So, am I a Keynesian because I want bigger government? If I were, shouldn’t I be advocating permanent expansion rather than temporary measures? Shouldn’t I be for stimulus all the time, not only when we’re at the zero lower bound? When I do call for bigger government — universal health care, higher Social Security benefits — shouldn’t I be pushing these things as job-creation measures? (I don’t think I ever have). I think if you look at the record, I’ve always argued for temporary fiscal expansion, and only when monetary policy is constrained. Meanwhile, my advocacy of an expanded welfare state has always been made on its own grounds, not in terms of alleged business cycle benefits.
In other words, I’ve been making policy arguments the way one would if one sincerely believed that fiscal policy helps fight unemployment under certain conditions, and not at all in the way one would if trying to use the slump as an excuse for permanently bigger government.
But in that case, why am I a Keynesian? Maybe because of convincing evidence?
Consider the relationship between the monetary base — bank reserves plus currency in circulation — and the price level. Normal equilibrium macro models say that there should be a proportional relationship — increase the monetary base by 400 percent, and the price level should also rise by 400 percent. And the historical record seems to confirm this idea. Back in 2008-2009 a lot of people were passing around charts like this one, which shows annual rates of money base growth and consumer prices over the period from 1980-2007:
It seemed totally obvious to many people that with the Fed adding to the monetary base at breakneck speed, high inflation just had to be around the corner. That’s what history told us, right?
Except that those who knew their Hicks declared that this time was different, that in a liquidity trap the rise in the monetary base wouldn’t be inflationary at all (and that the relevant history was from Japan since the 1990s and from the 1930s, which seemed to confirm this claim). And so it proved, as shown by the red marker down at the bottom.
What is the Federal Reserve?
The Fed, as it is often called, is the nation's central bank. It controls the supply of money in the U.S. economy. The $20 bill in your wallet can be used to buy things because the Fed says so (Look! It even says "Federal Reserve Note" at the top).
The Fed also regulates thousands of private banks around the country and is ready to make emergency loans to them if they temporarily run short of cash. And it manages the technical plumbing that ensures that banks have plenty of money on hand to fill up their cash machines and makes sure that when your employer tries to electronically transfer your paycheck every other Friday, the money shows up in your checking account.
The Federal Reserve System includes the Board of Governors, based on Constitution Avenue in Washington, and a dozen reserve banks based around the country, plus 20 smaller branch locations. It’s pretty huge: The Federal Reserve System has around 20,000 employees and $2.3 billion worth of real estate. It had $3.7 trillion on its books at last count.
How powerful is the Fed chair, really? No, seriously, I want a ranking.
Oh, you want power rankings? I’d put the Fed chair at the second most powerful person in the United States. The president comes first. But consider the alternatives for the No. 2 slot: The vice president’s only formal power is to break ties in the Senate; the president can choose to ignore and marginalize him. High Cabinet officials like the secretaries of state and defense take their orders from, and serve at the pleasure of, the president. Similarly, you could make a case for White House chief of staff, but that position is basically a vessel for carrying out the president's wishes. The chief justice of the Supreme Court is both powerful and independent, but is much more likely to be outvoted by peers than is the Fed chair.
"The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve Bank’s discount window.
The Fed’s Discount Rate is an administered rate set by the Federal Reserve Banks, rather than a market rate of interest. Use of the Fed’s discount window soared in late 2007 and 2008, as financial conditions deteriorated sharply and the Federal Reserve took steps to provide liquidity to the financial system. Discount window borrowing soared to a record $111 billion at the height of the global financial crisis in October 2008, while the Federal Reserve’s board of governors set the discount rate at a post-WW II low of 0.5% on Dec. 16, 2008."EXPLANATION of 'Discount Window'
"The discount window is an instrument of monetary policy (usually controlled by central banks) that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions. The term originated with the practice of sending a bank representative to a reserve bank teller window when a bank needed to borrow money.[1]
The interest rate charged on such loans by a central bank is called the discount rate, base rate, or repo rate, and is separate and distinct from the prime rate. It is also not the same thing as the federal funds rate and its equivalents in other currencies, which determine the rate at which banks lend money to each other. In recent years, the discount rate has been approximately a percentage point above the federal funds rate (see Lombard credit). Because of this, it is a relatively unimportant factor in the control of the money supply and is only taken advantage of at large volume during emergencies."
| Liability Type | Requirement | |
|---|---|---|
| % of liabilities | Effective date | |
| Net transaction accounts 1 | ||
| $0 to $14.5 million2 | 0 | 1-22-15 |
| More than $14.5 million to $103.6 million3 | 3 | 1-22-15 |
| More than $103.6 million | 10 | 1-22-15 |
| Nonpersonal time deposits | 0 | 12-27-90 |
| Eurocurrency liabilities | 0 | 12-27-90 |
"Singapore's monetary regulator announced Friday that it's censuring at least 20 banks for trying to rig benchmark interest rates and ordered them to set aside hefty reserves. The Monetary Authority of Singapore also said it had identified 133 traders that participated in the manipulation and that some of them will be investigated by the country’s white collar crimes unit."What are the effects of a move like this? How does it change the supply of money?
