• What Does Quantitative Easing Do?

    Sep 26 • Money and Monetary Policy • 373 Views

    A quantitative easing limerick:

    “I’m afraid,” said Bernanke to Geithner,

    “The debt crisis still has lots of bite in ‘er.

    Though it may cause some ranklin’

    I’ll print lots more Franklins;

    We’ll loosen our money, not tighten ‘er!”


    When the Fed said “The Committee…is prepared to provide additional accommodation if needed to support the economic recovery and return to inflation…,” Slate’s Plain English Tool said they really meant to say, “We’ll keep an eye on things, and if we need to create trillions more dollars out of thin air to bring down unemployment and pump up inflation, that’s what we’ll do…”

    The Economic Lesson

    The standard story in econ textbooks says that when the Federal Reserve buys treasury securities or other financial instruments (quantitative easing), its goal is to expand the money supply through the money multiplier. Specifically, the Fed buys securities, the money is deposited in banks, reserves increase, more money is available for loans, interest rates fall, and borrowing accelerates.

    But maybe, the standard textbook story is wrong. According to a recent Federal Reserve paper and a speech from a Fed vice chairman, “Bank loans are primarily driven by demand factors. If there is an increase in demand for loans, banks increase their supply of loans…and obtain the funding by issuing uninsured deposits.”(p. 39 from the Fed paper)

    In other words, the key to activating the money multipier could be the demand for money rather than the supply of money. There might sometimes be a correlation between the Fed’s security purchases (quantitative easing) and the money multiplier but not necessarily causation.

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    Obesity Concerns

    Sep 25 • Economic Debates, Government, Regulation • 315 Views

    The new vending machine at a Mason, Ohio high school only sells carrots. At 50 cents a bag, “they are selling like hotcakes”. Is it because the baby carrot video ads are amazing or that no other vending machine works during school hours?

    This takes me to two recent papers:

    1)In a new report described by The Economist, among the 33 OECD countries, approximately 16% of all adults are obese and 50% are overweight. For the U.S. and Mexico, however, the obesity number balloons to 33%. Correspondingly, health care spending on obese people is 25% more than on people who are not overweight.

    2) The “Heavy Burden” report from George Washington University tells us that being obese costs an obese woman an extra $4879 annually and an obese man, $2646.

    Solutions? The OECD report says we need action from government, private industry, and physician counseling. New U.S. health care regulation includes posting calorie counts. With chain restaurants already covered, the new health care regulation targets movie theaters, food courts, and airplanes for posting calorie counts. (But not carrots in vending machines.)

    The Economic Lesson

    An externality is the impact of a behavior or contract that is experienced by a third uninvolved party. When the impact on third parties is undesirable, we call the result a negative externality.

    We could say that burgeoning obesity rates are a negative externality. For example, urban transit improves. The result? Taking the bus or train, we experience the negative externality of burning fewer calories than we would burn when walking to work.

    A benevolent impact on an uninvolved third party is called a positive externality. A community experiences the positive externality of flu vaccinations




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    Should We Miss Larry Summers?

    Sep 24 • Economic Debates, Economic Thinkers, Government, Macroeconomic Measurement, Money and Monetary Policy, Regulation • 278 Views

    As you know, Larry Summers, chair of the National Economic Council, former president of Harvard, former Treasury Secretary, former chief economist at the World Bank, and Harvard professor, is leaving the Obama economic team. But what did he bring? You might want to consider a 2009 New Yorker article and The New Republic’s commentary and then decide if you will miss him.

    An excellent portrait, The New Yorker article is part bio, part personality, part role for Obama.You leave it thinking that he is smart, he knows what he believes, and he might have moved slightly leftward toward supporting more government when the market is dysfunctional.

    By contrast, The New Republic primarily focuses on whether Summers was sufficiently liberal. Their conclusion is maybe more than people realize.

    The Economic Lesson

    When I asked Dr. Summers the most important idea an economics teacher could share with her students, he said, “The power of the market.” Also, Tom Friedman has this quote from Larry Summers:  “In the history of the world no one has ever washed a rented car.” 

    Dating back to 2002, both statements reflect a fundamental faith in demand, supply, and the productive influence of the market’s incentives.

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    Translating the Fed

    Sep 23 • Money and Monetary Policy • 305 Views

    I just discovered the Slate Plain English tool. Still under development, its function is to transform unintelligible jargon into normal English. To see how it works, you might want to look at a Slate/Planet Money translation of Tuesday’s Federal Reserve statement.

    When you go to the Slate translator, just click on a Fed sentence and you will see it in everyday English. For example…

    From the Fed: “Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak.”

    From Slate: “Companies are buying more stuff, for now, but they’re not building new factories or offices.”

    The Economic Lesson

    Based in NYC, the Federal Open Market Committee (FOMC) is responsible for determining the Federal Reserve’s interest rate policy. Usually, they decide to boost economic activity by buying treasury and federal agency securities in financial markets and/or lowering the discount rate. (A good way to remember–boost and buy) If they want to sink economic activity because of excessive inflation, then they sell treasury and federal agency securities in financial markets and/or raise the discount rate. (sink and sell)

    The term for buying and selling treasury and federal agency securities is open market operations. One consistent goal of open market operations is a federal funds rate target– an interbank loan rate goal.

    Typically released on a Tuesday or Wednesday, at 2:15 after a Federal Open Market Committee (FOMC) meeting, a narrative of the Fed’s assessment of the economy and policy is publicized. The FOMC has scheduled 8 meetings for 2010.

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    Speculators, Thomas Jefferson, and President Obama

    Sep 22 • Demand, Supply, and Markets, Economic History, Financial Markets, Regulation • 559 Views

    Thomas Jefferson and President Obama had similar concerns about financial speculators. In 1790, Thomas Jefferson opposed funding the domestic part of the Revolutionary War debt if the financial speculators who bought bonds at a depressed price would benefit. Instead Jefferson hoped that the original buyers of the bonds would get some money even if they no longer owned them. Fast forward to this week’s town hall meeting. Referring to the depressed housing market, President Obama said, “And we think it’s very important that speculators…that they’re not getting help.”

    The similarity between Jefferson and Obama? Both wanted to be sure that when government acted, speculators would not profit.

    Alexander Hamilton’s response to Jefferson also relates to today. Hamilton believed that whoever legally purchased the Revolutionary War bonds, legally owned them, and could legally profit from them. He was not concerned with speculators.

    The Economic Lesson

    Many call the U.S economy a market system but a mixed economy would be more accurate. Together, the market system and the government guide economic activity. We could say that we have a continuum with government at one end and the market at the other. Since 1790, we have moved to the left and right along that continuum, continually debating the role of government.


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