Unconventional Monetary Policy: From the comments

Special thanks to studentee for this link from Nick Rowe. The discussion is full of goodness, beyond the points raised in my previous post. In particular, I will pull out this assertion and rebuttal from Nick & RSJ.

First Nick:

I am Ben Bernanke. I commit to printing trillions and buying up every single financial asset -- government bonds, commercial bonds, stocks, and new stocks and bonds as issued, and will keep on doing this forever and ever until my NGDP target is met. At this point even rsj says, "OK, that would maybe increase future AD by $1, and increase future NGDP by $1". So now everyone starts spending more, even if it's just a small amount. But that's not an equilibrium expectation either, because we are still not at my NGDP target, so I repeat my commitment, and rsj raises his expectation another $1 when he sees that everyone else has raised their expectation too, and raised their desired spending. And so on.

Roosevelt did it. The Swiss did it. Central banks have been loosening monetary policy and creating inflation throughout history. Did history come to a full stop in 2009?

Half the US seems to be afraid of inflation. All Bernanke has to say is "Yep, I'm going to do whatever it takes to make sure your fears are justified!"

Now RSJ:

The Federal Reserve cannot purchase any financial asset. What the bank can and cannot do is defined in the Federal Reserve Act.

It can purchase obligations of the U.S. government, gold, bills of exchange, and agricultural paper. Adding that all up, you have at most about 7 Trillion or so of assets that the central bank can buy (it does not buy gold today).

After that, there is nothing left for the CB to legally buy.

Compare that to the 60 Trillion or so of U.S. assets that are out there.

Again, this is where knowledge of the institutions is important.

By the way, there is a *reason* why central banks cannot purchase "baskets of output" or "all assets", as you keep insisting.

Even the ECB, which has no risk free assets to purchase, is limited in what it can buy, both legally and effectively (e.g. politically, by the member banks that supply capital to it).

That reason is that should the CB purchase an asset that is defaulted upon, that loss of capital becomes a fiscal transfer from the ECB to the borrower.

That fiscal transfer has to be paid for by someone -- it is not paid for by the central bank, which is an intermediary between those who supply capital to it and its borrowers.

Therefore central banks can only engage in these types of transfers should the capital suppliers allow it.

In the case of the Fed, the capital supplier is the U.S. Treasury, and if the U.S. treasury wanted to make transfers (as under TARP), then it would do so itself, after permission from Congress, as spending needs to be authorized by congress and cannot occur as a result of CB policy.

So the democratic process limits the amount of fiscal policy that central banks can conduct under the guise of monetary policy.

Even if you are confused about the distinction between the two -- the legislators are not confused; which is why they have put strict limits on what central banks can and cannot buy, in order to limit any unauthorized ex-post transfers.

Discriminating minds want to know if Government backed Solyndra debt is (legally) purchasable by Bernanke. Also, how about open swap lines with Mexcico?