Saturday , April 4 2020

Fortunately?

Summary:
This Bloomberg article by former New York Fed President Bill Dudley caught my eye: In the fall of 2008, the Fed needed to supply large amounts of liquidity to support the ailing economy and unfreeze gridlocked financial markets. These liquidity provisions blew up the Fed’s balance sheet and the amount of reserves in the financial system. Fortunately, because the legislation for the Troubled Asset Relief Program gave the Fed the immediate authority to pay interest on reserves, the Fed could maintain control of short-term interest rates even with a lot of excess reserves and an enormous balance sheet. Yes, and “fortunately” Congress gave President Bush the authority to invade Iraq if he felt it were in the national interest.  And “fortunately” Congress gave President Trump the

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This Bloomberg article by former New York Fed President Bill Dudley caught my eye:

In the fall of 2008, the Fed needed to supply large amounts of liquidity to support the ailing economy and unfreeze gridlocked financial markets. These liquidity provisions blew up the Fed’s balance sheet and the amount of reserves in the financial system. Fortunately, because the legislation for the Troubled Asset Relief Program gave the Fed the immediate authority to pay interest on reserves, the Fed could maintain control of short-term interest rates even with a lot of excess reserves and an enormous balance sheet.

Yes, and “fortunately” Congress gave President Bush the authority to invade Iraq if he felt it were in the national interest.  And “fortunately” Congress gave President Trump the authority to set tariff rates.  And “fortunately” Congress gave President Nixon the authority to set nationwide wage and price controls.  And “fortunately” Congress gave President Johnson the authority to send 500,000 troops to Vietnam.

HT:  David Beckworth


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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