E The Lowdown Federal Reserve Bank

I will go so far to say that, in the remembrance of Boz Scaggs' famous lyrics, it is a "dirty lowdown" Fed Bank. I have  been arguing that the Federal Reserve is a conspiratorial bank, mispricing risk and liquidating the ill fated results of speculation from mispricing risk.

Well, now, George Selgin Phd., esteemed lead economist at the CATO Institute and the Alt M blog, has confirmed the conspiracy in a recent blog post. I will try to encapsulate the main points of his work while adding what I have written before on the subject in order to help clarify the issue.

First, Professor Selgin probably knows more about excess reserves than anyone else outside the Fed. His blog post begins with a view that the Fed is trying to sell how good interest on excess reserves (IOER) policy really was. The Fed work was adopted in 1912 and amended effective January 30, 2018 as perhaps a final statement on the matter. 

The Fed authors said:

...The FOMC undertook other monetary policy actions to put downward pressure on longer-term interest rates, including large-scale purchases of longer-term Treasury securities and agency-guaranteed mortgage-backed securities. These policy actions made financial conditions more accommodative and helped spur an economic recovery that has become a long-lasting economic expansion.

In response, Selgin stunningly blogged:

Although the passage itself doesn't refer to interest on reserves, its purpose is to introduce a discussion devoted to singing the praises of that policy instrument. It's in light of that intention that the passage raises my hackles. For what the Fed's report doesn't say is that, when the Fed introduced IOER in early October 2008, it did so, not because it thought "monetary stimulus was necessary to address the significant economic downturn and the associated downward pressure on inflation," but because it was determined to prevent its then-ongoing emergency lending from having any stimulus effect, and from thereby becoming a source of unwanted upward pressure on inflation! IOER was, in other words, originally intended to serve as a contractionary monetary policy measure, just when monetary expansion was desperately needed. [Emphasis mine]

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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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