Blog Profile / Interfluidity

Yes, Virginia. The banks really were bailed out.

I find it really depressing that I have to write this. But it seems I have to write it. Substantially all of the TARP funds advanced to banks have been paid back, with interest and sometimes even with a profit from sales of warrants. Most of the (much larger) extraordinary liquidity facilities advanced by the Fed [...]

Toy models of inequality, negative interest rates, revolutions, and trade deficits

Oddly, the toy model in the appendix of my previous post got a bit of attention. Megan McArdle is unimpressed. In the model, I posit a world in which abundant labor and scarce land yield an unstorable crop in great quantity. But because labor is so abundant (and so the marginal labor unproductive), wages are [...]

The negative unnatural rate of interest

David Andolfatto points out that US five-year real interest rates are now negative. Nick Rowe discusses the possibility that the so-called “natural” real interest rate could be negative, referring us to Frances Woolley’s discussion of the drag demographics might exert on real returns. (I’ll respond to Rowe and Woolley specifically in a little appendix to [...]

Expectations can be frustrated

As the previous post suggests, I support targeting an NGDP path. I think an NGDP path target is superior in nearly every respect to an inflation target, and so represents a clear improvement over most central banks’ current practice. [1] But, unlike the “market monetarists”, I do not believe that central banks can sustainably track their [...]

The moral case for NGDP targeting

The last few weeks have seen high-profile endorsements of having the Federal Reserve target a nominal GDP path. (See Paul Krugman, Brad DeLong, Jan Hatzius and colleagues at Goldman Sachs.) This is a huge victory for the “market monetarists”, a group that includes Scott Sumner, Nick Rowe, David Beckworth, Josh Hendrickson, Bill Woolsey, Marcus [...]

IOR caps: a new instrument of monetary policy?

As the MMT-ers emphasize, in aggregate bank lending is almost never reserve-constrained. Unless a central bank is willing to tolerate arbitrarily high interest rates, it must be willing supply reserves in response to increasing demand. However, to point out that the banking system is not reserve constrained does not imply that individual banks are not reserve [...]

The lump of unfairness fallacy

Ezra Klein is a wonderful writer, but I don’t love his retrospective on the financial crisis. (Kevin Drum and Brad DeLong do.) The account is far too sympathetic. The Obama administration’s response to the crisis was visibly poor in real time. Klein shrugs off the error as though it were inevitable, predestined. It was not. [...]

An echo

I write, or at least I start to write, lots more blog posts than I ever publish. The paragraph below is from a post I began over the summer during the debt ceiling fracas. Intellectually, I did not consider gratuitous default on US debt to be wise policy. But throughout the period, I felt a [...]

The long bond does the limbo

Yields on long-term US bonds have been falling like a rock since August. On the demand side, there’s no great mystery to this. Stock markets have done poorly, which tends to support Treasuries as a “flight to safety” asset. Other “safe havens” have looked wobbly. European debt in general has been tarnished by the sovereign [...]

Rogue traders and stated-income borrowers

The financial scandal du jour is a $2 billion dollar loss at UBS blamed on a “rogue trader”. You’d think the whole “rogue trader” problem would have been solved by giant, sophisticated investment banks. After all, it was way back in 1995 that Nick Leeson brought down a 233 year-old global institution. Since then we’ve [...]

Saving Europe with sovereign equity

One way to think about the European financial crisis is that it is a matter of capital structure. Countries like the United States and Great Britain are equity-financed, while countries like Greece, France, and Germany are debt-financed. [1] There is no question that some European countries have very real problems. But there is also no [...]

The bounds of monetary policy on Planet Earth

I read too much from monetarists and quasimonetarists and progressive monetarists and what not that monetary policy is what we need, that fiscal is unnecessary. For the moment, let’s put aside the big disputes about whether macro demand-side remedies are a good idea. Let’s stipulate that they are, that increasing aggregate demand or accommodating people’s elevated [...]

Counterparty of last resort? Yes, but...

Central banks are dangerous

I really thought that Michael Shedlock was overstating the case:...

The size of the Fed's balance sheet limits the scale of the public's losses

Yves Smith points us to a couple of pieces discussing the Fed's "balance sheet constraint", the notion that the central bank may run out of treasury securities to exchange,...

disappearances and derelictions

This wasn't the first time, and I can assure you it won't be the last of my sudden disappearances. I'd like you all to think that I am occasionally called off...

Liquidity isn't apple pie

Yves Smith packs a powerful insight into an unassuming sentence:...

Spreads and paradoxical liquidity

In my previous post, I suggested that "depth-weighted spreads" ought to serve as a measure of the uncertainty surrounding a asset's future cash-flows. Felix Salmon quite correctly points out...

Stock of Treasury securities at the Fed

The graph below plots the US Federal Reserve's stock of "uncommitted Treasury securities", defined as Treasury securities held outright less securities lent to dealers. The graph starts in December 2007, just...

Let's not write the Fed a blank check

Last week, the Fed decided to ask Congress for the right to pay interest on bank reserves. (Hat tip Barry Ritholtz, see also William Polley, Mark Thoma,...