Nobelist Becker: Eliminate QE2

Because QE1 was such a resounding success, the Fed determined last week—with only one dissenting vote, from Kansas City Fed President Thomas Hoenig—that it's was time for a second round of "quantitative easing" (QE2). Peter Suderman outlined the case against QE2, in which the Fed creates money out of thin air for the purchase of Treasuries, here, and Reason Foundation economics wizard Anthony Randazzo warns of the manifold risks of the scheme here. Now comes a no-confidence vote from Nobel laureate Gary Becker:

One justification frequently given for further Fed open market operations is that it will increase bank lending through raising bank reserves ("high powered" money). The reluctance of banks to lend has clearly been a factor in the slow down in the US recovery. Yet the Fed's creation during the past couple of years of well over trillion dollars in additional reserves through open market operations has not induced rapid increases in bank lending. Instead, banks have accumulated huge amounts of excess reserves; that is, reserves above the amount they are required to keep as collateral for their deposit liabilities.

Randazzo explains why liquidity isn't the problem and why banks are sitting on sizable reserves here. Becker thinks that a potentially large increase in inflation (and the Fed wants a slight increase) isn't worth it.

Fed Chairman Bernanke wrote in an article in the Washington Post on November 4th that "The Federal Reserve cannot solve all the economy's problems on its own." The slowdown in the recovery of the American economy is not the result of Fed policy, and cannot be cured by yet another bout of open market operations. This is why the Fed should curtail, and better yet, eliminate its plans for QE2.

In other news, Reuters econ blogger James Pethokoukis balanced the budget in under a minute!

Comments

[@]

Ouh, ouh, I want to use the car.

[#]

You can have the iron.

[David E. Gallaher/Ruthless]

Pooshin' on a strang... Don't make much sense.

[BeltwayLurker]

It is not thin air. Just the electrons.

[Bob Mugabe]

But it worked so well for us!

[Homeowner in Libertopia]

Water tastes good, yes?

GLUB GLUB!

[JoshINHB]

One justification frequently given for further Fed open market operations is that it will increase bank lending through raising bank reserves ("high powered" money).

Utter bullshit.

If you want to "force" the banks to start lending then pass a 10% tax on excess reserves.

That would

1) Raise $90 billion this year

2) Result in $7 trillion of new loans next year.

[Hugh Akston]

1) Raise it for whom?
2) How creditworthy would those borrowers be? Would banks lend to them without the government stick in thier ass? If so, why do we need the stick? If not, why would we want high risk borrowers tying up more capital?

[JoshINHB]

You're missing my point.

The Bernanke doesn't need QE2 to encourage or force banks to lend.

[John Thacker]

No need to put a tax on reserves, simply stop the very unusual practice of paying interest on reserves, or cut it.

[Umbriel]

I've seen indications that when the voting/non-voting Fed board members rotate next year, power will shift to a much more anti-QE voting bloc. How much damage the current crew can do then remains to be seen.

[JW]

I not only balanced it, but came in with a surlus year one with no new taxes.

http://www.nytimes.com/interac.....s=zzxph000

Tough work that. I almost moved a hair out of place on my head.

[Amakudari]

Geez, I have a $176 billion surplus in 2015 and $640 billion left over in 2030, with the only "tax increases" coming from getting rid of preferential tax treatment (i.e. I'd rather see low rates than high rates and exemptions for everything under the sun for people leaving a lifestyle upon which the government smiles). And I'd rather see Social Security and Medicare recognized as redistributive social insurance, not retirement income and health care plans. For reference's sake, I'd use the surplus to buy back Treasuries and lower taxes, but I assume most folks would want to hang on to some of the programs, in which case they'd have hundreds of billions to play with. That folks would rather rage about a "catfood commission" than recognize exactly how unnecessary, reckless, expensive, and arbitrary many of these programs are is pretty depressing.

I do like how maintaining current spending levels with only tax reform fails utterly to balance the budget, though.

[Amakudari]

Also worth noting:

A 5% cut in federal salaries would still leave them above private sector pay. I'd rather see the government bring benefits in line with the private sector, then lower them if the job provides job security. In some cases, this would probably raise the salaries of some doctors, lawyers or scientists, which is perfectly fine with me, but by and large it would reduce the deficit further.

Also:
$46.7 billion - Department of Education
$42.7 billion - Department of Homeland Security
$26.3 billion - Department of Energy
$26.0 billion - Department of Agriculture
$13.8 billion - Department of Commerce
$13.3 billion - Department of Labor
$10.5 billion - Environmental Protection Agency
$8.5 billion (i.e. we make up the annual loss) - US Post Office
$8.1 billion - Transportation Safety Administration

And that's just the low-hanging fruit. Maybe some of those are worth saving, but even being conservative -- getting rid of half and assuming there are some offsets above -- would save around $100 billion a year more. By 2015 we'd be through the upfront severance costs and my total (net of the post above) would be close to $300 billion. That's somewhere around $1,000 of tax savings for every American, or $1,000 per American for progressives to play with and pat themselves on the back for balancing the budget.

And, I'm ignoring the duplication we have in law enforcement and security.

So seriously, next time someone, hands on hips, asks a libertarian how on earth they could possibly balance the budget, it's pretty easy to do it with hundreds of billions left over.

[smartass sob]

So the banks borrow money from the Fed at almost zero interest and then turn around and put it in a virtually risk-free investment that pays a 3 to 4 percent rate of return. Meanwhile where does the government get that 3 to 4 percent to pay to the banks? Oh yeah, I forgot - the tax slaves payers. But where did the Fed get the money to loan to the banks in the first place - some other dimension they opened up with their keyboard finger exercises? Is that other dimension alternately known as the purchasing power of already existing dollars?

[Hugh Akston]

Can we please stop using the term Nobel as some kind of mark of gravitas? Fucking Pauly Krugnuts walked away with one of those.

[heller]

And Obama...

[John Thacker]

I still don't see why the path of least resistance for the Fed wouldn't be to reduce or eliminate the interest on reserves, if they feel that banks are holding onto interest on reserves.

Interest on reserves is currently higher than the six-month Treasury rate.

[JoshINHB]

Maybe,
just maybe the whole exercise is about funding the deficit with the side benefit of further enriching a few cronies and not economic growth or any other such thing.

[Troll]

But the Economist says that quantitative easing is working!!!

[heller]

http://www.youtube.com/watch?v=PTUY16CkS-k

[Bill Woolsey]

It is sad that Becker has confused money and credit.

The problem with the economy is that money expenditures have fallen by 13 percent below the growth path of the Great Moderation. The reason this has happened is that the demand to hold money has risen faster than the quantity of money.

How much banks are lending is of little importance.

[Pro Libertate]

Wait, eliminate the Queen? Isn't that illegal? Aren't the British our allies?