21 Jun 2010

Dean Baker Looks at the Fed, and He Likes What He Sees

Economics, Federal Reserve, Financial Economics 10 Comments

It’s really funny how economists can look at the same basic facts and reach such different conclusions. For example, I only recently really understood what the deal was with the Fed remitting its excess earnings back to the Treasury. And when I had finally comprehended the scheme, I concluded: The Fed is a giant counterfeiter!

In contrast, Dean Baker–much older and more traveled in power-broker circles–apparently knew this for a while. And here’s what Baker has to say about it:

Actually, the debt being run up at present is helping future generations by keeping their parents employed, improving the infrastructure and providing them with a better education. There is little or no real burden associated with this debt since much of the debt being issued is held by the Fed. The interest on these bonds is therefore paid to the Fed, which in turn refunds the money to the government.

Last week, the NYT reported that the Fed paid more than $47 billion in interest to the government. So, where is the burden on our children?

At least when Brad DeLong talks about the magic of painless deficits, he always qualifies it by saying these arguments only apply in a liquidity trap. But in Baker’s post here, he doesn’t even throw in something like, “Of course, under normal circumstances if someone said the federal budget deficit were painless, because the Fed could just monetize it, then we would have to send that fool to Zimbabwe.”

But nope, here Baker just mocks people who actually think $1 trillion+ deficits might not be such a good idea.

10 Responses to “Dean Baker Looks at the Fed, and He Likes What He Sees”

  1. Bob Roddis says:

    Once one becomes familiar with the period 1913-1948 thanks to Bob Murphy, Tom Woods, Ron Paul and Bob Higgs, one asks, “Where’s the factual basis for Keynesianism? Where’s the theoretical basis”? We can also ask,” Where’s the complete Keynesian critique of the Austrian School?” Such analyses simply do not exist. I think that says it all about the cowardice and dishonesty of the Keynesians. Baker’s usual M.O. is the same as DeLong’s: If you don’t understand our Keynesian paradoxes, it’s simply because you are just not as smart and clever as we are.

    Baker has a few chapters in the leftist version of “Meltdown” where he writes:

    Pushing down the value of the dollar should also be a top priority. There is no way to correct our trade imbalance with an overvalued dollar providing a massive subsidy for imports and imposing a tariff on U.S. exports. A lower dollar will make U.S. manufactured goods far more competitive in the [p.130] world economy, and will thus create a large number of relatively high-paying jobs. One benefit of the housing meltdown is that it should be much easier to get our trading partners to go along with a lower dollar now that we can show them how much money they lost by investing in U.S. financial assets that have gone had.

    Who elected Baker king of the universe where’s it’s “OK” to “push down the value of the dollar”? This sounds like Hayek describing Keynes’ plans for Britain in the 1930s: Trick the workers into accepting lower wages through inflation without them realizing what hit them.

    Dishonesty and arrogance: A sign of bad character.

  2. Bob Roddis says:

    The last phrase of the Baker quote above should have read “by investing in U.S. financial assets that have gone bad

  3. Taylor says:

    Guys, guys, guys! This is so simple, how do you not get it? Allow me to explain:

    See, we owe it to the Fed, because the Fed is bailing all of us out. And the Fed owes it to the Treasury because the Fed refunds its interest income to the Treasury. And the Treasury owes it to us because we the people own the government.

    So, Keynes was right! We owe it to ourselves! How can I be indebted to myself, hmm? That does not make sense.

    Ladies and gentlemen of this supposed enlightened economic circle, I have one final thing I want you to consider. Ladies and gentlemen, this is Chewbacca. Chewbacca is a Wookiee from the planet Kashyyyk. But Chewbacca lives on the planet Endor. Now think about it; that does not make sense!

    Why would a Wookiee, an eight-foot tall Wookiee, want to live on Endor, with a bunch of two-foot tall Ewoks? That does not make sense! But more important, you have to ask yourself: What does this have to do with Dean Baker and owing debts to ourselves? Nothing. Ladies and gentlemen, it has nothing to do with this situation! It does not make sense! Look at me. I’m a a 4th-tier blogger from the internet defending a major institution of Keynesian wealth-redistribution, and I’m talkin’ about Chewbacca! Does that make sense? Ladies and gentlemen, I am not making any sense! None of this makes sense! And so you have to remember, when you’re sitting around the internet deliberatin’ and conjugatin’ the Emancipation Proclamation, does it make sense? No! Ladies and gentlemen of this supposed enlightened economic circle, it does not make sense! If Chewbacca lives on Endor, you must grant the logic of Keynesian debt schemes! The defenders of Keynesian economics rest their case.

  4. Contemplationist says:

    Bob this is nothing. The purest expression of the actual dinosaur 30s Keynesian view that deficits simply don’t matter (without ANY caveats) can be had by googling JK Galbraith’s son James K. Galbraith who is a tenured prof at UT Austin. Try it, you’ll be shocked in a funny way.

  5. Grandpa Oddball says:

    A giant counterfeitter? I wouldn’t phrase it quite that way. The money is “real” enough it’s just that the FED creates a lot of it! As for owing all this money to ourselves, of course we owe a lot of worthless dollars to not only ourselves but also to a substantial part of the rest of the world. And , unfortunately, our policies over the past 40 years have depleated our real wealth. The pollite term is that the dollar has become devalued but at its current rate the dollar will have little or no value in the future and will cease to function as “money”. Has no one heard of Gresham’s Law?

  6. happyjuggler0 says:


    The federal debt still matters. Imagine that instead of the Fed owning Treasuries, it owned corporate debt. It would still remit money to the Treasury each year, but in this case Dean Baker wouldn’t be caught dead saying the US debt doesn’t matter, because it would obviously be wrong. Any corporate officer would be jailed for fraud if he claimed that his company didn’t have to pay back its debt because the Fed owned it.

    The key here is that the Fed isn’t giving the Treasury back its own money. It is giving the Treasury dollars stolen via inflation from holders of those dollars. The debt instruments that it buys with those stolen, or counterfeited, dollars is totally irrelevant to the matter at hand.

  7. Mitchell Powell says:

    Yech. ‘We owe it to ourselves so it doesn’t matter’ is nonsense. Even if we lived in a world where all US government debt was in the hands of US citizens, proponents of the US debt should more accurately say. “The US government owes it to some of us and will take massive sums of money from the rest of us to pay it off, or else it will utterly debase the currency and cheat all of us. And because some of us owe it to the rest of us, it doesn’t matter except to the taxpayer or the holder of cash or both.”