Political Entrepreneurs

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The Federal Reserve and Quantitative Easing

January 6th, 2013 by Wayne Leighton

On January 3, 2013 the Federal Open Market Committee (of the Board of Governors of the Federal Reserve) released the minutes of its last meeting, held December 11-12, 2012. As has already been widely reported but is worth remembering, the Fed decided that it will  continue monetary expansion with a combination of 1) purchase of Treasury securities and 2) purchase of mortgage-backed securities (MBS).

The following key (or “money”) paragraph is taken from the Committee’s minutes (emphasis added in italics):

In their discussion of monetary policy for the period ahead, all members but one judged that continued provision of monetary accommodation was warranted in order to support further progress toward the Committee’s goals of maximum employment and price stability. The Committee judged that such accommodation should be provided in part by continuing to purchase MBS at a pace of $40 billion per month and by purchasing longer-term Treasury securities, initially at a pace of $45 billion per month, following the completion of the maturity extension program at the end of the year. The Committee also maintained its existing policy of reinvesting principal payments from its holdings of agency debt and agency MBS into agency MBS and decided that, starting in January, it will resume rolling over maturing Treasury securities at auction. While almost all members thought that the asset purchase program begun in September had been effective and supportive of growth, they also generally saw that the benefits of ongoing purchases were uncertain and that the potential costs could rise as the size of the balance sheet increased. Various members stressed the importance of a continuing assessment of labor market developments and reviews of the program’s efficacy and costs at upcoming FOMC meetings. In considering the outlook for the labor market and the broader economy, a few members expressed the view that ongoing asset purchases would likely be warranted until about the end of 2013, while a few others emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases. Several others thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.

What’s the rest of the story here? Does the FOMC — or at least a notable portion of its members — think the time will soon come for a policy shift? An article in the Economist, published a day after the FOMC released its minutes, tries to dig a little deeper:

The Fed is currently buying $85 billion worth of Treasury and mortgage backed bonds per month via quantitative easing, or QE, which means printing money. What caught investors’ attention, however, was the revelation that “several” of the FOMC’s 12 voting members “thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013.” Going deeper into the minutes, this sentiment appears more widespread once seven additional non-voting members are included. Leaving aside members who wanted to stop QE right away, the remainder “were approximately evenly divided between those who judged that it would likely be appropriate for the Committee to complete its asset purchases sometime around the middle of 2013 and those who judged that it would likely be appropriate for the asset purchases to continue beyond that date.” So the median member probably wants to stop between the middle and end of 2013. Ben Bernanke, the chairman, is probably toward the later part of that range.

In other words, there is a debate among the decisionmakers on the Federal Open Market Committee. That’s pretty common. But the size and duration of the recent QE policies, and the amount of effort put forth relative to the benefits derived … this is less common.

Most of all, since what they decide has such tremendous impact on the U.S. economy, the ideas debated among this very special type of madmen in authority deserve our careful attention. Ed and I discuss the impact of these ideas in chapter 6 of Madmen, as have a number of other economists following the 2008 financial crisis. More on this soon.

 

 

 

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From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.189, ch.7)

The most successful entrepreneurs know what they do well, they know the market and the opportunities within it, and they choose those activities that create the most value. This is true in economic as well as political markets.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.178, ch.7)

[W]hen the right elements come together at the right time and place and overwhelm the status quo, it is because special people make it happen. We call them political entrepreneurs.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.176. ch.7)

While we started this book with Danny Biasone saving basketball, we end it with Norman Borlaug saving a billion lives. These stories are not that different. Both faced vested interests, which were reinforced by popular beliefs that things should be a certain way—that is, until a better idea came along.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.174, ch.6)

Because there was a general belief that homeownership was a good thing, politicians found the public with open arms.... Everybody was winning—except Alfred Marshall, whose supply and demand curves were difficult to see through the haze of excitement at the time, and except Friedrich Hayek, whose competition as a discovery procedure was befuddled... In short, once politicians started getting credit for homeownership rates, the housing market was doomed.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.166, ch.6)

Everyone responded rationally to the incentives before them. In short, the rules that guided homeownership changed over time, which in turn changed the incentives of these actors. And bad things happened.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.153, ch.6)

They understood the economics. The ideas had already won in ... the regulatory agency itself. All that remained to be overcome were some vested interests and a handful of madmen in authority.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.146, ch.6)

If the idea for auctions of spectrum use rights had been part of the public debate since at least 1959, why didn’t the relevant institutions change sooner? What interests stood in the way?

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.121, ch.5)

When an academic scribbler comes up with a new idea, it has to resonate well with widely shared beliefs, which in turn must overcome the vested interests at the table. Many forces come together to explain political change, even though it may seem like coincidence of time and place.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.120, ch.5)

It’s the rules of the political game that deserve our focus, not politicians’ personalities or party affiliations.

From the Pages of Madmen, Intellectuals, and Academic Scribblers (p.119, ch.5)

In short, ideas are a type of higher-order capital in society. Like a society that is poor in capital and therefore produces little consumer value, a society that is poor in ideas and institutions will have bad incentives and therefore few of the desirable outcomes that people want.

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