As Summers reportedly put it, while the Fed was engaged in quantitative easing, the Treasury was doing ‘quantitative contraction’. And surely the two arms of government should be better coordinated than that.
Pointer from Mark Thoma. My remarks.
1. Read the rest of his post.
2. Larry Summers is quite late to the party. Some of us have been talking about this issue for years. For example, almost four years ago, James Hamilton wrote,
since 2008, the Treasury has been issuing more long-term debt faster than the Fed has been buying it… What we find in the latest data is that this trend has continued over the last 3 months, even with QE2.
3. Wikipedia defines superstition as
the belief in supernatural causality—that one event causes another without any natural process linking the two events—such as astrology, religion, omens, witchcraft, prophecies, etc
I think that belief in the macroeconomic impact of the Fed can be properly regarded as a superstition. The Fed’s rules and regulations affect the allocation of credit, and it can aid particular banks when they get in trouble. However, its ability to control interest rates and nominal GDP is far less than most economists and investors believe.
Note that, as with the vast majority of my posts, this was written a few days ago and scheduled to be posted at this time. I find that staying away from immediate publication encourages me to evaluate the wisdom of a post using my “future self.”
OK, but note that this was the response of many of Newton’s contemporaries to his theory of gravitation – what possible natural process can be making the Sun exert a force on the Earth? They saw it as just a “spooky” pseudo-theory, and indeed we still don’t know what “causes” gravity in a QM sense. But the theory got accepted is because of its great predictive validity.
It certainly looks very much like Fed announcements move interest rates. Perhaps Sumner’s prediction market will provide similar real-time evidence for NGDP.
We can gain a lot of insight by just consolidating the Fed with the Treasury department. As you point out there is no reason to think that QE has any first order effects on the economy. Now once we consolidate the Fed with Treasury we can ask what possible effect the maturity structure of government liabilities can have on the economy and the answer seems to be zero unless the process of financial intermediation has broken down. This may have been the case for QE1 but it is clearly not the case now.