Thursday, December 17, 2015

More good stuff from George Selgin


George Selgin continues to shed light on Fed policies.  Here, he is writing about interest on reserves.

Here is a graph from the post, showing the estimated natural real short term interest rate.

Here is a graph I have previously put together of interest on reserves, the effective federal funds rate, and the accumulation of excess reserves.

Here is an earlier post I did on the timeline of events in late 2008.



  1. So, he clearly shows the tightening appears to have happened after the money market run in September, 2008.The bogus MBSs had already been discovered. The question is why did the Fed crumble the economy? Was it to shake out marginal businesses, or put RE toward the bottom so Wall Street types could buy low and sell high? And/or were the banks being protected from too much heating up of the economy? Chart don't lie. LIBOR crossed the swaps rate and that caused the financial system to fail. LIBOR was the low rate that banks bet on and Swaps rate was the fixed rate that borrowers had to take if they wanted a loan.

    1. Sorry the chart is here:

  2. Selgin's chart looks about right to me. After all, 10-year Treasuries are offering 2%+pennies. So what "should" overnight interest rates be?

    Seems to me "about zero" is a good answer. Or, "Well, less than zero, but that is hard to do." (Yes, they do it in Europe).

    By Selgin's chart, it looks like the Fed might have been getting close to having the federal funds rates where it "should" be, but now they went and raised it....

    I still say the other tools the Fed has are as important, such as QE. Not doing QE is probably a mistake. Who knows about their reverse repo program.

    Evidently, now IOER gets raised also, to 0.50%. The banks get double what they used to, for doing nothing. Perhaps they swiped a manual from the USDA.

    1. It does seem like there are some parallels between the NIRA & AAA and our current health care, education, and housing markets. I hadn't thought about how raising IOR is the same pattern of reacting to deprivation by centralizing power and raising prices by constricting supply. Here, the supply is a supply of money or credit and the price is interest rates. Interesting point.

  3. Regulatory capture. Create a Department of Agriculture and who will be most concerned with its policies? To which group will the Department of Agriculture ultimately become aligned?

    Give to the Fed regulatory power, and the power to dispense money through interest on excess reserves, and which group will become most concerned with the Fed? And to which group will the Fed ultimately become aligned?