Three Strikes against the Fed

Lambert here: New hope for The Fed?

By Willem Buiter, Visiting Professor of International and Public Affairs, Columbia University and CEPR Research Fellow. Originally published at VoxEU.

The US Federal Reserve – the world’s most important central bank – is not in a good place. This column outlines three flaws in the operating practices of the Fed – (i) its refusal to adopt negative policy rates, (ii) the build-up of significant credit risks through non-transparent (quasi-)fiscal actions, and (iii) stress testing analysis which fails to account for the severity of the COVID-19 crisis. It proposes a number of ways forward, including a symmetric policy rate around zero, a temporary ban on dividend payments, new equity issuance, and conducting a comprehensive stress test of the financial system.

The Fed’s current operating practices are afflicted with three serious flaws. Like most other central banks, the Fed refuses to set seriously negative policy rates; Like many other central banks, including the ECB, the Fed acts as an unaccountable fiscal principal rather than as a transparent and accountable fiscal agent of the federal government; and, unlike most other advanced economy central banks, it has emasculated the stress tests it imposes on systemically important banks to ensure their capital adequacy.

Going Deeply Negative

Regarding negative policy rates, the Fed does not even go down to the effective lower bound (ELB), which equals the zero interest rate on currency minus the carry cost of currency (storage, insurance, etc.). The example of the ECB and other European central banks suggests that, even without reforms, the lower bound on the Fed’s target federal funds rate could be set at -75 basis points rather than at its current level of 0.00. Indeed, the rates on required reserves and on excess reserves, both currently 0.10%, could be lowered to -75 basis points, providing a modest but non-trivial financial stimulus.

It would be better, however, to get rid of the ELB altogether. The reason is straightforward: a policy rate at the ELB is useless as an instrument for providing a stimulus to aggregate demand. Abolishing the ELB could be achieved either by taxing currency (as proposed by Gesell 1916), or by introducing a variable exchange rate between currency and deposits with the central bank (as proposed by Eisler 1932), or by abolishing currency altogether and offering every member of the public access to a central bank digital currency. This could take the form of a checkable interest-bearing account managed by commercial banks, savings banks, the post office, and other convenient financial institutions, integrated with Apple Pay and similar mobile payments systems, and guaranteed by the central bank. If there are social concerns about the inability of part of the population to manage without cash (including the elderly and those who don’t have any experience with bank accounts and electronic/digital payments technologies), the temporary retention of low-denomination currency notes could address this issue. It would lower the ELB without abolishing it (see Buiter 2009, Lilley and Rogoff 2020).

The only economic argument against going seriously negative with the policy rate is the ‘reversal interest rate’ proposition of Brunnermeier and Koby (2018), that a sufficiently low level of interest rates can distort the incentives faced by banks and result in a lower level of bank lending. This does not by itself pin down the level of the ‘reversal interest rate’ (which could be materially negative), nor would it allow for intermediation between savers and investors through capital markets rather than through banks, which avoids the ‘reversal interest rate’ obstacle.

Quasi-Fiscal and Outright Fiscal Actions of the Fed and the Legitimacy of Its Operational Independence

With regards to the non-transparent and unaccountable (quasi-)fiscal actions of the central bank, I will focus on the size and composition of the Fed’s balance sheet. I recognise that the setting of the policy rate(s), forward guidance, and yield curve control have unavoidable fiscal consequences – redistribution between borrowers and lenders and profits for the Fed and thus for its beneficial owner, the federal treasury. It is key to recognise that, whatever the formal (often bizarre) ownership structure of a central bank, the national treasury is its beneficial owner, ultimately entitled to its profits and responsible for any losses.

The Fed also pays annual remittances to the US Treasury. If there is any systematic and transparent dialogue between the Fed and the US Treasury about these remittances, it remains well hidden. The amounts of money involved are non-trivial.1

Since the COVID-19 pandemic struck, the Fed has taken on significant credit risk by lending to and purchasing risky debt instruments from private financial and non-financial corporations, state and local governments, and households. Only a small fraction, generally not more than 10% of the Fed’s maximum possible exposure to these high-risk activities, is covered by US Treasury guarantees or other means of indemnification. Consider the following examples, all taken from the Fed’s own press releases and associated background papers:2

1. Municipal Liquidity Facility (MLF): The MLF will provide a liquidity backstop to issuers of Eligible Notes through an SPV (special purpose vehicle). The Treasury will make an initial equity investment of $35 billion in the SPV, which will have the ability to purchase up to $500 billion of Eligible Notes.

2. Main Street Lending Program (MLP): The Treasury provides $75 billion equity to the Main Street SPV, which will purchase up to $600 billion of participations in eligible loans.

3. Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF): The combined size of the CCFs is up to $750 billion. The Treasury will make a $75 billion equity investment in the SPV for both CCFs.

4. The Term Asset-Backed Securities Loan 2020 Facility (TALF 2020): The Treasury will make a $10 billion equity investment in the TALF SPV. The initial size of the facility is up to $100 billion.

The US dollar liquidity swap lines with other central banks are another example of the US Treasury allowing (or encouraging) the Fed to take on material credit risk and other price risk without offering the Fed full, or indeed any, indemnification.

The guiding principles for the Fed’s (quasi-)fiscal operations should be simple: the US Treasury guarantees the entire balance sheet of the Fed. Actions undertaken by the Fed that involve taking on material credit risk, price risk, and other risk must be joint decisions of the Fed and the US Treasury. Because some of the joint actions by the Fed and the US Treasury may have commercially sensitive and market-sensitive dimensions, temporary discretion, confidentiality, and secrecy may be warranted. Full openness and transparency should, however, be restored as soon as possible. Unless these principles are adhered to, many of the Fed’s balance sheet actions cause it to lose its legitimacy and threaten its operational independence even in those limited areas where it makes sense: the setting of the policy rate(s) and the provision of funding liquidity and market liquidity as lender of last resort and market maker of last resort.

Note that the ECB is in even worse shape regarding the legitimacy of its fiscal and quasi-fiscal operations compared to the Fed. The ECB is owned by the 19 National Central Banks (NCBs) of the euro area according to the capital key. Each NCB is beneficially owned by its national treasury/ministry of finance. There is no euro area fiscal authority, however, that guarantees the assets on the ECB’s (and the Eurosystem’s) balance sheet or engages with the ECB’s Governing Council in meaningful, open, and transparent discussions about the appropriate management of the ECB’s and Eurosystem’s balance sheet. The result is, since the Global Crisis, a growing illegitimacy of the ECB/Eurosystem as it has taken large amounts of both sovereign and private credit risk onto its balance sheet on terms that involve a meaningful fiscal transfer to the private and public counterparties.

Stress Testing

The Fed Board released, on 25 June 2020, the results of the full Dodd Frank Act Stress Test (DFAST) 2020, including the performance of 33 individual banks, designed in 2020 Q1, before the coronavirus.3

It also released the results of an additional sensitivity analysis that did try to take into account the economic consequences of the COVID-19 pandemic, by testing the resilience of 34 large banks under three recession and recovery scenarios: V-shaped, U-shaped, and W-shaped.4 Only aggregate results for loan losses and capital ratios of the 34 banks included in the sensitivity analysis were provided, however. The sensitivity analysis did not allow for the potential effects of government stimulus payments and expanded unemployment insurance. On the other hand, the recession and recovery alphabet soup that was considered leaves out the more pessimistic, and in my view realistic, L-shaped scenario, as well as other scenarios (V-shaped, U-shaped, and W-shaped), where the recovery does not reach the pre-COVID-19 path of potential output for many years, if ever. Nor does it consider scenarios where the post-recovery growth rate of potential (and actual) output is persistently (or even permanently) below the pre-COVID-19 growth rate. Lower global and US potential output growth may well be the result of increased economic nationalism and growing anti-globalisation sentiment and policy measures. It can also be driven by a cautionary and uncertainty-motivated shift from ‘just-in-time’ economics (think supply chains) to ‘just-in-case’ economics where more redundancy is built in, rationally, but at the expense of growth.

Not surprisingly, the full stress test downside scenario based on pre-COVID-19 information is comparable to the least dire, V-shaped recession and recovery scenario in the sensitivity analysis. It is extraordinary that the “Board will use the results of this test to set the new stress capital buffer requirement for these firms, which will take effect, as planned, in the fourth quarter.”5This full stress test should have been discarded as irrelevant when COVID-19 hit and should have been replaced by a full stress test based on one or more downside scenarios that incorporate the COVID-19 pandemic and its economic and financial consequences. If necessary, the stress testing process could have been delayed. It is better to be a bit late but relevant than right on time but irrelevant.

In the sensitivity analysis, aggregate loan losses for the 34 banks involved ranged from $560 billion to $700 billion and aggregate capital ratios declined from 12% in the fourth quarter of 2019 to between 9.5% and 7.7% under the hypothetical downside scenarios. Risk-weighted assets of the 33 banks participating in the stress test were $10,354 billion in 2019 Q4.

Based on the stress test and the sensitivity analyses the Fed suspended share repurchases by the banks for the third quarter. There are two caps on dividend payments. Dividend payments in the third quarter are capped by the lesser of the amount paid in the second quarter and the average net income over the prior four quarters – the first three of which were pre-COVID.

I consider the decision by the Fed to permit dividend payments in 2020 Q3 to be unwise. I do not share the sanguine attitude of the Fed about the capital adequacy pre-COVID-19 of the 33 largest banks. Corporate lending and investments in high-yield corporate debt, including asset-backed securities (ABS) like covenant-lite collateralised loan obligations (CLO), implied a potential vulnerability that the Fed chose to ignore. The widespread impairment of the creditworthiness of non-financial corporate and household borrowers since the COVID-19 pandemic started must have made for losses, including honest mark-to-market losses, that could be well in excess of the $700 billion that is the maximum aggregate loan loss the Fed considers. At the very least, there should have been a complete ban on dividend payments (as on share purchases) for 2020 Q3. A cautious Fed would indeed have insisted on additional equity issuance in 2020 Q3 by the 34 banks involved in the sensitivity analysis.


The Fed – the world’s most important central bank – is not in a good place. Like all other central banks, it accepts the Effective Lower Bound on the policy rate as an absolute constraint rather than as something that, from a technical perspective, can be eliminated easily. For legitimacy reasons, eliminating the ELB and creating full symmetry of the policy rate around zero should be a decision that is approved by the Treasury and possibly by both Houses of Congress.

Like most advanced economy central banks since the Global Crisis, there has been massive quantitative and qualitative easing by the Fed. Since the start of the COVID-19 pandemic, the size of the Fed’s balance sheet has increased massively, and the composition of its balance sheet has shifted towards less liquid, higher-risk assets on an unprecedented scale. For those (risky) Fed programs for which both a maximum scale and a Treasury guarantee/equity injection can be established easily, we find up to $1,950 billion of potential Fed exposure and a mere $195 billion of Treasury equity to back it up. If any of these Fed balance sheet risks materialise, this is likely to involve a hit to the Fed’s capital and an associated redistribution from the tax payer (or the beneficiary of public spending) to the defaulting bank, non-financial corporation or household. Such (quasi-)fiscal redistribution is not part of the Fed’s mandate. Its legitimacy and ultimately its operational independence in setting the policy rate and acting as lender of last resort and market maker of last resort is undermined and may be taken away from it.

Stress testing of the largest bank in the COVID-19 era has been a debacle this year. It is time to undertake immediately a new comprehensive DFAST 2020 stress test, simultaneously with the Comprehensive Capital Analysis and Review (CCAR), which is a complementary exercise to DFAST.

As part of CCAR, the Fed “evaluates institutions’ capital adequacy, internal capital adequacy assessment processes, and their individual plans to make capital distributions, such as dividend payments or stock repurchases.”6 The manifest overlap with DFAST is a fact of life and not necessarily a negative feature, because in a world shaken by the pervasive uncertainty created by the COVID-19 epidemic and the political and economic responses to it, redundancy and duplication can, up to a point, be a blessing rather than a curse.

In the meantime – until the results of the new DFAST and CCAR stress tests are known, the uncertainty principle calls for extreme caution in the regulator’s approach to the capital adequacy of systemically important banks (and indeed of banks in general). I would favour not just a ban dividend payments in 2020 Q3, but the imposition of a requirement for additional equity issuance to boost the capital adequacy of the US banking system. New equity issuance sufficient to ensure that, under the worst downside scenario, capital ratios do not decline below 10% in 2020 Q4, would be a modest step in the right direction.

There is hope for the Fed, but it must change its ways.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. Steven B Kurtz

    Fiat, credit based currencies are stimuli for planetary destruction. Neoclassical economists have no clues about non-renewable resources, waste sink overload, biodiversity loss, toxic levels in the food chain/water/air…and most importantly that increasing consumption exacerbates all of these.

    Negative interest rates (demurrage is another term) penalize savings. It is a perverse reward for being spendthrifts. Debt is a cancer which disempowers borrowers, and so is monetization of debt (money printing) which devalues people’s earnings. The delusion that money/credit has inherent value will hit home when these economists’ lights go out, pantries are empty, faucets go dry, and they are freezing or roasting at home. They might deserve it, but the system breakdown will affect all of us.

    1. Ian Ollmann

      Savings, in a bank, are already discouraged and have been for quite some time. Most people who care about yield have moved to other storage modes, such as bonds or stock ETF that still have a return. I’m a bit concerned about how much publicly traded companies are going to suffer due to economic retrenchment as a result of gut punching the lower classes at first sign of pandemic. Many already drunk on debt. That could be a problem.

      If you are worried about the lights going out, may I recommend you investigate diversifying into home solar with battery storage? The latter will allow the panels to function when the grid is no longer available to sync with and can help pay for itself in the mean time by arbitraging time of use electricity pricing if your local electricity provider provides that. It will also pay back a very safe inflation protected ROI in the form of reduced power bills. Assuming full sun, the guaranteed ROI may be better than traditional historical performance of the traditional equity debt investments, depending of course on local electric rates, net metering, etc. You can even charge your car with it. I should also think that reliable power would be good insurance in protecting your stock/bond portfolio against a crash. You can’t sell if you can’t trade. At least in our area in California, the landlines don’t work in a power outage anymore. You can possibly invest in some sort of satellite based communication, but it won’t work (for long) if you can’t power it on your end. Subsidies in the US are expiring soon.

      A generator won’t work if you can’t get fuel delivered for it. If the grid goes down for a while, you should question whether even if the fuel delivery companies are willing to accept cash, they may not be able to keep up with demand.

      1. Maritimer

        “If you are worried about the lights going out,…”

        Yes, I am but not so much about the lights but the fact that if that occurs in the CASHLESS society (electronic, digital payments only) the Elite proposes, one can’t buy food, gas, pay bills, etc. Covid 19 on steroids! (Ever been in a Stupormarket when the puter goes down? Cash only!)

        And, with all their years of meetings in DC, Brussels, Geneva, backrooms and luxury resorts, the Elite must have another agenda here as regards a single electronic payment system. They cannot be so stupid as to construct a single payment system that is extremely vulnerable in part or in whole to solar storms, cyberattack, computer viruses, EMP weapons, war, etc.

        So, contrarian economic experts: what is the real agenda of a cashless, single digital payment system? (I am quite astounded that no contrarian leading light has addressed this issue.)

        1. deplorado

          Prof. Richard Werner (definitely a contrarian, but perhaps holding some controversial views too unapologetically to be given more mainstream visibility) addresses this issue from time to time in various venues. My understanding is he believes this is part of a total Sovietization of the world economy – i.e. central command and control of the world economy.
          It certainly is starting to seem like that in the US-aligned world.

    2. Susan the other

      IMO we’ve been enthralled with the concept of “debt” without ever understanding it beyond the exchange of things like gold coins. I wish David Graeber had not made the bold assertion that “debt is money.” What is money is credit. Credit is not a logjam, credit has a fluidity that what goes around comes around. Blaming fiat for financial imbalances of debt is off the mark. Blaming an unenlightened logjam mentality about fiat debt is a more accurate explanation. Likewise blaming ecological exploitation and destruction on too much fiat is wrong. To my thinking we should blame exploitation and destruction on the profit motive. It has actually gone from a motive to an imperative as the options for easy profit grow more scarce. So more money is borrowed and more destruction is used to achieve ever smaller profit. It has nothing to do with fiat. Fiat is just an efficient financial technology; digital fiat as well.

      1. Ian Ollmann

        So, one way of looking at the current neoliberal thesis that “the way to run an economy is to gradually starve the masses” is that it is probably very green. We already know that for the lower classes, savings rates are low. Money in = money out. To the extent that economic activity Is a proxy for environmental destruction, it would seem to follow that starving the the vast majority of people should reduce destruction. There is only so much champagne one rich man can drink! Obviously there are plenty of counter examples of desperate peasants denuding the countryside of trees for firewood. Maybe we are mostly urban now in industrialized countries. In any case, the wealthy, who mostly just chunk extra cash into the markets as it becomes available, serve as a sponge to absorb excess liquidity and thereby avoid inflation, except of course in the markets themselves. Yields have been dropping for years from too much cash chasing too little return. We even have the masses doing it through 401ks. It would be nice if this grand Ponzi scheme was based on real value, but as we recently learned 80% of our economy appears to be non-essential! There is still time to fix that, at least for when I want to withdraw from my 401k, but I live in a deluded world where asset valuation should reflect returns and it seems abundantly clear that most do not agree!

        I’m not saying we should starve the poor, mind you. It certainly would be better if most middle class citizens at least had the wherewithal to buy an EV and install solar, and demand green products even if they cost a bit more. We need them to do that. At current income levels, they are going to be looking at landlords and auto companies to solve global warming for them. Neither is particularly motivated to do so. Nor are the wealthy very motivated to solve poor men’s problems. We have a culture of starving the poor after all! For now, it is up to the wealthy to save the elephants. They really can not be expected to speak for themselves or demand justice. I gave.

        You are certainly right about the profit motive being misdirected at times. Any cost that can be foisted off onto someone else will be. Capitalism does not serve need, but only desire. The man who does not check his desires into the service of his needs will be ill served by capitalism indeed. “Personal responsibility!” says the Right. They might know something about the shortcomings of capitalism, if you listen carefully. One might just ask, however, whether it is really necessary to lay such traps at the feet of your fellow man, or if it would be better UI design to just make the right thing easy and the wrong thing more difficult. I would rather my fellow man was more virtuous, if even for the wrong reasons.

  2. Brian (another one they call)

    I would ask Mr. Buiter to find a new line of work. He is a fine example of the new collection of expert yet idiot (from the definition I have read I believe he qualifies) Trying to make a system of absolute theft and mayhem into something that can be explained by drivel. The Fed is in trouble for many reasons; destroying the currency, pandering to solely rich board members demanding profit in the face of collapse, ELB should be removed so interest can go lower still?
    Buiter cares nothing for humanity and would throw all under the bus for the sake of profit based on interest rate arbitrage or whatever he might think is double plus good.
    No word on the impoversishment of citizens of all nations putting away things of value to allow them to stop working for peanuts to survive as the value of all their savings melt away to pay for the inflation this curiosity would visit upon us.
    Alas, no Mr. Buiter. You are insane and the premise you suggest only exists in the foggy stretch in the imagination of your fellow travellers on the road to extinction.

    1. Yves Smith

      I would not have posted this piece. Buiter did great work before the crisis. Going to Citi seems to have diminished him.

      The advocacy of negative rates is all wet. The Fed has actually realized it is not in a good spot even with mere super low positive rates but has been unable to get out of that corner.

      1. OpenThePodBayDoorsHAL

        All four of the CEOs of the largest banks in Europe stated and were quoted on roughly the following: “Negative interest rates destroy the banking system”. They would know. Odd that the “regulator” charged with the necessity of maintaining the stability of the banking system (having abandoned the necessity of maintaining the purchasing power of the scrip) are leading their wards headlong to that event horizon.

        I give you $1000. In two years, having received *zero* for the right to use my money for two years, I receive $980 back. We’re talking about something here but I’m not sure the word “money” applies any more. And I’m not even sure the words “lending” or “credit” describe what’s happening any more either. “Confiscation” comes to mind.

        Governments should manufacture and issue money from their Treasurys. If other organizations want to get paid for underwriting risk and lending said money, great.

      2. vlade

        Buiter lost it. Apart from point 3 (which seems to me to be there just to he can have three points), it’s like he got a fresh Econ undergrad write it for him, steeped in the bad old way economists worked for years before 2008. He just left off the austerity, as that’s not CB’s issue, except he does touch on it with point 2, complaining how the CBs are taking “credit risk on […] households”, and that via Fed, the Treasury is.


  3. griffen

    Maybe its too early or the fact it’s a Sunday. Is the Fed privately owned by the member institutions, and if thats a yes then how would the US Treasury guarantee anything ? I quit reading after that.

    My recall is the member banks commit reserves to join the regional Fed. For a brief window I worked at a smaller institution who did so with the Dallas Fed.

    1. Paul Hirshman

      It seem that the Fed is an immense scam, perhaps the most immense in world history. Private banks, and their private shareholders, share power over our credit and money system with the Treasury. These semi-private, extraconstitutional interests, decide how to supervise an economy from which they benefit personally, via the manipulation of interest rates and the purchase of private assets of various sorts, using its unlimited credit-creation power. Private parties have a say in whether to create trillions of dollars of liquidity, whether to buy the bonds of this or that privately held corporation (which the bank shareholders own shares of), and whether to provide dollars to foreign governments. But you don”t. Hahahahahahahaha. Sodom and Gomorrah were merely rural county branches of this operation.

      1. John k

        But the 33 banks mentioned have so much clout it is more accurate to say they run the treasury. Certainly only their reps are considered for top posts.
        No doubt why blankfein was so distressed by the thought of a sanders presidency.

    2. John Zelnicker

      July 5, 2020 at 10:28 am

      The Federal Reserve is an agency of the federal government, created by an act of Congress, as amended from time to time. It is not owned by member banks.

      Yves has written extensively about the structure of the Fed. According to the topic list on the right there are 1,372 posts on the Fed.

      Nathan Tankus has done a great job of explaining what the Fed is doing to support investments during the corona virus crisis as well as posts detailing how monetary policy and the payments system (clearing checks) works.

      I recommend it highly.

      1. griffen

        Thanks for the correction. I will do my homework accordingly.

        Proving once again, commenters are the best around.

  4. Oh

    I read through the article a couple of times but I couldn’t understand what problem(s) he wants to solve. Is he concerned about the legitamacy of the Fed’s actions? What good will it do if the Treasury guarantees the Fed’s actions? The whole article confused me! Maybe I need more cups of coffee this AM.

  5. Susan the other

    If the Treasury takes over the Fed lock, stock and barrel, who becomes the “lender and market maker of last resort?” If that was Rogoff’s idea, I’m pleased to see it: “abolish currency and offer every citizen/person access to a central bank digital currency.” I wish I had read what I thought was coming: just nationalize the banks. Stop pretending there is a firewall between Treasury and the Fed. The real reason the Fed is making “quasi” fiscal decisions is because Congress is on vacation. Always. There is no justification for blaming the Fed for the irresponsible behavior of Congress. It was interesting to read Buiter’s comments on financial sanity about the ELB – “get rid of it altogether because it does not provide stimulus to aggregate demand” (Somebody please tell Congres what this means in terms of fiscal responsibility.) and his description of a financial policy (fiscal too?) that creates a full “symmetry” interest rate that can fluctuate between negative and positive positions as necessary. This was so informative, especially in comparing the ECB with the FED – the ECB is hamstrung because it has no EU Treasury. Also known as sovereignty. I’m thinking that if we had a “symmetry of finance” in times of crisis (or all the time would be even better) it would be very MMT because money out, money in. No usurious profit? No problem. Instead we now get Congress sending off stimulus money to small businesses, using private banks as intermediaries who must not create any non-performing loans for themselves or they’ll be out of business, and etc. Absurd. The banks would probably be pleasantly relieved to be nationalized.

    1. Jeremy Grimm

      “If the Treasury takes over the Fed lock, stock and barrel” — what does the Treasury need the Fed for? I believe the US Treasury and the Fed are two peas in the same pod. The Fed acts as a convenient ‘cut-out’ for the US Treasury’s actions caring for the interests of those who own the Government.

      1. Ian Ollmann

        The separation is necessary to give the illusion that we can’t just print money whenever we like.

        1. HotFlash

          I have met couples like that. He says they can’t because she won’t, and she says they can’t because he won’t. I am sure some self-help- guru has a name for this sort of mutual facilitation. And so between them both, they’ll lick the platter clean.

  6. Mikel

    All that happens with the lower and lower rates are overhyped, overinflated asset bubbles…housing and stock market.
    None of it is worth what is said. All lies.

    The little BS trickles to small biz and average households amounts to ZERO with all the unspoken INFLATION in prices of everythimg that is a necessity. Y’know, the things they don’t include in their BS inflation index to keep this outright scam going.

    All I see is a sought after global currency crisis in order to move to the grand cashless theft that is the bankstas wet dream.

    1. JEHR

      The banks and large (global) corporations have already figured out how to milk profit from everything they engage in. The money flows to these entities from the rest of the population who are left with the dregs that may not even meet the bare necessities of one’s life. Why should they change anything? Only the people en masse will be able to make total change and I’m not sure that will happen in the future, at least not in the near future.

    2. Don W.

      In addition, stimulus makes no sense during the pandemic. Non-sociopaths don’t want people going to work to produce non-essential stuff/services or going out and spending money beyond the essentials and spreading disease and death. If we try stimulus while at the same time the pandemic suppresses production, I would expect that to cause inflation. Stimulus is for after the pandemic. Rescue is for during the pandemic.

      In that context, higher rates to encourage savings and less spending could be desirable when trying to get a pandemic under control i.e. during the rescue phase. This is more as a counter-example to the idea that low/negative rates are desirable. Fiddling with interest rates in any direction is pretty much fiddling around the edges and is not a substitute for effective legislative action.

  7. Jeremy Grimm

    I tried but I couldn’t read this post. Unemployment in the US is at its highest level since the Great Depression; small businesses are dropping like flies; links in the supply chains for food and pharma are snapping; unknown other supply chains, suspected to be fragile, creak and strain under growing stresses; civil unrest is growing, as our police riot; rents are due from renters locked down from their work — or worse — told they must return to work in unsafe conditions; mortgage payments and credit card debt are growing past due; and I’ve only just scratched the surface.

    Am I really expected to waste attention or concern that the Fed “… accepts the Effective Lower Bound on the policy rate as an absolute constraint rather than as something that, from a technical perspective, can be eliminated easily. For legitimacy reasons, eliminating the ELB and creating full symmetry of the policy rate around zero should be a decision that is approved by the Treasury and possibly by both Houses of Congress.” If this gibber means the author of this post believes the Fed really really needs to add negative interest rates to its bag of tricks … with Congressional blessings for ‘legitimacy reasons’ … am I wrong to wonder whether this author is stark raving mad? [I missed the arguments for why negative interest rates are needed or ‘good’ and the details presented for how to implement negative interest rates are — to put it as nicely as I can — obscurely presented.

    Greater transparency of the Fed actions sounds good, but am I really expected to agonize because “… the Fed has taken on significant credit risk by lending to and purchasing risky debt instruments…”? This isn’t the first time the Fed took on significant credit risk but I was under the impression “the US Treasury guarantees the entire balance sheet of the Fed.” Why does a statement of fact need to be a guiding principle? Our poster wants the US Treasury to work jointly with the Fed … and the rest of the argument goes place I can’t follow. From here in the peanut gallery I get the strong impression the US Treasury does work jointly with the Fed but goes to lengths to appear to hold the Fed at arm’s length. If the poster is really concerned about transparency the four examples of risk “all taken from the Fed’s own press releases” bear a closer look. All four actions are complex, indirect, and I believe deliberately designed to hide their impacts on the economy. The Fed operates with obscure levers to had transparency.

    The bank stress testing worked so well the last time I don’t see the value in wasting any time on this section of the post. From my view in the peanut gallery the US Political-Economy faces a dire future. If the Fed’s bailout of our wealthy is the best we can hope for — we are in for a very rough ride.

    I know this post is just written the way economists write but I believe this particular economist should be compelled to read some Keynes for writing style and clarity [but as for content I doubt any of that would sink in].

    1. deplorado

      >> “am I wrong to wonder whether this author is stark raving mad?”

      He is not mad. He is just doing his job – push an agenda. And that — that is totally rational.

  8. ewmayer

    Typical central-banker techno-jargon blah blah blah, designed to distract the mopes from the ongoing looting of the fruit of their labors, by way of relentless “inflation targeting” in prices and equally relentless crushing of wage infation, and via central-bank-promoted asset-price bubbles, each one bigger and more destructive to the proles than the last.

    And the handwringing about the state of the precious TBTF banks – capital adequacy, shmapital adequacy: We already know about the Loanable Funds fiction, i.e. that in reality bank lending is not capital-constrained. And should any of the TBTFs or other “systemically important financial institutions”, including, apparently even parasites like hedge funds, blow themselves up with bets gone wrong, Uncle Feddie will simply conjure up as much fiat as is required to take those toxic ‘assets’ from their balance sheets to its own, deliberately overpaying in the process (as Ben Bernanke noted the Fed should do prior to the maga-bailouts following the GFC) in order to magically recapitalize things. What a racket.

  9. marku52

    I too don’t see the point of all this flim-flammery. Is there anyplace where there has been an observed benefit to negative rates? Low rates are already burdening savers that depend on their savings for income. I might “stimulate the economy” quite a bit more if there were a safeplace where I could put money at 5% interest, as in the old S&L days.

    Go ahead, limit the 5% accounts to $100K, one per person, with no ownership through cutouts like LLCs. I bet this would be much more “stimulating” than all this negative rate stuff, that mainly seems to create asset bubbles.

    1. HotFlash

      This sounds good, and would work as a start. However, what about ‘offshore’ and other undeclared accounts? I remember a few decades back there was a bank break-in at one of our city’s biggest Chinatown branches. The thieves broke into the safe deposit box vault, ignoring the cash. Note: FDIC/CDIC does not cover contents of safe deposit boxes. The lineup of depositors looking to check their boxes next day was *enormous*.

      My point: Unless there is an enforceable transparency agreement among international banking institutions, we will just see endless rehashes of the old shell game.

  10. George

    Here is the Bank of International Settlements questioning CB policy a few years back.

    In our model, central banks implement unconventional measures to provide credit to the economy when bank lending is impaired. We seek answers to the following questions. If unconventional measures are used effectively to address financial market impairments, do they also reduce the likelihood that interest rates will reach the effective lower bound? Should central banks use interest rate policy at all, once they have deployed unconventional measures? How long should they optimally keep those measures in place?

    The BIS at the time suggested raising rates; Sorry but I can’t find the link but saved their minutes because it resonated with me at the time. Shortly after this Powell began raising interest rates; we know how that worked out.

  11. Sy Krass

    Digital currency? Great we already have it. Everytime you see your bank account on a computer screen and make a payment electronically is a digital transaction. Why get rid of currency? What is the piont?

    1. HotFlash

      1.) I do not necessarily want Everyone knowing what I buy. Trivial example: I look up a recipe for home-made apple vinegar, and get click-bait for toenail fungus for weeks. I click on an ad at NC for Make Billions in Foreign Exchange! (I like to help Yves) and get ads for FX trading, BitCoin, yada. I do flush my cache, but can’t always do it before They tag me.

      2.) Although I am not engaged in any unsanctioned journalism, I do appreciate the journalists who do it and their work product. Ways I can pay them back include $$=> them and also my help in muddying the waters/making the haystack bigger.

      3.) I resent that the stores I must use for basic commodities want very much to track me and my purchases, which info they use for their own purposes, and also sell. To whom? If I were to run afoul of The MOTU (not likely, although you can’t rule out their trapping plankton such as myself), they could identify me wherever I go b/c it is *this* hand lotion, *that* shampoo, *that* brand and shade of lipstick, *that* candy bar. I learned from Stranger in a Strange Land, “Believe me, dear, a diet order can be as individual as a fingerprint.” Thanks, Bob!

      4.) Powerout => you got no money. We had a multi-national blackout in 2003. In out part of the world it lasted 4 days. Not perhaps earth-shattering, so long as you have a backup — you all digital? Good luck with that.

      5.) External control. Ahem. If Da Banks, and Da Gummint, and Da Corporations control *all* your access to the stuff by which you can continue to live, you are totally not free. It’s a noose. Stick your head in voluntarily? Ok, fine for you, but me, I don’t trust them. They wouldn’t do that? I am sure Ann Frank’s parents were surprised.

    2. deplorado

      Im going to go on a total limb and say, get rid of currency (i.e. dollar) so as to entirely disconnect it from fiscal control and authority. Disconnect the link with a nation-state. Make the next reserve currency truly, legally, supra-national. Not connected with a country’s budget deficit.

  12. Sound of the Suburbs

    The central banks are picking winners.
    As they are independent, there is not a lot we can do about it.

    The FED picks the winners, but you weren’t on the list.
    Tough luck, buster!

  13. anon78

    Though negative rates on risk-free deposits may seem “balmy” to some, they are an ethical necessity EXCEPT in the case of individual citizens to a reasonable account limit – to avoid welfare proportional to account balance.

    Thanks Lambert for this interesting article.

  14. Glen

    The Fed has not “been in a good place” since Greenspan rammed interest rates into the ground and held them there to pump up W’s economy.

    And the Fed has repeatedly demonstrated that giving the crooks in Wall St access to endless funds is a good way to WRECK the American economy.

    Whocudanode? Everybody by now.

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