Thursday, July 16, 2009

What a fool believes: who pays for quantitative easing?

A couple of themes today centered on foolishness.

Only a fool could believe our unemployment insurance program is too generous, or could argue against the extension of benefits as the administration has done.  We need a livable dole for all the unemployed.

Via:  Matt Yglesias 

I really just wanted to reproduce this chart showing how relatively stingy unemployment benefits are in the United States:



N.B.: more than half of unemployed Americans do not receive unemployment insurance payments.

Other references:

Receiving unemployment insurance increases likelihood of re-employment with health insurance – EPI.  Also produces better fit of job with worker skills.

Brookings paper cited by Yglesias – has a great set of charts. 

Here’s one that could be titled, “A fool believes insanely rising asset prices are real wealth”:


But what a fool believes he sees
No wise man has the power to reason away
What seems to be
Is always better than nothing
There’s nothing at all
But what a fool believes he sees...

--Michael McDonald, Kenny Loggins

First, the fool saw wealth in debt.  Now, the fool believes in “quantitative easing,” the Fed buying Treasury and other debt and monetizing it to support federal deficit spending by putting high-powered reserves into the banking system.  When the economy has more debt than it can handle, as evidenced now by high default rates and no credit growth and a sky-high debt/GDP ratio (below), this is a way of hiding the losses of the banking system.  Remember, the Fed has refused to tell us what the losses are on the trillions of dollars of debts it has taken from the banking system as assets (and from other types of institutions, what types we don’t know). When these “assets of the Fed” begin to charge off, the Fed should recognize losses and correspondingly reduce the reserves of the banks.  The risk of hyperinflation from quantitative easing is low when consumer and business credit growth is low or negative, as it is now, and high-powered money is eroding.

Via: Comstock Funds


But who makes up the losses to the Fed?  The assets were exchanged (say) dollar for dollar for high-powered reserves.  The reduction in the bank’s reserves is a high-powered money-multiplier event if deposit creation against the reserves has taken place.  If they are being held as excess reserves, no calls on loans need occur.  But has the bank recorded a loss as good accounting would require?  Can you see why the banks and other institutions who have unloaded assets on the Fed are nervous about a Congressional audit?  It’s no wonder the level of excess reserves is so high (below).  Will the losses on the Fed’s assets be added to the taxpayers’ burden?  This would just be another way of making the same mistake the feds have wanted since Hank Paulson, which is to make the banks whole by transferring (as near to) the face value of the banks’ bad debts onto the backs of the taxpayers.

Losses on the Fed’s “qualitative easing” (as Willem Buiter calls the taking in of less than Treasury grade assets) need to be properly sent back to the banking system and not borne by the taxpayer.  So far the Fed is still playing games, sweeping the problem under the carpet.

Audit the Fed.  Make the banks charge off bad debts, not put them onto the taxpayers’ backs.  A debt-deflation is assured otherwise.


1 comment:

  1. Regarding the first chart, what does "average" mean? Median or mean? And does it include other benefits such as health care.