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I was hesitant to even post these comments because they’re very similar to Richard Fisher’s comments which I posted this morning, however, the Brian Sack comments show that this misguided thinking is pervasive:

“The effect of asset purchases on the economy remains a point of ongoing debate, with some uncertainty about the channels through which such purchases operate and the magnitude of those effects. My own perspective is aligned with the view expressed by Chairman Bernanke in Jackson Hole—that the effects arise primarily through a portfolio balance channel.2 Under that view, our asset holdings keep longer-term interest rates lower than otherwise by reducing the aggregate amount of risk that the private markets have to bear. In particular, by purchasing longer-term securities, the Federal Reserve removes duration risk from the market, which should help to reduce the term premium that investors demand for holding longer-term securities. That effect should in turn boost other asset prices, as those investors displaced by the Fed’s purchases would likely seek to hold alternative types of securities.

Some research studies have estimated that the effects of the earlier expansion of our securities holdings by just over $1.5 trillion lowered longer-term Treasury yields by about 50 basis points through this portfolio balance channel.3 These effects on Treasury yields appear to have been transmitted into lower rates on private credit instruments and higher asset prices more broadly.”

Clearly, Mr. Sack thinks QE will be effective in generating an economic recovery.  Obviously, I disagree and I believe these Fed officials are entirely misinterpreting how our monetary system works.  I have just a few questions for the NY Fed President:

  • Why do you think adding more reserves will make banks more likely to lend when history clearly shows that this is not the case?
  • Why do you think it would be a good idea to prop up various asset prices when the underlying fundamentals do not support such prices?
  • It’s clear that QE can benefit the banks, but it is also clear that QE has done little to nothing in helping generate a sustainable household recovery.  Will you ever support policy measures that focus on Main Street as opposed to propping up bank balance sheets?

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