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During the Great Deflation Scare
of 2002 -- you remember, the brief interlude between the collapse of the
stock market bubble and the rise of the housing bubble -- researchers at the
Fed authored a series of papers exploring "unconventional measures".
These studies and other musings were reported in speeches by Bernanke and
papers published on various regional Fed web sites (in an earlier piece,, I
identified 14 such papers and speeches). These so-called
"unconventional" measures consisted of the outright monetization of
assets and, failing that, various bizarre money-crankish schemes for debasing
the dollar.
It looks as if these plans, and
other similar ones developed since then, are now being put into effect. Last
week, the Wall Street Journal reported (on their paid site) Fed Weighs Its
Options in Easing Crunch.
WASHINGTON -- The Federal Reserve is
considering contingency plans for expanding its lending power in the event
its recent steps to unfreeze credit markets fail.
Among the options: Having the
Treasury borrow more money than it needs to fund the government and leave the
proceeds on deposit at the Fed; issuing debt under the Fed's name rather than
the Treasury's; and asking Congress for immediate authority for the Fed to
pay interest on commercial-bank reserves instead of waiting until a
previously enacted law permits it in 2011.
So far, the Fed has not been
monetizing assets as such. They have been taking distressed debt off the
balance sheet of banks and then selling an equal amount of US Treasury
securities from it's own balance sheet. (However, Steve Waldman on his blog
has called this covert
nationalization; and the (UK)
Telegraph has reported that the Fed may consider outright nationalization
of insolvent banks.)
But if you accept the mainstream
analysis, the Fed is not increasing the monetary base because, on net, they
are purchasing and selling the same quantity of securities. The article
devotes considerable space to the possibility that the Fed might run out of
assets on its own balance sheet, and what steps can be taken to prevent this.
But why? The Fed does not want
the Fed Funds rate to drop, as would happen if it made net purchases of
securities from the banking system. But, in the end, the Fed does not need to
swap assets for assets. In can simply purchase distressed or worthless assets
and write a check on itself to pay for it. And so, further down:
Fed officials also are
investigating the feasibility of the Fed issuing its own debt and using the
proceeds to purchase other assets or make loans. It has never done so; the
legality is unclear. Some foreign central banks, such as the Bank of Japan,
do so.
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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