Tyrone runs monetary policy

Tyrone barely knows enough technical macroeconomics to bark out an opinion, much less defend it or specify coherent policies.  Nonetheless he suggested that I pass the following along to Ben Bernanke:

It seems there is not enough lending.  People would lend more if interest rates were higher or at least I think I learned that in Econ 101.  So let’s raise interest rates.  I’ve also heard we have banks buying T-Bills and the Fed and government buying claims to real businesses.  Can that be true?  Isn’t that backwards?  If they aren’t working properly, why not just recall all the T-Bills? (Didn’t General Motors do something like this once?  It seemed to work out for them.)  Then the banks would have to invest somewhere.  Give a bonus to any bank that does something real.  Let the others rot.  (Tyrone then called up Trudie, who told him: "Have the Fed announce it will go massively short in the T-Bill futures market, sometime in the near future and without further warning.  That would scare people out of government assets.")

What about that guy who set up the phony investment company?  Can the Treasury make a new one of those, only bigger?  He took money away from people and gave it to charities and the needy and the arts and higher education.  That sounds like stimulus so why are we sending him to jail?  Wasn’t he ahead of the curve?

Why don’t we increase the tax deduction for donations to any charity which manages to expand its spending on overhead or is the word infrastructure?  For every dollar given, let the donor deduct more than a dollar from taxes.  That’ll get the money out of the banks of those rich people and into the hands of real Americans.  Still, it’s not as good as the phony guy who’s been doing this for twenty years.  I guess we’re all trying to catch up to him.  It seems he had help from his family but Bernanke does not.  Makes all the difference.

Tyrone tells me, by the way, that soon he will try his hand at a restaurant review.  It can’t be any worse than this.


Tyrone barely knows enough technical macroeconomics to bark out an opinion, much less defend it or specify coherent policies....

In case other readers didn't spend five minutes sifting through the links, I just discovered that Tyrone is Tyler's alter ego who has the opposite opinions of Tyler. I'm not sure if they fight each other while planning to blow up empty corporate buildings, though.

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I suggested about a year ago that, if we wanted to bring down treasury prices, we should put out a rumor linking the government to subprime mortgage loans.

I then forgot this idea until the FMs were nationalized and we started reading stories about widening CDS spreads on US government debt.

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So let's raise interest rates. [...] why not just recall all the T-Bills?

This policy has the virtue of bringing matters to head. Regarding the effects of these policies, I agree entirely with Bernanke.

I was getting tired of this whole slow-motion collapse anyway. It just gives Paulson, Bush, and Obama too much time to issue press releases.

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What do we need Tyrone for when both Bush and Obama have been devoted to Madoffnomics?

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Seriously, why don't they raise interest rates? It creates more investment/savings. I'm drawing a blank, but maybe if we had a fixed exchange rate currency, then there would be questionable evidence from 8 years ago that may backup increasing interest rates.

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If I'm not mistaken, the system works this way:

The funds rate the fed sets is the rate at which banks lend to other banks. Without the fed involved, the rate would currently be "high" because banks have been unsure about the solubility of other banks. When the fed sets a "low" funds rate, it is lending money to banks which banks can then use to lend to other banks. In other words, it is injecting liquidity (available cash) into the banking system, which makes banks more willing to make all types of investments.

If the fed were to set a "high" funds rate, it would be borrowing money from banks, which would remove liquidity from the banking system and thus discourage all kinds of investments.

In this context "high" means above what the market would decide by itself, and "low" the opposite.

I hope this clears things up, Tyrone!

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The Fed has been injecting so much liquidity into the system for so many months now that bank CEOs should look like SpongeBob Squarepants.

Maybe they do. Where's all this liquidity going?

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The liquidity is being held. This is one of the first times that, in banks, the value of treasuries is greater then deposits.

"The funds rate the fed sets is the rate at which banks lend to other banks"

Not really, it sets the rate between the fed and the banks, the rate between the banks (LIBOR, which is just an average rate at which banks lend to each other) usually follows the fed rate.

Basically the Fed has decided that the only way to make all the debt that is defaulting actually serviceable is to make more dollars available and that debt cheaper. This should actually force people away from fixed income and into assets.

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maybe we should invent a kind of money that "dissolves", in that it disappears when it comes in contact with excess liquidity.

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Hey, I like your suggestion about imaginary interest rates. After all, we have now seen actually negative
nominal rates recently. I think we could go further. Not only allow imaginary rates, but allow ones that
are sums of imaginary ones and real ones, that is, ones that are complex numbers. I would not be surprised
if these might prove useful in allowing a resolution for the crisis in the exotic derivatives markets? Heck,
Tyrone might even approve of this, although I suspect his alter ego would consider to be a bit too far out...


Since you are lecturing everybody on how things work, the "they" who "try to make supply-demand for money
line-up" is the New York Fed with its daily interventions into the money markets, mostly the repo one to
be more precise, with those open market transactions no actually creating the money supply, but altering
the monetary base, thus leading to changes in the money supply as the banking system responds to those
changes in the monetary base.

And, you are not right about the ECB. While in the past European central banks, including the Bank of
England, were more likely to operate through their discount window, as did the Fed in the past, they now
operate much more like the Fed, although the open market ops are carried out by each of the individual,
still existing central banks, in coordination with instructions and feedback involving the ECB.

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