Great Leap Forward


In a surprising turn of events, the Fed announced this morning that it is ramping up its quantitative easing policy. As you know, it has been buying $85 Billion in bonds every month, boosting its balance sheet above $3.3 Trillion. However, that has had no perceptible impact on the economy, which is slipping back toward recession.

Chairman Bernanke insisted “It is time to throw out all the stops. We’re going for broke. We will buy anything for sale. You name it, we’ll buy it.”

He admitted that the Fed has been secretly buying equities through its dealer banks. QE4 is going straight to Wall Street. Bernanke argued “Look, if several Trillion dollars of Fed purchases of stocks won’t push the Dow to 45,000, I don’t know what would.”

Bernanke said the Fed will also stand by to purchase homes. He’s heading to Detroit tomorrow to see what’s for sale.

The NYFed is looking to buy the Brooklyn Bridge if anyone knows its current location. The Dallas Fed is bidding for the Cowboys Cheerleaders. The San Francisco Fed told the Humboldt County Pot Growers Association that it would only buy medicinal grade while it awaits a legal opinion determining whether its independence includes immunity from prosecution for felonious trafficking.

Apparently misunderstanding Bernanke’s directive, the KC Fed has offered to sell the Royals.

When questioned where the Fed would find the money to fund QE4, Bernanke responded: “We learned from the first three phases that we can’t run out. Trillions, Quadrillions, Whatever! We’ve got the Magic Porridge Pot. When we want more, we just keystroke it.”

He refused to put time limits on this new phase of QE: “No, it will never end. We’re going to buy everything. The whole damned planet. Some stars, too. I want to buy some Black Holes. Those things are dense; you can stuff a lot of money into them.”

Reflecting on a world in which the Fed owns everything, Bernanke said “Yes, that’s the logical conclusion. The end game. And here’s the best thing about it: we’re independent. We should have thought of this a long time ago.”

In other news……

This morning I saw a very nice quiz concocted by a financial markets guy. I don’t want to get him in trouble so will borrow heavily from him but without attribution. If you can get this right, then you know why Quantitative Easing One, Two, and Three is a big bunch of baloney.

Consider the following thought experiment. These are the scenarios; what is the expected result of each?

A. The Treasury decides that it will fund itself 30% more in Overnight Bills and reduce bond issuance across the curve.

B. The Fed announces it will increase QE by 30% (it will remit the net income of this activity back to the Treasury)

C. Congress announces a new tax on all passive income from USTreasuries, to holders both at home and abroad (ie Central Banks), for all new-issue USTreasuries. The tax will be equal to 30% of the return in excess of the fed funds rate

D. Treas Secty Lew pre-announces that we will ‘selectively default’ and apply a haircut of 30% on all future Treasury coupon payments of new issues in excess of fed funds rate.

What will be the likely effects of each policy? Don’t peak!


OK here is what the markets guy (rightly) says:

Here’s what’s funny. Most intelligent market participants will say things like:

A. Stocks down a few percent on fear of US debt downgrade. Economy slightly weaker or unchanged.

B. Stocks up 5-10% and economy grows another 1% for 1-2 yrs; monetary stimulus.

C. Stocks down 5-10% on tax hike (like last year) that maybe corrects. Economy slows 1-2% for a year or so because it’s a tax hike (ie fiscal consolidation).

D. Stocks down 80% and we go into a great depression on steroids. All investment dollars flee the US. I can’t tell you what happens next because my Bloomberg account gets shut down. They might even declare an Internet Holiday.

Here’s what’s craziest: THESE ARE ALL THE SAME THING. The name and the processes are different, the OPTICS are different, but the net is the same. There’s the government and there’s everyone else. The government either pays more out – in interest payments or transfer payments or vendor payments, or it takes back more in taxes or default or interest ‘savings.’ Everything the government net gets in ‘revenue’ the rest of the world loses in income. Everything the government dissaves (deficits) the rest of the world saves. Equal and opposite.

Now, there’s someone who understands monetary and fiscal policy! It’s MMT all the way.

One can only hope that someday, somehow, some way, the Fed will eventually understand what the heck it is doing.

Buying Treasuries at best has a negative impact on the economy as it reduces interest income. Buying toxic waste MBSs off the balance sheets of banks might reduce their balance sheet insolvency, but does nothing to stimulate the economy. (It also teaches banksters the wrong lesson: Uncle Ben will always clean up your mess, so make another one!)

If the Fed really did start buying houses, that could help. If it bailed out indebted households that almost certainly would help. If it started hiring the unemployed, we could end this crisis in about a week. Buying bridges, cheerleaders, or black holes would be a much less efficient way to stimulate the economy, but one could envision transmission mechanisms that would allow that to work, too.

Not that I think the Fed is actually going to do that. Because it doesn’t know what it is doing.



SteveMay 14th, 2013 at 7:52 pm

Of course you could create a National Credit Office and pass an amendment to the constitution mandating a citizen's dividend and a compensated retail discount then effective demand and inflation would never be economic problems again….because the individual would be guaranteed his proper due and inflation would be mathematically impossible. That way instead of otherwise trying to tweak or balance an unbalanceable system forever you'd be dealing terminatedly with the underlying factors that make the financial/monetary system unstable.

That was suggested over 90+ years ago by C. H. Douglas and his Social Credit.

L. Randall Wray L. Randall WrayMay 15th, 2013 at 1:07 am

Steve: Yep he was wrong then and still wrong now, but at least he was trying. I’d give him 3.5 stars.

grahamnewman1929May 15th, 2013 at 1:42 am

When the fed buys back the treasuries that have been issued aren't they simply reversing the mopping up of the govt spending and thus putting dollars back into the system?

Randy, for those of us still working through MMT could you give a re-fresher on the feds buying operations. I understand (I think) the relationship between the fed and the banks but what about the intersection with fiscal policy?

Also, Hy used to speck of the discount rate applied to future cash flows on investments or marketable securities….if the fed successful in depressing longer term rates would this not boost equity prices and thus hope as hy would have predicted to increase investment spending to capture the arbitrage between market prices and the investment?

Thanks….glad to have your perspective and was a minsky summer school student.

grahamnewman1929May 15th, 2013 at 1:52 am

When the fed buys back the treasuries that have been issued aren't they simply reversing the mopping up of the govt spending and thus putting dollars back into the system?

JMarcoMay 15th, 2013 at 3:46 am

Can the Fed finance highway construction? Why not have the Fed start financing large highway construction and bridge repairs projects with special emphasis on the states with the largest unemployment rates. They could offer the states financing based on current short term fed rates for say ten years to be followed by long-term fed rates for next 10-20 yrs.

edwardMay 15th, 2013 at 4:15 am

This is a joke right? This article is opposite of everything in the news and where are these quotes from?

NeilWMay 15th, 2013 at 6:51 am

Isn't it the case that when the central bank starts buying things that were not initially issued by the government sector it is really conducting fiscal policy by stealth.

So where's the political debate and decision by our elected representatives that it is better to use government funds to buy houses or mortgage assets than to buy food to give it to the poor?

At what point is it going to become clear that our system of government has become (or arguably returned to) a technical autocracy?

I think this has gone on far enough. I'd like my democracy back.

L. Randall Wray L. Randall WrayMay 15th, 2013 at 11:50 am

JMarco: Kelton and I worked with Kenny Bohnsack to develop a proposal for Rep Ray LaHood a decade ago along those lines…..

Warren Miller, CFAMay 15th, 2013 at 12:57 pm

Hmmm. Does "MMT" stand for Modern Monetary Theory. . .or Multiple-Mirror Telescope?

simple mindMay 15th, 2013 at 3:25 pm

I'd like Bermanke to buy my home back, which was under water by about $70,000 when I had to sell it two years ago.

GregMay 15th, 2013 at 6:52 pm

I'm still a little confused by the thought exercise. While C and D seem the same to me, I don’t see it for A and B.

In scenarios C and D, it seems to me that merely coupons are reduced in the future, which should have no effect on yields. That is, people will pay less for bonds with lower coupons. Zero-coupon bonds would not be affected at all. To raise X dollars in borrowing, the government sells a greater number of cheaper bonds, but X dollars are still raised. The money going from the government to the rest of the economy stays the same, yes?

In scenario A, the Treasury pays out less as it borrows increasingly at the overnight rate. Moreover, yields on higher maturities might go down because of the reduction of supply, which would make it cheaper for the Treasury to borrow at higher maturities as well. Keeping federal spending unchanged, the net result is less money from the federal government to the rest of the economy in the future.

In scenario B, the Fed buys up bonds and reduces future borrowing costs for the Treasury as net income from QE is remitted to the Treasury. Federal spending is unchanged. This still results in a short-term outflow of money from the government to the rest of the economy, yes? That outflow may just gather dust in the form of yet more excess bank reserves, I understand, but the timing of money flows seems different in this scenario, as opposed to scenarios A and C/D.

I’m not trying to argue for QE here; just trying to understand. While there may be arguments that the timing differences are inconsequential, the timing differences are still there, yes?

L. Randall Wray L. Randall WrayMay 15th, 2013 at 6:52 pm

Well, only Bernanke knows that. I see two possibilities:
a) he’s confused
b) he thinks he can boost the confidence fairy by giving the appearance that he’s done something important

JMarcoMay 16th, 2013 at 1:27 am

Maybe Bernanke is confused and frustrated. His days as Fed chairman are numbered.

He is calling attention to the economy that with Congress's help is slipping back into a recession. He can't say what should be said to Congress …"Stop spending your focus on Benghazi and IRS audits of Tea Party non-profits and get the large number of unemployed workers back into economy. I really can't reduce employment but you are charged with that responsibility. So do it!"

PGDMay 17th, 2013 at 7:19 pm

Not sure I get this…by buying MBS (newly issued, not just toxic waste), isn't the Fed in part encouraging additional mortgage financing, and thus indirectly 'buying houses'…or at least helping finance others to do so?

Ben JohannsonMay 21st, 2013 at 1:53 am

The Fed can't knowingly buy junk, so it's picking up the higher quality stuff paying out 2-4%, interest incomes now lost to the banks. The only way more financing could result is if lenders start reducing standards, which I think is actually the Fed's goal though it will never openly admit it.

EEBMay 22nd, 2013 at 5:45 am

Ever since the GFC, I have maintained that what the economy needed was WPA (or, as they call it nowadays, ELR). Of course, I could be wrong. I remember (many years ago!) reading Robert Theobald, entertaining the prospect that about 90% of the workforce would be redundant due to automation and cybernation. Even before that, Bertrand Russell wrote an essay titled "In Praise of Idleness". And then, I thought of a pithy parable told to me many years ago by a wise man: Moses said unto the children of Israel, "pack up your camels and your asses, for we are going to the Promised Land". Four thousand years later, FDR told his children, "light up your Camels and lay on your asses, for THIS is the Promised Land". So, am I right, or is Theobald right?

Gary GoodmanJune 4th, 2013 at 6:57 am

This part of QE is removing Treasuries, but The Fed is adding the equivalent balance to Reserves. Note: Both Treasuries and Reserves balances are spreadsheets on the Fed's mainframe.

If banks created money out of reserves, then THEORETICALLY this would "encourage" banks to lend. But banks don't lend reserves. They create loans via balance sheet expansion, by buying loan agreements and creating deposits out of those new assets.

So increasing the reserve balance, the result is: a bigger Reserve balance. Nothing more, practically, for the real economy.

Dollars are going back into "the system", IF, by "the system" you mean banks' Reserve accounts on the Fed's computers. Not into the "ECONOMIC system".

Art PattenJune 13th, 2013 at 2:38 pm

Neil: "Isn't it the case that when the central bank starts buying things that were not initially issued by the government sector it is really conducting fiscal policy by stealth."

Only if it purchases at above market price, I thought?

Randy's fantastical examples here, in addition to being laugh-out-loud funny, illuminate how bizarre QE is. The Fed seems to think it's akin to large gold discoveries 100+ years ago. Instead, it's essentially the removal of certain assets from the economy. In this case, the Fed would be engaged in removal of real capital from the system (although if the Dallas Fed were able to sell the Houston Astros to the NY Fed, liquidation might not be such a bad thing…ouch).

"At what point is it going to become clear that our system of government has become (or arguably returned to) a technical autocracy? I think this has gone on far enough. I'd like my democracy back."