March 03, 2013

Quantitative Easy Street

Actually, who cares about the cliffhanger finish?  Leave Dudley and Snidely to their fate.  The Bernank is not going to "unwind" the Fed balance sheet; it will swell to about $4 trillion over the next year, and then the Bernank will either decide to keep playing the same game (which is not doing much for the economy), or he'll knock it off.  The assets on the Fed balance sheet, for which it paid nothing, will "mature" and die in place.  I don't know what happens to a Treasury bond when it matures as a Fed asset.  Let's suppose we're dealing with five-year bonds with a value of $10 billion; does the Treasury pretend to pay the Fed so the Fed can pretend to turn around and "remit" it to the Treasury, as it does with interest "payments?"  Does the answer to such a stupid question even matter?  Once you've entered a make-believe world of conjured money, it's ridiculous to impose "rules."  As for the mortgage-backed securities, these dodgy stacks of crap assets will either get paid or they won't (if the underlying properties are foreclosed or become worthless), but either way, the accounting entries on the Fed's books will simply decline to zero.  Until that happens, the Fed will keep passing along the payments to the Treasury, a nice stipend and indirect form of taxation, made especially convenient because the Fed paid zero for the right to this income stream.

The Fed doesn't really need to do anything with its cupboard full of assets, all paid for with the big blue sky, unless inflation begins ticking up.  There does not seem to be much danger of that currently. One might think of the American economy as a frail old man who has pneumonia but doesn't run much of a fever.  He simply lacks the vital force to generate one.  Similarly, ridiculously low rates on savings accounts and the pitiful return on passive investments generally are often blamed on the Fed, but I think The Bernank was right in his Senate testimony.  The economy is so weak (it was surprising to hear Bernanke admit that so candidly) that America's great slosh of liquidity just sits around like a stagnant pond (not Walden), and there's no particular reason that banks would pay you a lot of money for the privilege of warehousing money for you.

A thought experiment: the Fed could, I suppose, simply disburse this $85 billion it is hallucinating monthly to the American people.  Let us suppose that each of America's 300 million people were the recipients; that's $283 per month.  A family of four would receive about $1,132 a month.  That's a nice chunk o' change (h/t: Henry):  $13,500 a year.  Who couldn't use that these days?  If we want to revive the Planning & Tanning economy, isn't that a move that would jump-start the process?

I would surmise that the Money Printing Amen Chorus (MPAC) would scoff at such an unrealistic suggestion.  If the Fed is going to conjure up money, it must be paid only to Primary Dealers, those already fantastically wealthy financial institutions who act as the go-between in Treasury auctions, and the similar fat cat institutions (also mostly Primary Dealers) who sell stacks of crap assets in the form of MBS to the Fed.  The benefit to the general American commoner is "indirect;" trickle down, if you will.  The Bernank is supporting the housing market and is enabling huge deficit spending by the Congress, including various forms of public handouts.  That's how we get our cut.  The Fed can't just give us cash directly.  Well, in principle it could.  What could "ease" things more through Quantitative Easing than just putting us all on Easy Street?  The Treasury could even tax our Quantitative Easing payments, thus securing another income source.  Say they set that tax rate at 15%, sort of like an additional FICA.  That's $150 billion paid into the Treasury annually, enough to offset some of the deficit spending on Social Security and Medicare.  The commoners wouldn't mind that much.  These would be taxes paid out of money the Fed simply gives us.

The MPAC is beginning to squirm about now.  The problem with this idea is that, although it's a reductio ad absurdum, there isn't much difference between this approach and what the Fed is already doing.  The Fed thinks it has found a way to print money and yet control the inflationary effect; the problem is that in controlling the inflationary effect, nothing happens in the real economy because real Americans never see the money.  If you let real Americans have the money directly, you unleash inflation and it has real effects on the economy, and in time they become disastrous.

Meaning: money printing doesn't work because the only way you can do it is in a way that has no lasting effect.  It blows a few temporary bubbles, some more insiders get rich, and the rest of us continue to watch as our standard of living continues to sink.