17 Dec 2010

Regrets, I Have a Few…

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…and since it’s late / now I’ll list them.

OK Bob Wenzel says that if you have bad news, you should dump it late on a Friday when nobody will notice. So here goes:

* Bill Woolsey is right that I skipped a step in my Bernanke bashing. Ever since people started saying, “Of course we won’t have big price inflation; Bernanke can just bump up the interest rate on reserves!” I have said that that is literally just postponing the problem while it grows exponentially. I had in mind the idea that if excess reserves are, say, $1 trillion, and the Fed has to offer 10% to keep M1 from exploding, then excess reserves next year are going to be $1.1 trillion. But, Woolsey is right (assuming I’ve understood his objection) that technically that doesn’t have to happen. The Fed could (at least for a while) simply reduce its “equity” position, either in a relative sense or even an absolute sense. For example, if $100 billion of Treasury debt is maturing, and normally the Fed would just roll it over, instead the Fed could pay that $100 billion to the banks. So total reserves (and hence excess reserves) wouldn’t go up. The Fed would basically be sterilizing its interest payment to the banks, by selling off a chunk of its bond portfolio. (I think I have this right. If not, Woolsey can take me to the woodshed again.)

* As far as this post and this post, well shoot what can I say.

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