Tuesday, July 26, 2011

The Fed's Balance Sheet: Size and Composition

Here's an illustration of the Fed's balance sheet from the Cleveland Fed.

A lot of talk has focused on the expansion of the Fed's balance sheet since Sept 2008. The big question: why no inflation? Bob Higgs writes:
Ordinarily, one would have expected this development to produce hyperinflation of the general price level. However, the price level has increased quite moderately, and for a while many analysts warned that deflation was the greater risk. [...] Not only has hyperinflation failed to appear; even garden-variety inflation of prices in general has been extremely low by the standard of recent decades.
The most obvious answer, of course, is that the banks are simply sitting on the reserves, rather than lending them to customers. And why are they doing so? The usual answer is that since late 2008, the Fed has paid the banks a rate of interest on their reserves at the Fed. This interest rate has recently been in the range 0-0.25 percent. Although this is not nothing, it verges very closely on nothing. And if one notes that the purchasing power of money has fallen at least a bit, it is clear that the banks are realizing a negative real rate of return on their holdings of excess reserves at the Fed.
Moreover, they are doing so notwithstanding that they appear to have the option of lending at 3.25 percent to their best corporate customers and at higher rates to their less creditworthy customers.
So we haven't seen much inflation yet. But if (when?) banks start lending out reserves, we should see it pick up. Right?

Good question. The standard view is that the Fed can simply sell its assets to keep the money supply from expanding when the money multiplyer picks up. But the Fed's balance sheet ain't what it used to be. It is not only larger, but also differs in terms of composition. Note that traditional security holdings have actually fallen since Dec 2007. The net increase stems from loans to financial institutions in 2008 and 2009 (much of which has already been repaid) and then large scale asset purchase programs associated w/ Freddie and Fannie starting around Jan 2009. The Fed can certainly sell these assets. But at what price? Will they be able to suck up enough money when the time comes? We will soon find out.

Addendum: Check out this Barron's article by Walker Todd and Bill Ford.

The SPEA Research Paper Series

The series is now available online through SSRN. Here is the announcement, but I think they should have led with something about Lin Ostrom's papers being available through the series:

View Abstracts: http://www.ssrn.com/link/Indiana-U-Bloomington-Public-Enviro-PUB.html
Subscribe: http://hq.ssrn.com/jourInvite.cfm?link=Indiana-U-Bloomington-Public-Enviro-PUB

The Indiana University School of Public and Environmental Affairs (SPEA) is a world leader in public affairs and the environmental sciences and is the largest school of public affairs in the United States. In the most recent "Best Graduate Schools" rankings by U.S. News & World Report, SPEA ranked second and was the nation's highest-ranked graduate program in public affairs at a public institution. The School's curriculum and research are distinguished by a vigorous interdisciplinary approach to education and problem-solving. SPEA will celebrate its 40th anniversary in 2012. The SPEA working papers series eJournal contains works in progress from our faculty.

Tuesday, July 19, 2011

Lucas on the Recovery

Robert Lucas gave a talk recently at University of Washington on Macroeconomic recovery in the US. His slides are available.

Lucas argues that, by imitating European policies on labor markets, welfare, and taxes, the U.S. has chosen a new, lower GDP trend. If this is correct, the weak recovery we have had so far may be all the recovery we will get. He uses these two slides to support his argument. The first shows the spread in growth rates which Lucas describes as the cost of the welfare state--note the lower trend for most of Europe. The second shows the US recovery in the recent recession.

What do you think?


Friday, July 15, 2011


I just learned about GeoFRED, which allows one to create maps shaded to reflect Federal Reserve Economic Data. (Justin, Matt: Tax collections by state are available in a variety of categories.) This could be a useful addition to classroom or public lectures.

Thursday, July 14, 2011

Blockquoting X

X = Ben Bernanke.
The reason the Federal Reserve was founded a century ago was to try to address the problems arising from financial panics, which did, by the way, occur in an unregulated environment in the 19th century.

Wednesday, July 13, 2011

The Political Economy of Coin Images

This story is old news-- a combination of free shipping on U.S. Mint coins and credits cards giving frequent flyer miles for spending yields free flights-- but this bit was new to me:

Native American coins bear the likeness of Lewis and Clark guide Sacagewea. By law, Sacagewea must appear on one in every five dollar coins manufactured, the legacy of political dealings on Capitol Hill.