Is QE contractionary?

I ran across a fascinating blog post by Peter Stella at Vox-Eu on exit strategies and QE. 

Peter points out that only banks can hold reserves, while anyone can hold short term Treasuries. And you can easily use Treasuries for collateral.  That means that short term Treasuries are in some sense more liquid than reserves, and that by buying huge amounts of Treasuries and issuing reserves, the Fed may be actually contracting. 

In Peter's words:
Large Scale Asset Purchases (LSAPs) have inadvertently caused a significant change in the composition of assets available in the open market.
  • The stock of marketable, highly liquid, AA+ collateral fell by trillions (disappearing into the Fed’s portfolio, i.e. System Open Market Account).
  • The stock of assets available only for interbank trade (bank reserve deposits at the Fed) rose by trillions.
..Treasuries and Fed deposits are equally safe. But they differ significantly in their marketability. Anyone can trade Treasury securities; only banks can exchange Fed deposits. ... 
  • Banking and money creation has not worked for at least two decades in the way that most people learned in school.
The old system was rather simple in the textbooks. The basic assumptions were (i) all credit was provided by banks; (ii) all bank credit (assets) were funded by the issuance, or creation, of depository liabilities (money) subject to a reserve requirement; and (iii) central banks controlled credit/money/inflation by rationing bank reserves. A stable 'money multiplier' was hypothesised to allow central banks to accurately predict the eventual impact of changes in bank reserves on money and credit. 
The problem with the old theory of monetary operations is that none of the three assumptions has been true for at least a generation. 
Most credit in the US is created by nonbanks; virtually all bank lending is funded by the creation of liabilities that are not subject to reserve requirements,3 and central banks do not ration reserves. In fact they take great pains to provide banks with the amount of reserves they desire. Central banks influence credit not by rationing the quantity of reserves but by altering the interest rate that banks must pay to obtain the quantity of reserves they desire.
  • Today, credit creation in general and money creation in particular are no longer tied to the stock of reserves (i.e. the stock of banks’ deposits at the Fed).
Today, bank deposits at the Fed have only one real role – to facilitate management of the payments system. They are used to settle transactions among banks. Thus:
  • The old notion that the quantity of bank reserves constrains lending in a fiat money world is completely erroneous.
  • Traditional monetary policy has virtually nothing to do with money.4
....Plainly the stock of reserves is no longer connected to credit or meaningful measures of “money” via the old-notion of a reserve-ratio-based money multiplier. 
I don't buy it all, and I think some of the magic properties of treasuries as collateral and money are a bit overstated. But I'm collecting interesting stories by which it might be the case that current monetary policy has the opposite of the intended sign or other unexpected effects.  Peter certainly offers an interesting example.

He also points out that simply raising interest paid on vast reserves may have different effects than conventional policy which rations reserves. At a minimum he corrects my frequent assertion that reserves and Treasuries are perfect substitutes. No, Treasuries might be more "liquid''!

(Thanks to Thorvald Moe for pointing me to this interesting post.)


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