major radical macro economist
stan pollin has remdy adive for washington
1) " the Fed should undertake open market operations on private assets, with the aim of directly bringing down long-term rates for business borrowers."
translation buy up corporate bonds
raising the price of existing bonds and lowering the coupon rate on new issues
--- pollin nicely writes :
fed QE policy raised
".. the interest rate spread between long-term Treasuries and private bonds "
how ? well..QE " did nothing to reduce the risk premium
embedded in long-term private rates"
of course not but that's just pure gibberish anyway
lets say the spread pre QE was 500 basis points after 550 basis points
something other then QE
must have raised the risk premium
QE by lowering the riskless t rate lowered the shadow riskless rate on corporate bonds ..
normally our models predict
the corporate rates should fall too
as their shadow riskless rate falls along side the t rate's fall
that is unless risk premiums for reasons presumeably un connected to E
are rising around the same time ...but back to reality ----
2) " the Fed could impose maximum reserve requirements,
which would be the equivalent of an excess reserve tax."
the notion here seems to be if you exceed the maximum you pay a penalty
3) " the federal government should substantially expanding the federal loan guarantees for smaller businesses."
the last bit sounds lovely
but points 1 and 2 ...
well take 2
,
" banks would become forced to pay a price for hoarding excess cash reserves"
the thought here is obvious default costs weighed not against the zero cost of free reserves of today
but now against the imposed penalties for free reserves of tomorrow
might tip bankers into orignating more business loans by taking on
some riskier borrowers
hmmmm maybe but then i don't get this bit:
" both the banks and non-financial businesses would see the high risks of borrowing/lending fall sharply."
no banks would see taking on more default and delinquency risk
balanced off against the penalty for hoarding cash
and as to borrowers
well the less credit worthy now might get a loan..
again risks are independently determined ..no ?
this seems unclear to herr professor pollin
yes if uncle guarantees some batch of loans the risk on them falls
hence my affections for his 3rd point
--so long as this guarantee is on new loans not turn overs
ie only on the extensive margin of the stock of existing loans
but as for the other two points
why give a windfall to existing corporate bond holders
why reduce borrowing cost on existing loans
as they are turned over and for boprrowing that would have been made at the old higher rate anyway in particular
for corporations already stuffed with cash and making nice profits already ?
key here why assume a lower cost of borrowing impacts
the amount of borrowing by firms of an acceptable credit worthiness
only by lowering the standard of credit worthiness
can you expect to induce more loans
maybe you can lower that threshold
by penalizing the carriage of excess ie free reserves
but otherwise this is just a wind fall operation
.
