Maybe I don't understand where you are coming from... but why couldn't the fed do the usual moves to tighten? Once it's redeemed and becomes cash, it's pretty simple, no?
no kidding, but you know, I was a trader and always tried to protect and insulate my kids from the ups and downs of the market. I never wanted to tell them, "We can't afford dinner tonight because Papa was long and corn went down." So you try to maintain some kind of stability but yes, it would be a lot easier if we just treated every tax payer as an adult
He doesn't acknowledge that the cash is NOT getting into the money supply. The bill/note/bond expires and you either roll into a new one or take the cash. It is that simple. Who cares how big the balance sheet becomes, as long as the money supply IN CIRCULATION hasn't increased markedly...which it hasn't. Still waiting to hear his better alternative to what the Fed is doing.
When the fed adds security, say treasury bills to its balance sheet, it pays the counter party in cash for the security, thereby expanding the money supply. So the expansion of the money supply is obvious. If it doesn't roll, then the redemption is equivalent to taking cash out of the money supply. When you say 'in circulation', I assume you mean the expansion of credit rather than the velocity of money?
Sure, the Fed could absolutely tighten. Nothing would stop them from raising rates, and making money more expensive. This is designed to do what, primarily? Put the brakes on the economy when it overheats, right? It makes money less accessible (more expensive) and harder to come by (in theory). The problem is, think of all that "stuff" the Fed bought off the banks. I'm not going to argue with you guys on the quality of that "stuff" but the Fed paid the banks cash for it, in the form of printing money. Why did they do this? The official line from the Fed was that they wanted this cash to go into the greater economy to stimulate spending and lower unemployment. But what actually happened? The banks parked all that money right back at the Fed to use as reserves, and then used it as collateral to increase leverage and speculate in the markets again - stocks, commodities, bonds, whatever. Anything that would offer return in such a low interest rate environment. The Fed wanted them to lend it, but why lend it to a population that simply did not have the credit worthiness to provide them the risk level they wanted, when they could speculate and make much better returns? So that money sits at the Fed. If the economy heats up and the Fed wants to tighten, there is still that pesky several trillion dollars of reserves that will sooner or later come out. The only way the Fed gets rid of that is to sell back it's "Stuff" to the banks and drain cash from the system. Hence, it must reduce it's balance sheet. Raising rates is fine, but making money more expensive when there is already so much out there that is cheap....well, like putting the cart before the horse, so to speak. Hope that helps.
Yes, this is the case with the purchasing of bills from the US Treasury. The Fed buys from the primary dealers who buy from the Treasury and then sell back to the Fed (minus a nice "fee"). But with all the other "Stuff" in the aforementioned post, this was given as cash to banks outright.
Um.... all that other 'stuff' being MBS, which the fed managed to buy at pretty a hefty discount. Buying a security for cash isn't exactly 'given as cash to banks outright'. If the Fed were a fund, they probably would have been considered as a pretty impressive investor. That MBS portfolios throws out tons of interest payment and eventual redemption. It will eventually become cash just as the bills/bonds portfolio. So what's the problem? I still don't understand where you see as the problem for the eventual shrinking of this balance sheet. (Finally, as someone who traded treasuries for the buy side, your statements on how the buy back works for primary dealers is pretty off).
I'm sorry, but this sentence doesn't make any sense to me at all. Make money expensive is pretty freaking simple for the Fed, no? In this context, I don't see what the cart is, what the horse is, and why one needs to be in front of the other.
I believe this speaks to the crux of the matter, and is the source of disagreement. There are those, they are in the minority, who would have preferred the Fed to have taken a different tact. There are many who think that leaving the gold standard was the watershed event, and it may have been. But isn't the reality that it became impossible to maintain? There are even some who would want to go back to a gold standard! What's done is done, and we are not going back. The majority of economists believe that a Keynesian approach to recessions --and this was a major recession -- is the best way to handle them. They shy away from using Keynes name because of all the bad publicity, carping and bitching over Tarp, the bailouts and stimulus. The path we are on was chosen because those in charge weighed the alternative, which was at best a prolonged and deep recession and at worst a depression and deflation. So there remains too opposing schools of thought. Those who seemingly want to deny reality, and those like myself who think the course the Fed, Treasury and Administration embarked on was the correct one, given the circumstances. It will take years for full recovery, and too many are impatient. I see signs that the economy is moving in the right direction and that a deeper recession, at least so far, has been avoided. Kudos to the Fed. True, the Greenspan Fed played a major role in visiting this mess upon us. Now the Bernanke Fed is rescuing us. Bernanke is not Greenspan, and thank goodness! There is no painless cure, but I am not going to second guess, I am unqualified to do so, what seems to me to be an exceptionally competent and consistent Bernanke led Fed. By the way, for those interested, I believe that John Williams at shadowstats.com keeps track of M3.