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On Robert Pollin's comments:
This is typical Deficit Dove
logic. Close but no cigar. And there are no points for trying. Altogether, mainstream economics is utterly worthless. It's so devoid of the real world it's beyond saving. That goes for left and right-wing economists; the latter of whom are total opportunists and wouldn't give a shit about the truth even if they understood it. Unfortunately, the former group has better intentions but is misinformed and afraid of challenging "conventional wisdom." Not only does this make them p###### but complicit in intellectual frauds that dominate the field.
Ok, tirade over.
It's interesting that Pollin didn't make the direct connection between interest payments on the national debt and FED policy. Failure to do so will get us into trouble with the deficit hawks. The argument to be made is not rates are low so we can deficit spend with no problem of paying bond holders. IT DOES NOT MATTER IF RATES ARE 1,000%
. There is never a problem with SOLVENCY
. The issue then would be inflation, as higher interest rates raise net-interest payments to the non government, and raise the costs of lending. So you got more incomes chasing higher costs, and the price level rises as a consequence. Lower rates are deflationary and the FED's zero percent policies and QE monetary stimulus are stepping on the brakes, and not the gas
. This is blatantly
evidenced by the $90 billion in profits that the FED recently turned over to the Treasury. That's incomes that would have otherwise been earned by the non-government. QE is helping to support financial markets, and the FED erroneously believes that that will stimulate wealth-expectations and reduce fears, which will encourage more aggregate demand spending. In reality, it's creating a price bubble, shifting where capital gains are earned, and doing nothing to support aggregate demand, and everything to reduce it.
Okay, FED rant over (mostly).
Rates are on federal deficits because the FED makes them low. Treasury borrowing operations are just a reserve drain
. This is literally staring us in the face, so to speak.
Here's an image of 6-month Treasuries vs. the fed funds rate. http://www.frbsf.org/education/activities/drecon/2006/0608a.jpg
Notice that they move in tandem. That band gets even tighter w/ 3-month Treasuries. Longer term Treasuries reflect expected changes in the fed funds rate. The decision to issue longer term Treasuries is a policy choice, and the only reason to do so would be to support higher interest rates.
Taxing excess reserves would raise Treasury interest payments. It's the reserves that bid down the price the government pays on government securities. It would also raise the costs of bank lending.
Banks don't lend reserves
. They don't borrow "free money" from the FED to hoard. Those reserves are sitting on their books because of FED operations. Reserve operations are not bailouts for banks, per se. They are about liquidity. There's a discussion to be had there about the role of the FED in providing support to "shadow banks", but for another time. Here's the short but sweet: TARP and FED liquidity policies did nothing to save the banks, and more to support bank bonus payouts to managers. Regulatory forebearance saved the banks.
Reserves are the funds in the banks' checking accounts at the FED. They are the final form of payment in the banking system.
Minimum reserve requirements are like minimum checking account balances. Government securities are functionally the same as savings accounts. When a government security comes due, the FED marks down the savings account, and marks up the checking account. It does this all day long, and over $400 trillion in government securities have been redeemed in the last 10 years.
Lending is capital and regulatory constrained, not reserve constrained. Banking is a public-private partnership. Banks put up the required capital. Government gives them a license. Banks make loans on honest credit analysis (not). The loans create deposits
. Government supplies the insurance, regulations, and then the necessary funding (reserves) for banks to clear the transactions of their deposit holders.
Anyways, Deficit Doves and Deficit Owls have a mutual enemy in the Deficit Hawks, but the Doves will eventualy turn on us and then advocate policies that will cause the next recession. They have the same goal in mind as the Hawks, the difference is speed and method.
OWLS CAN SEE IN THE DARK