oldfart
Older than dirt
- Nov 5, 2009
- 2,411
- 477
The short answer is not really. The question itself shows an attitude that's a lot more common than the business media realizes. The public at large has a pretty vague idea of what the FED does and assumes that in any economic crisis there is something the FED ought to be doing. This case is the exception.
First, the FED is constrained by the zero lower bound on nominal interest rates, and we are already there. There is no way the FED could "stimulate" the economy or somehow make the situation better by traditional monetary policy. All it could do in a debt crisis is provide liquidity, but the markets are awash in excess liquidity to the tune of $2.5 trillion already.
But doesn't the FED do something with Treasury bonds? Couldn't they just buy more? Of course they could buy more, but that doesn't change the amount of T-bonds issued; it just shifts them from private sector balance sheets to the FED balance sheet. For purposes of the public debt, the FED is considered part of the private sector, so unless the Fed agreed to cancel the bonds bonds held by the FED still count against the debt limit.
Is this a loophole? I don't think so, especially for large amounts or over long periods. Mechanically it would work, the FED has far more T-bills on its balance sheet than the federal budget deficit. The federal government could spend all it takes in each month and cover the shortfall by not redeeming T-bills held by the FED. Of course this would eliminate the current profit the FED is showing on its operations (which is returned to the Treasury) and create an operating deficit for the FED. But so what? Until the FED runs out of T-bills to cancel, it is just creating an operating loss on its books. No other FED operation would be effected and the markets need not be disturbed. Of course this can't go on forever (the FED would run out of Treasury securities to cancel) and at that point I'm not sure how it gets off the merry-go-round. It risks a true very high inflation (and you really don't want me to go through the monetary theory on how that happens!). But it could buy some time.
Such a policy is probably a bad idea, as we have found that buying time just encourages more Congressional irresponsibility. So we are back to the FED not really having any tools that would help much when we hit the debt ceiling.
So what do you think? Should we give the Oldfart FED-rescue-of-the-debt plan a spin? Would the Republican House caucus collectively have their brains implode? Would the markets see this as a good accounting trick, or a signal to head for the hills?
First, the FED is constrained by the zero lower bound on nominal interest rates, and we are already there. There is no way the FED could "stimulate" the economy or somehow make the situation better by traditional monetary policy. All it could do in a debt crisis is provide liquidity, but the markets are awash in excess liquidity to the tune of $2.5 trillion already.
But doesn't the FED do something with Treasury bonds? Couldn't they just buy more? Of course they could buy more, but that doesn't change the amount of T-bonds issued; it just shifts them from private sector balance sheets to the FED balance sheet. For purposes of the public debt, the FED is considered part of the private sector, so unless the Fed agreed to cancel the bonds bonds held by the FED still count against the debt limit.
Is this a loophole? I don't think so, especially for large amounts or over long periods. Mechanically it would work, the FED has far more T-bills on its balance sheet than the federal budget deficit. The federal government could spend all it takes in each month and cover the shortfall by not redeeming T-bills held by the FED. Of course this would eliminate the current profit the FED is showing on its operations (which is returned to the Treasury) and create an operating deficit for the FED. But so what? Until the FED runs out of T-bills to cancel, it is just creating an operating loss on its books. No other FED operation would be effected and the markets need not be disturbed. Of course this can't go on forever (the FED would run out of Treasury securities to cancel) and at that point I'm not sure how it gets off the merry-go-round. It risks a true very high inflation (and you really don't want me to go through the monetary theory on how that happens!). But it could buy some time.
Such a policy is probably a bad idea, as we have found that buying time just encourages more Congressional irresponsibility. So we are back to the FED not really having any tools that would help much when we hit the debt ceiling.
So what do you think? Should we give the Oldfart FED-rescue-of-the-debt plan a spin? Would the Republican House caucus collectively have their brains implode? Would the markets see this as a good accounting trick, or a signal to head for the hills?
