The Covid-19 pandemic greatly increased the scope and power of the Federal Reserve. The Fed created a number of new emergency lending facilities, which allowed it to make off-balance sheet loans and buy the debt of corporations and municipalities through special purpose vehicles backstopped by the Treasury under the CARES Act. Meanwhile, the Fed's large-scale asset purchase program, known as quantitative easing (QE), was put on steroids after the pandemic struck in March 2020. The Fed has been purchasing longer-term Treasuries and mortgage-backed securities amounting to $120 billion per month, pushing the size of its balance sheet to an astonishing $7 trillion.Of course, the pandemic and lockdowns, which put the economy in a downward spiral, justified pumping liquidity into the financial system. But the shift toward allocating credit and the drift into fiscal policy have put the Fed's independence and credibility at risk. Indeed, those actions have set a precedent for the future, making it difficult for the Fed to normalize monetary policy and adhere to its primary function of providing sound money and a stable growth of nominal income.This conference's focus is on digital currency. In my remarks today, I will paint with a broader brush and briefly discuss the lessons I think the Fed can learn from the pandemic, including why it is important to leave entrepreneurs free to experiment with digital currencies and why any credible monetary system ultimately needs to be based on a genuine rule of law. I shall begin by arguing that while Covid-19 has been costly, both in terms of human and economic losses, it has provided for deregulation and innovation that will benefit society.
[...]I should say that there was no greater single authority who impacted our policy deliberations when I served as chairman of the House Financial Services Committee than John Taylor. [...]the balance sheet can certainly be injurious to future taxpayers, and it is one more way that the Fed's independence could be compromised. [...]when the 2008 financial crisis occurred, the Fed asked for the power to pay interest on excess reserves. The CBO can't foresee a year in the next decade where the national debt won't rise faster than national income, which is a frightening prospect. [...]the Fed has a massive balance sheet with the assets it has bought, and it has borrowed the money from commercial banks to pay for those assets.
Negative interest rates were once seen as impossible outside the realm of economic theory. However, several central banks have recently adopted negative policy rates. The Federal Reserve is coming under increasing pressure to follow suit in the wake of the coronavirus crisis. This paper investigates the actual effects of negative interest rates using the Swedish experience from 2015 to 2019. The Swedish Riksbank was one of the first central banks to introduce a negative interest rate in 2015 and the first central bank to abandon a negative rate in 2019. We find that negative rates had a modest effect on consumer price inflation due to globalization, but significant effects on the exchange rate and domestic asset prices, thus fostering financial imbalances. We conclude by discussing the implications of our results for larger economies such as the United States. (Less)
Cato Journal, Vol. 40, No. 1 (Winter 2020). Copyright © Cato Institute. All rights reserved. DOI:36009/CJ.40.1.3. Michael D. Bordo is Distinguished Professor at Rutgers University and Distinguished Visiting Scholar at the Hoover Institution. Mickey D. Levy is Chief Economist for the Americas and Asia at Berenberg Capital Markets. Both are members of the Shadow Open Market Committee (SOMC). The authors thank Andrew Filardo, Owen Humpage, Bernie Munk, and George Shultz for helpful comments. An earlier version of this article was presented at the SOMC’s September 27, 2019, meeting. Tariffs and Monetary Policy: A Toxic Mix Michael D. Bordo and Mickey D. Levy
Our work on "reverse" monetary policy transmission is the first analytic work on how transmission takes place from collateral in the market to short-term market rates (Singh and Goel 2019) The use of long-dated securities as collateral for short tenors-for example, in securities lending, derivatives, repo markets, and prime brokerage funding-also impacts the risk premia (or moneyness) along the yield curve In this article, we show that transactions using long-dated collateral, post-Lehman (i e , following the bankruptcy of Lehman Brothers on September 15, 2008), are fewer, and have adversely impacted the transmission to short-term market rates Our results suggest that the unwind of central bank balance sheets will likely strengthen the monetary policy transmission
Perhaps it's the treatment of ethnic or religious minorities, such as the Uighurs or Tibetans or Christians;maybe it's the crackdown on protests in Hong Kong and failure to uphold the "one country, two systems" principle;or assertiveness in territorial disputes;or censorship;or protectionist trade practices;or intellectual property theft;or cyber-hacking;or spying;or most recently, being slow to disclose the emergence of the coronavirus and engaging in a propaganda war regarding who is at fault [ ]if the general sentiment in the United States is becoming anti-China due to Chinese government behavior (with a big assist from prodding by certain politicians and assorted China hawks in Washington), as it has been (Devlin, Silver, and Huang 2020), the small community of foreign policy experts who have influence over these issues will have a good deal of power to push an aggressive response toward the Chinese government [ ]the Chinese leadership seems intent on destroying the "one country, two systems" principle that it agreed to for the governance of Hong Kong [ ]the administration has been countering China's aggressive actions along the Taiwan Strait by sending warships and aircraft to the region (Doornbos 2020;Ali 2019) and approving more arms sales to Taiwan to show its support (Browne 2020)
Negative interest rates were once seen as impossible outside the realm of economic theory. However, several central banks have recently adopted negative policy rates. The Federal Reserve is coming under increasing pressure to follow suit in the wake of the coronavirus crisis. This paper investigates the actual effects of negative interest rates using the Swedish experience from 2015 to 2019. The Swedish Riksbank was one of the first central banks to introduce a negative interest rate in 2015 and the first central bank to abandon a negative rate in 2019. We find that negative rates had a modest effect on consumer price inflation due to globalization, but significant effects on the exchange rate and domestic asset prices, thus fostering financial imbalances. We conclude by discussing the implications of our results for larger economies such as the United States.
The U.S. Postal Service (USPS) is a large business enterprise operated by the federal government. It has more than 600,000 employees and more than $70 billion in annual revenues. Revenues are supposed to cover the postal service’s costs, but mail volume is plunging, and the USPS has been losing billions of dollars a year for more than a decade. The USPS has a legal monopoly over letters and mailboxes. That policy is an anomaly because the federal government’s general economic stance is to encourage open competition in markets, yet the USPS monopoly prevents entrepreneurs from entering postal markets and trying to improve quality and reduce costs for consumers. While mail volumes have fallen, the USPS has expanded its package business. But it makes no sense for a privileged federal entity to take business from private, taxpaying companies in the package industry. Postal and package markets are evolving rapidly, and the goal of federal policy should be to create a level playing field open for competition and innovation. Europe is facing the same challenge of declining mail volume, and it has focused on opening postal markets and privatizing postal providers. The U.S. Congress should follow suit by privatizing the USPS and opening postal markets to competition. These reforms would give the USPS the flexibility it needs to cut costs and diversify, while providing equal treatment to businesses across postal and package markets.
During the last few years an apparently new and revolutionary idea has emerged in economic policy circles in the United States: “Modern Monetary Theory” (MMT). The central tenet of this view is that it is possible to use expansive monetary policy—money creation by the central bank (i.e., the Federal Reserve)—to finance large fiscal deficits, and create a “jobs guarantee” program that will ensure full employment and good jobs for everyone. This view is related to Abba Lerner’s (1943) “functional finance” idea, and has become very popular in progressive spheres. According to MMT supporters, this policy would not result in crowding out of private investment, nor would it generate a public debt crisis or inflation outbursts.
The Federal Reserve started to pay interest on bank reserves during the Great Recession in 2008. These payments set an effective floor to the fed funds rate and allowed the Fed to determine shortterm interest rates with great precision. Together with a greatly expanded balance sheet, the interest rate paid on reserves became the primary monetary policy tool by which the Fed implemented its monetary policy decisions during the last decade. But the payment of interest on bank reserves had several side effects that were perhaps not fully recognized at the time that the decision was made. By paying interest on reserves, the Fed not only contributed significantly to the earnings of its member banks, but also influenced the size of the income transfers that the Fed regularly makes to the Treasury. Consequently, the effects of monetary policy actions became directly linked to the operating revenues of the federal government and by this to fiscal policy. As the Fed increasingly influences important fiscal variables, such as the size of the federal deficit, there looms the danger that politicians will attempt to influence the monetary policy actions of the Fed, thereby endangering the independence of the institution.
In the absence of a monetary rule, a central bank is vulnerable to politicization. In the case of the United States, Congress delegated monetary authority to the Federal Reserve in 1913 and has increased the scope of that authority over time, especially following crises. However, Congress has never enacted an explicit rule to guide Fed policy, and it has used the Fed as a scapegoat when things go awry. By law, the Federal Reserve has a triple mandate to “promote effectively the goals of maximum employment, stable prices, and
MMT has become popular with Green New Dealers because it claims to remove or at least loosen traditional constraints on government spending. Although MMT makes much of its preferred way of looking at the process of producing money, it does not credibly reveal more scope for deficit spending without inflation. Its proposal to use taxation as a monetary policy instrument ignores decades of efforts to separate monetary policy decisions from fiscal/spending decisions in light of
he Chinese renminbi (RMB) has come a long way in a short period. It was only in the early 2000s that the Chinese government began the process of gradually opening up the country’s capital account, allowing financial capital to flow more freely across its borders. This process was very gradual at first and picked up pace only a decade later. Over the last few years, the RMB’s progress as an international currency has been remarkable in some aspects. However, the currency’s seemingly inexorable progress stalled in 2014. Starting in mid-2014, the Chinese economy seemed to be losing steam, domestic and foreign investors became less confident about the stability of its financial markets, and, to compound these problems, China’s central bank made some missteps as it attempted to make the currency’s value more market determined.
