The View from the Roasterie LXXVII: January 17, 2014
Liveblogging World War II: January 17, 1944

Of Quantitative Easing, Political Economists, and Marshallian Parrots...

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Over at the Washington Center for Equitable Growth: “Beer Goggles”, Forward Guidance, Quantitative Easing, and the Risks from Expansionary Monetary Policy: Friday Focus (January 17, 2014)...

I forget who it was who told me that one of British classical economist J.R. McCulloch's lines was: "it is straightforward to make of a parrot a plausible political economist--all you need to do is to teach it to say 'supply and demand'. And I have never been able to adequately source the quote.

But I did personally here Milton Friedman say:

Walrasians believe we are automatically and magically at some general equilibrium. Marshallians believe that supply cubes slope up and demand curves slope down. Trust Marshallians..."

I am reminded of this, again, because I once again find myself concluding that people simply could not make the arguments they are making if they drew a supply-and-demand diagram: quantitative easing takes some of the net risk the market demands the private sector hold off the table. How can this make private-sector portfolios more risky?

And so over at the Washington Center for Equitable Growth: “Beer Goggles”, Forward Guidance, Quantitative Easing, and the Risks from Expansionary Monetary Policy: Friday Focus (January 17, 2014):

When the Federal Reserve undertakes quantitative easing, it... takes some risk off the table, buying up... risky assets.... The demand curve for risk-bearing capacity seen by the private market thus shifts inward, to the left: a bunch of risky Treasuries and GSEs are no longer out there.... And this leftward shift in the net demand to the rest of the market for risk-bearing capacity causes the price of risk to fall, and the quantity of risk-bearing capacity supplied to fall as well. Yes, financial intermediaries that had held Treasuries and thus carried duration risk take some of the cash they received by selling their risky long-term Treasuries to the Fed and go out and buy other risky stuff. But the net effect of quantitative easing is to leave investors and financial intermediaries holding less risky portfolios because they are supplying less risk-bearing capacity...

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