Posts filed under “Think Tank”

Interactions between Monetary and Fiscal Policy

Interactions between Monetary and Fiscal Policy in the Current Situation
Vice Chairman Donald L. Kohn, At the Conference on Monetary-Fiscal Policy Interactions, Expectations, and Dynamics in the Current Economic Crisis, Princeton University, Princeton, New Jersey
May 23, 2009

Our current economic situation has altered some of the usual interactions between monetary and fiscal policy. One change regards the relative effects of monetary and fiscal policy. The depth and persistence of economic weakness has meant that traditional monetary policy–the target for the federal funds rate–has become constrained from easing as much as might be desirable under the circumstances, and, as a consequence, the target federal funds rate is anticipated to remain near zero for some time. But as a result, fiscal stimulus has potentially become more effective in boosting economic activity than it usually would be.

Another change involves the potential for monetary policy actions to have greater fiscal implications than usual. The Federal Reserve has extended both its open market operations and lending programs in unprecedented ways to ease financial conditions and to help revive economic activity. In our open market operations, we have embarked on large-scale purchases of intermediate- and long-term Treasury securities, agency debt, and agency-guaranteed mortgage-backed securities (MBS) in order to put further downward pressure on borrowing costs, greatly increasing the degree of maturity transformation on our balance sheet. In addition, our traditional liquidity operations have been extended to include new borrowers and new markets, with the potential for greater credit risk than usual.

In my view, our nontraditional policy actions have been necessary to avert a far worse economic outcome, and they remain consistent with the traditional goals and principles of monetary policy. Moreover, as I will be discussing, we have structured these policies with the aim of accomplishing our objectives with few, if any, fiscal consequences. I will conclude with some thoughts about the transition back toward more typical monetary policy as the economy and financial markets improve.1

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Category: Federal Reserve, Think Tank

Bernanke’s Boston College Law School Commencement

Chairman Ben S. Bernanke
At the 2009 Commencement of the Boston College School of Law, Newton, Massachusetts
May 22, 2009
Commencement address

I am very pleased to have the opportunity to address the graduates of the Boston College Law School today.  I realized with some chagrin that this is the third year in a row that I have given a commencement address here in the First Federal Reserve District, which is headquartered at the Federal Reserve Bank of Boston.  This part of the country certainly has a remarkable number of fine universities.  I will have to make it up to the other 11 Districts somehow.

Along those lines, last spring I was nearby in Cambridge, speaking at Harvard University’s Class Day.  The speaker at the main event, the Harvard graduation the next day, was J. K. Rowling, author of the Harry Potter books.  Before my remarks, the student who introduced me took note of the fact that the senior class had chosen as their speakers Ben Bernanke and J. K. Rowling, or, as he put it, “two of the great masters of children’s fantasy fiction.”  I will say that I am perfectly happy to be associated, even in such a tenuous way, with Ms. Rowling, who has done more for children’s literacy than any government program I know of.

I get a number of invitations to speak at commencements, which I find a bit puzzling.  A practitioner, like me, of the dismal science of economics–and it is even more dismal than usual these days–is not usually the first choice for providing inspiration and uplift.  I will do my best, though, and in that spirit I will take a more personal perspective than usual in my remarks today.  The business reporters should go get coffee or something, because I am not going to say anything about the markets or monetary policy.



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Category: Think Tank

inflation-deflation sword fight

With the markets clearly getting concerned about the US$ ($ index falling this morning to just shy of the important technical level of 80), inflation (with the CRB index now up more than 20% from its lows and gold just $45 from $1000), and the financial condition of the US govt and coincident rise in…Read More

Category: MacroNotes

Potential Funding Worries Send Shudder Through Markets

Good Evening: The U.S. capital markets shuddered with a thought that many participants had never before considered — the credit worthiness of the sovereign entity known as the United States of America . This unheard of discussion started with a small downtick in the credit outlook for Great Britain , but, as with any form…Read More

Category: Markets, Think Tank

I am constantly amazed at the willingness of some very smart people on Wall Street to follow the herd, even over the proverbial cliff. How can we believe in rational markets when so many investors are sticking their heads in the sand?  The people buying bank stocks  on “value” fall into this camp, IMHO.  More…Read More

Category: Credit, Markets, Think Tank


In response to the S&P move on the outlook for the sovereign credit rating of the UK, its 5 yr CDS has risen today to 82 bps from 72.5 bps yesterday and is at the highest level since May 6th. For comparison, Italy is at 90 bps up from 84 yesterday, Japan is at 50,…Read More

Category: Think Tank

Poole’s Market Solution to Fix Banks

Former Fed Governor William Poole Here is a proposal, not at all original but deserving of serious public discussion. As a condition of enjoying the benefits of a bank charter, every bank must issue 10-year subordinated notes equal to 10 per cent of its total liabilities. The specification can be adjusted, but this one serves…Read More

Category: Bailouts, Credit, Think Tank


Treasuries reversed to the downside at about 11am after the results of today’s Federal Reserve purchase details of US Treasuries hit the NY Fed’s website. While the absolute amount of treasuries purchased was similar to yesterday at $7.4b, the amount offered to them was $45.7b up from $37.2b yesterday and it was the supply on…Read More

Category: Think Tank

Philly Fed

The May Philly Fed survey came in at -22.6, 4.6 pts weaker than expected but is a slight improvement from April’s reading of -24.4 and is the 3th month in a row of less negative #’s. New Orders weakened a touch to -25.9 from -24.3 but Backlogs rose a touch to the highest since Sept….Read More

Category: Think Tank

Morning Note: Bitch Slapped

It never matters until it does. I’m referring to the ever growing burden of debt. It’s ok for a while as long as lenders continue to go along and then a point is reached where enough is enough and it turns into an ever tightening noose and lenders balk. Her Majesty’s Throne in the UK…Read More

Category: MacroNotes