Can the Fed raise interest rates? • Hacker News Board

Re: Can the Fed raise interest rates?

#71

Post by roymurdock » Wed, Sep 16, 2015, 9:08 PM UTC

rhino369 wrote: post #67

roymurdock wrote: post #18

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side. Thomas Palley [1] sums this up nicely in a 2011 critique of QE: The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However,…

>playing with the supply side of money while having absolutely no effect on the demand side. This is a strange position to take on a website that glorifies start ups. Cheap capital can unlock demand by lowering barriers to entry. People looking for investment opportunities fund companies like Uber. And uber turns around an creates massive demand for private adhock drivers. That sort of incentivize won't reverse a rec…

HN is a strange and wonderful place full of all kinds of people with all kinds of opinions on startups.

And yes, easy money can help unlock demand, but it can't generate it in a sustainable manner.

> "Actually printing money" - and then what? Dropping it to the eager consumers out of helicopters? [1] They've given banks all the money they need, and then some. Banks act as the gate keepers of loans and investments within the economy, vetting those who are likely to pay back. That is their business.

They are not finding enough demand within the economy to push out more money, even with short-term interest rates near 0 for the past 6 years. So they sit on it, earning 0.75% on their reserves.

The Fed does not have the power to solve this problem, in my opinion.

[1] http://www.investopedia.com/terms/h/helicopter-drop.asp

Re: Can the Fed raise interest rates?

#72

Post by carsongross » Wed, Sep 16, 2015, 9:09 PM UTC

irln wrote: post #68

carsongross wrote: post #53

Earlier quoted context omitted.

That is not correct. For demand deposits there should be a 100% reserve requirement. No bank run is possible: if everyone shows up and wants the money they are legally able to demand at a given moment, it's all there. Loans are then (strictly) duration matched with financial instruments offered to the public. Collateralization provides the banks with assets to offset the inevitable bad loans, but "investors" can't de…

> Loans are then (strictly) duration matched with financial instruments offered to the public. So loans are funded by the public? > It's pretty straight forward when you just think in terms of contracts. Its a testament to how fucked up (or, perhaps, effective) our education system is that smart people like yourself can't see these problems straight away. Why are folks like you so afraid of discussing issues that mig…

So loans are funded by the public?

Of course, with the banks as intermediaries.

Why are folks like you so afraid of discussing issues that might challenge your worldview? I would argue that only by being able to articulate answers to these questions (some of which you claim have such obvious answers) can we obtain a better understanding. Maybe your schooling encouraged a blinders mentality, but I humbly suggest you be open yourself to provide answers and not insults.

The last part was a bit offsides, sorry about that, but it was directed mainly at the econ education community, not at you. I'm happy to discuss anything, as I hope this thread indicates. I've come to my understanding through a long and winding path, including half an econ degree at Berkeley, some marxism, a trip through anarcho-capitalism and forcing myself to concentrate long enough to get through (most of) Steve Keen's work.

I'm advocating a 100% reserve ratio on demand deposits only, duration matching of non-demand deposits and a citizens dividend for economic stimulus. Ain't no school gonna teach you that. :)

Re: Can the Fed raise interest rates?

#73

Post by ConfuciusSay » Wed, Sep 16, 2015, 9:10 PM UTC

rhino369 wrote: post #67

roymurdock wrote: post #18

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side. Thomas Palley [1] sums this up nicely in a 2011 critique of QE: The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However,…

>playing with the supply side of money while having absolutely no effect on the demand side. This is a strange position to take on a website that glorifies start ups. Cheap capital can unlock demand by lowering barriers to entry. People looking for investment opportunities fund companies like Uber. And uber turns around an creates massive demand for private adhock drivers. That sort of incentivize won't reverse a rec…

QE1 worked, in that it saved us from a depression. But the jury's still out on whether that was just a can kicking exercise to be reckoned with at a future date. The other QE's by any measure, have been a failures, at least when compared to QE1.

And when almost all major global economic indicators are looking negative, it's hard to talk about QE in terms of it being successful policy.

Re: Can the Fed raise interest rates?

#74

Post by Steko » Wed, Sep 16, 2015, 9:10 PM UTC

irln wrote: post #60

Steko wrote: post #56

Earlier quoted context omitted.

Any mention of the Fed on HN seems to come with a generous helping of heterodox complaints about QE. I'll just point out that despite throwing everything at the wall for 6+ years they are all still batting zero.

There are so many smart people on HN, such as yourself (and not being sarcastic!), with wide ranging expertise. I think we can crowd source some improvements right here.

I claim no special skill or insight into economics, I'm just tagging these posts so people don't mistakenly think that what is presented is mainstream economic theory. Based on our experience in the last decade, as a first order approximation heterdox claims about QE unsupported by evidence should be greeted skeptically.

Re: Can the Fed raise interest rates?

#75

Post by toomuchtodo » Wed, Sep 16, 2015, 9:45 PM UTC

carsongross wrote: post #44

roymurdock wrote: post #18

The crux of the problem is that the Fed is "pushing on a string" - playing with the supply side of money while having absolutely no effect on the demand side. Thomas Palley [1] sums this up nicely in a 2011 critique of QE: The underlying problem is structurally deficient demand caused by thirty years of neoliberal economic policies that have undermined the income and demand generation process (Palley, 2009). However,…

A universal citizens dividend funded via direct issuance would be the least corrupt way to stimulate the economy at this point. In the long run, we will need a debt-jubilee if we want to continue the current monetary system.

That sounds very similar to a basic income (which I whole heartedly support)

Re: Can the Fed raise interest rates?

#76

Post by Tycho » Thu, Sep 17, 2015, 3:00 AM UTC

igravious wrote: post #66

roymurdock wrote: post #54

Earlier quoted context omitted.

Yes. I recommend that you read the linked paper, where Palley highlights the 5 channels through which QE should have had an expansionary effect on the economy, according to Keynesian economic theory (hence the name of the paper). Here are the 5 channels: 1. A traditional Keynesian interest rate channel whereby the Fed purchases long-term bonds in order to reduce the long-term interest rates as it is unable to further…

Not an economist but let me try to see if I really have as good a handle on all this macro-economic stuff as I like to think I do. Ok. My guess is that QE goes directly to banks. Banks should start lending. QE is inflationary so the economy artificially grows and exports are helped cuz the $ gets cheaper but imports are hurt. This is not so bad for the $ because it is the world's reserve currency and a lot of commodi…

A wealth effect might be a hard sell to a population who just came out of a catastrophic housing bubble.

Re: Can the Fed raise interest rates?

#77

Post by irln » Thu, Sep 17, 2015, 10:19 PM UTC

carsongross wrote: post #72

irln wrote: post #68

Earlier quoted context omitted.

> Loans are then (strictly) duration matched with financial instruments offered to the public. So loans are funded by the public? > It's pretty straight forward when you just think in terms of contracts. Its a testament to how fucked up (or, perhaps, effective) our education system is that smart people like yourself can't see these problems straight away. Why are folks like you so afraid of discussing issues that mig…

So loans are funded by the public? Of course, with the banks as intermediaries. Why are folks like you so afraid of discussing issues that might challenge your worldview? I would argue that only by being able to articulate answers to these questions (some of which you claim have such obvious answers) can we obtain a better understanding. Maybe your schooling encouraged a blinders mentality, but I humbly suggest you b…

Thanks a bunch for that reply and I too love discussing this material and I don't think we have much of a disagreement. What I am advocating is having answers to these basic questions like, "why have a reserve ratio?" So many times, even these basic questions haven't been thoroughly explored through debate so that people, new to the subject matter, don't have anywhere to go for context (except people shouting at each other).

With regard to your other reply I have some questions:

> I'm advocating a 100% reserve ratio on demand deposits only, duration matching of non-demand deposits and a citizens dividend for economic stimulus. Ain't no school gonna teach you that. :)

These would be demand deposits paying zero interest (not that they're paying much more than that today :) ?

"duration matching" sounds like those deposits are participants in the loan (e.g. share the risk)?

"citizens dividend for economic stimulus" not sure about this one?

Re: Can the Fed raise interest rates?

#78

Post by carsongross » Fri, Sep 18, 2015, 6:52 PM UTC

irln wrote: post #77

carsongross wrote: post #72

Earlier quoted context omitted.

So loans are funded by the public? Of course, with the banks as intermediaries. Why are folks like you so afraid of discussing issues that might challenge your worldview? I would argue that only by being able to articulate answers to these questions (some of which you claim have such obvious answers) can we obtain a better understanding. Maybe your schooling encouraged a blinders mentality, but I humbly suggest you b…

Thanks a bunch for that reply and I too love discussing this material and I don't think we have much of a disagreement. What I am advocating is having answers to these basic questions like, "why have a reserve ratio?" So many times, even these basic questions haven't been thoroughly explored through debate so that people, new to the subject matter, don't have anywhere to go for context (except people shouting at each…

> These would be demand deposits paying zero interest (not that they're paying much more than that today :)?

Yes. In fact, you would probably have to pay for the services around them, as with a safe-deposit box, so in some sense they would have negative interest. That's the price of being able to demand the money at any point. Banks would compete on the lowest price for this (and likely pass the cost through to point-of-sale surcharges.)

The core point is that the banks cannot commit fraud: they cannot tell all of us that we can have our money at any point and then not be able to deliver.

> "duration matching" sounds like those deposits are participants in the loan (e.g. share the risk)?

The idea is that banks can make profits on loans, but not by introducing double-counting of money at a given time-point, which is what they do now. (This is why bank runs are possible.) The participants still share default risk, which is hopefully covered by collateralization. If a bank fails to deliver on a given payment, they go into default like a normal business, and they have to strictly demonstrate that they can meet all time-dollar commitments without double-counting any money. Profits are earned via excess interest and I would imagine that well run banks would maintain a positive reserve on top of their commitment curve.

> "citizens dividend for economic stimulus" not sure about this one?

The government issues debt-free money or takes cash-flow from public entities like utilities and distributes it directly to the citizens. This serves as a way to broadly distribute monetary expansion, rather than putting money into the financial system or to favored constituents, with the attendant early-reciever and corruption problems.

It's not a system without flaws and it would be gut-wrenching to move to it. However it does have the advantage that it will never be implemented, so I will never be proven wrong. Perfect! ;)