tag:blogger.com,1999:blog-8897997766931633186.post1595112668378951920..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Williamson on Quantitative EasingBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-8897997766931633186.post-73043960624659505352016-10-26T03:29:35.153-04:002016-10-26T03:29:35.153-04:00It’s really uncertain where Fed is going to be lea...It’s really uncertain where Fed is going to be leading things, therefore, it’s absolutely vital that we are careful and make sure we do everything simple and straight forward, as only then we will be able to work it out. Luckily, I am trading with OctaFX broker where they have excellent structure with having lowest spread from 0.1 pips while there is also rebate program where I get up to 15 dollars per lot size trade on all trades, it’s just perfect and helpful.Shivanoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-41099048393253732082011-08-29T09:12:02.560-04:002011-08-29T09:12:02.560-04:00Just be to clear, my last point was this: Williams...Just be to clear, my last point was this: Williamson focuses on a financial intermediation story while ignoring the portfolio channel of monetary policy. In other words, he ignores how the Fed can still satiate money demand even if there is an offsetting decline in financial intermediation.David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-1404751310724936392011-08-29T09:05:38.872-04:002011-08-29T09:05:38.872-04:00Thanks, the cleared things up. Ultimately, the po...Thanks, the cleared things up. Ultimately, the point is there may be less financial intermediation. But, my concern about the increasing share of liquidity in portfolios still holds, right?David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-8643548096797038032011-08-29T07:38:25.788-04:002011-08-29T07:38:25.788-04:00Yes, but here is the worry.
The other intermediar...Yes, but here is the worry.<br /><br />The other intermediary sells its long term government bond and pays off the CD.<br /><br />The individual who received payment for the CD buys a T-bill.<br /><br />This drives down T-bill yields even closer to zero.<br /><br />A bank sells a T-bill and holds reserves.<br /><br />We could skip a lot of this, and have the person receiving payment for the CD just leaving the money in a checking account. The bank where that checking account is held matches it on its balance sheet with interest bearing reserves.<br /><br />Or suppose that one bank was holding another bank's CD. The CD financed a long term bond. The Fed buys a long term bond. The other bank sells the long term bond and pays off the CD. The bank collects on the CD and holds reserves.<br /><br />I chose the CD because in this (near) zero nominal interest environment, it is a (near) perfect substitute for money.<br /><br />Suppose instead of a CD, a bank was funding a long term bond with a checkable deposit. The Fed buys a long term bond and credits the reserve account of the seller's bank. The seller's bank credits the checking account of the seller. The buyer's checking account is debited as is the reserve balance of the buyer's bank. And the buyer's bank, looking at the slightly lower yields on long term government bonds, just holds onto the reserves, and earns interest on them.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-6874711578543578402011-08-28T21:37:55.046-04:002011-08-28T21:37:55.046-04:00Thanks so much Bill. Now some thoughts.
I think ...Thanks so much Bill. Now some thoughts.<br /><br />I think I now better understand Williamson’s argument: the more the Fed lowers the return to providing financial intermediation (by buying up more longer term securities), the less financial intermediation will be provided by other firms. In the limit, with perfectly elastic supply of financial intermediation, there is no change from the Fed’s actions. <br /><br />In terms of the example you gave, the Fed buys up long-term treasuries from banks and now banks have more reserves. Instead of using these reserves for new investments (assuming banks are not capital constrained and could) and thus more financial intermediation, banks instead reduce outright or reduce the growth of short-term liabilities likes CDs. <br /><br />If my understanding outlined above is correct, then it seems like an incomplete story. First, what happens to the creditors to the banks who had invested in or were looking for short-term assets like CDs? Unless they put their money under a mattress, they now have funds sitting somewhere else being intermediated by some entity. The only difference, it seems, is now the intermediation is going into riskier assets since there are fewer treasuries. If so, then the Fed is still having some effect here buy pushing creditors into riskier assets. <br /><br />Second, the whole story hinges on a financial intermediation story. If, instead, one looks at the non-bank public and their portfolio of assets it seems that the Fed’s buying up of long-term treasuries will increase the liquid asset share of their portfolios. Even if financial intermediation is falling as argued by Williamson, it seems the non-bank public would still be seeing their share of liquid assets grow. For one, they may be one selling the treasuries to the Fed and two, even if the financial disintermediation outlined above does occurs they must still have liquid assets in some form. And at some point they will become satiated with liquid assets and will want to rebalance their portfolios after that point. All the Fed needs to do is keep buying securities so that this rebalancing takes place. Does this make sense?David Beckworthhttps://www.blogger.com/profile/04577612979801459194noreply@blogger.com