesses. Can that be true? Isn't that backwards? If they aren't working properly, why not just recall all the T-Bills? (Didn't General Motors do something like this once? It seemed to work out for them.) Then the banks would have to invest somewhere. Give a bonus to any bank that does something real. Let the others rot. (Tyrone then called up Trudie, who told him: "Have the Fed announce it will go massively short in the T-Bill futures market, sometime in the near future and without further warning. That would scare people out of government assets.")
What about that guy who set up the phony investment company? Can the Treasury make a new one of those, only bigger? He took money away from people and gave it to charities and the needy and the arts and higher education. That sounds like stimulus so why are we sending him to jail? Wasn't he ahead of the curve?
Why don't we increase the tax deduction for donations to any charity which manages to expand its spending on overhead or is the word infrastructure? For every dollar given, let the donor deduct more than a dollar from taxes. That'll get the money out of the banks of those rich people and into the hands of real Americans. Still, it's not as good as the phony guy who's been doing this for twenty years. I guess we're all trying to catch up to him. It seems he had help from his family but Bernanke does not. Makes all the difference.
Tyrone tells me, by the way, that soon he will try his hand at a restaurant review. It can't be any worse than this.
Posted by Tyler Cowen on December 17, 2008 at 07:04 AM in Economics | Permalink
Comments
Tyrone barely knows enough technical macroeconomics to bark out an opinion, much less defend it or specify coherent policies....
In case other readers didn't spend five minutes sifting through the links, I just discovered that Tyrone is Tyler's alter ego who has the opposite opinions of Tyler. I'm not sure if they fight each other while planning to blow up empty corporate buildings, though.
Posted by: Bob Murphy at Dec 17, 2008 9:18:12 AM
Is this a thread where we can discuss far out ideas on how to fix the economy? I think that we should make interest rates an imaginary number. You can't have a recession if you can't solve for xy.
Posted by: libfree at Dec 17, 2008 9:28:21 AM
I suggested about a year ago that, if we wanted to bring down treasury prices, we should put out a rumor linking the government to subprime mortgage loans.
I then forgot this idea until the FMs were nationalized and we started reading stories about widening CDS spreads on US government debt.
Posted by: dWj at Dec 17, 2008 9:39:58 AM
Bob, I don't think Tyrone has the opposite opinions as Tyler, he just places a higher probability (perhaps a vanishingly small one) on an alternative hypothesis.
That being said, I think I may like Tyrone's restaurant reviews better than Tyler's.
Posted by: Jeff H. at Dec 17, 2008 9:55:36 AM
So let's raise interest rates. [...] why not just recall all the T-Bills?
This policy has the virtue of bringing matters to head. Regarding the effects of these policies, I agree entirely with Bernanke.
I was getting tired of this whole slow-motion collapse anyway. It just gives Paulson, Bush, and Obama too much time to issue press releases.
Posted by: Garrett Schmitt [evil] at Dec 17, 2008 11:39:00 AM
Tyrone is pretty good at this.
http://www.stanford.edu/~johntayl/Mayekawa%20Lecture%20-%20Taylor.pdf
Posted by: Michael F. Martin at Dec 17, 2008 12:12:17 PM
What do we need Tyrone for when both Bush and Obama have been devoted to Madoffnomics?
Posted by: Steve Sailer at Dec 17, 2008 6:24:48 PM
Who is Tyrone? Does Tyler C. have a stalker?
Posted by: Tyrone at Dec 17, 2008 10:22:33 PM
Seriously, why don't they raise interest rates? It creates more investment/savings. I'm drawing a blank, but maybe if we had a fixed exchange rate currency, then there would be questionable evidence from 8 years ago that may backup increasing interest rates.
Posted by: brainwarped at Dec 17, 2008 10:30:01 PM
He's right about one thing: the Fed should be buying T-bills.
The Fed could print enough dollars to buy up enough US debt to stabilize the dollar and end deflation.
And how will they know when to stop so that inflation can be avoided? Simple.
Set the value of the dollar to however much gold its worth now. Buy debt when the dollar goes below it and sell it when it goes above.
Of course, the additional dollars seeping back into the economy won't loof as flashy or flagrant as the spending Obama is planning. But it will happen a lot quicker.
Posted by: Alan Brown at Dec 18, 2008 2:48:45 AM
If I'm not mistaken, the system works this way:
The funds rate the fed sets is the rate at which banks lend to other banks. Without the fed involved, the rate would currently be "high" because banks have been unsure about the solubility of other banks. When the fed sets a "low" funds rate, it is lending money to banks which banks can then use to lend to other banks. In other words, it is injecting liquidity (available cash) into the banking system, which makes banks more willing to make all types of investments.
If the fed were to set a "high" funds rate, it would be borrowing money from banks, which would remove liquidity from the banking system and thus discourage all kinds of investments.
In this context "high" means above what the market would decide by itself, and "low" the opposite.
I hope this clears things up, Tyrone!
Posted by: David Jinkins at Dec 18, 2008 4:35:12 AM
Gosh...Tyrone...wow,
Kind Regards,
Missmarketcrash
Posted by: Missmarketcrash at Dec 18, 2008 5:24:19 AM
The Fed has been injecting so much liquidity into the system for so many months now that bank CEOs should look like SpongeBob Squarepants.
Maybe they do. Where's all this liquidity going?
Posted by: ZBicyclist at Dec 18, 2008 9:58:43 AM
Where the money is going? This is how it works, according to a plumber.
Follow the flow...
Posted by: Massimo GIANNINI - M.G. at Dec 18, 2008 10:18:39 AM
The liquidity is being held. This is one of the first times that, in banks, the value of treasuries is greater then deposits.
"The funds rate the fed sets is the rate at which banks lend to other banks"
Not really, it sets the rate between the fed and the banks, the rate between the banks (LIBOR, which is just an average rate at which banks lend to each other) usually follows the fed rate.
Basically the Fed has decided that the only way to make all the debt that is defaulting actually serviceable is to make more dollars available and that debt cheaper. This should actually force people away from fixed income and into assets.
Posted by: rumbelings. at Dec 18, 2008 10:28:59 AM
Removing liquidity decreases investment? Plausible. What increases the incentive to invest? (1) Little liquidity, or (2)lots of liquidity?
(1) You would want to make sound investment decisions to increase wealth.
(2) You would make many investment decisions to increase wealth.
Which put us where we are today? BOTH. Periods of low liquidity still see investment, but with high liquidity today, we see very low levels of investment. I think both work, but low liquidity seems like it has less repercussions.
Posted by: Brainwarped at Dec 18, 2008 5:30:12 PM
maybe we should invent a kind of money that "dissolves", in that it disappears when it comes in contact with excess liquidity.
Posted by: babar at Dec 19, 2008 12:03:58 PM
Unless most of the posters on this thread are assuming their own Tyronian alter-egos, I suspect that some lessons on how the money market works could be helpful:
- When the Fed buys bonds (or any asset) from private citizens, it creates money. (oppose of what Alan Brown says). Think of the Fed as letting a private citizen "cash in" their bonds. Technically the Fed may ask the Treasury for an IOU on these funds but the bottom line is that new money is being created.
- Creating more money (relative to demand) leads to currency depreciation, keeping your currency weak. This is because your inflated money now buys fewer goods than before so will exchange at a lower rate.
- If you have a fixed exchange rate currency, then you can't use monetary policy at home because your monetary policy is a slave to exchange rate movements - you must either create money or horde money to maintain the desired currency peg. This is China and India's problem. They both have 15% inflation because they are trying to keep their currency exchange rates weak.
- Pegging currency to commodities like gold is a solution to a problem that only makes things worse. The motivation is to take monetary supply out of governments hands to avoid the worst man-made distortions, but we substitute natural disasters because money value is now tied to something that is not at all under the control of governments: a commodity. The price of gold fluctuates a lot, would you like your dollars to move in the same direction?
- The US Fed Funds Rate (re: David Jinkins) is just a "target rate" that the Fed hopes to achieve but it's not something that it can just "set". Banks lend Federal Reserve balances to each other in a completely private market which the Fed does not control. But they try to make supply-demand for money line-up to achieve some "target" rate.
- 99% of money supply is created by Fed Open Market transactions - buying and selling treasuries. This is different than in Europe where lending from the Central Bank to private banks is the primary mechanism.
Posted by: KMC at Mar 15, 2009 2:40:28 PM
libfree,
Hey, I like your suggestion about imaginary interest rates. After all, we have now seen actually negative
nominal rates recently. I think we could go further. Not only allow imaginary rates, but allow ones that
are sums of imaginary ones and real ones, that is, ones that are complex numbers. I would not be surprised
if these might prove useful in allowing a resolution for the crisis in the exotic derivatives markets? Heck,
Tyrone might even approve of this, although I suspect his alter ego would consider to be a bit too far out...
KMC,
Since you are lecturing everybody on how things work, the "they" who "try to make supply-demand for money
line-up" is the New York Fed with its daily interventions into the money markets, mostly the repo one to
be more precise, with those open market transactions no actually creating the money supply, but altering
the monetary base, thus leading to changes in the money supply as the banking system responds to those
changes in the monetary base.
And, you are not right about the ECB. While in the past European central banks, including the Bank of
England, were more likely to operate through their discount window, as did the Fed in the past, they now
operate much more like the Fed, although the open market ops are carried out by each of the individual,
still existing central banks, in coordination with instructions and feedback involving the ECB.
Posted by: Barkley Rosser at Mar 15, 2009 3:55:28 PM
