tag:blogger.com,1999:blog-4900303239154048192.post6883838722110685817..comments2024-03-06T06:34:42.881-05:00Comments on EconoSpeak: Business Insider’s Too Simplistic Explanation of TaperingUnknownnoreply@blogger.comBlogger2125tag:blogger.com,1999:blog-4900303239154048192.post-24257436136660213242013-09-21T22:43:24.394-04:002013-09-21T22:43:24.394-04:00Well I would quarrel with one word of DeLong's...Well I would quarrel with one word of DeLong's analysis and that is 'risky'. Because in the normal sense of 'risk' there is no more such in a higher interest long bond than a lower interest note, each is backed as to face value and face yield by Full Faith and Credit of the U.S., something that is exposed to risk in the short to medium term only by actions of Congress vis a vis the Debt Limit. This lack of 'risk' in holding U.S. Treasuries to maturity is the key to its role as a 'flight to safety' harbor. Now for investors in Bonds there is a different kind of risk in long vs short and that is a price risk when buying or selling bonds in the secondary market because your price and more particularly ROI depends on how accurately you predict future interest rates, bet the wrong way and you might not get the price you wanted and the longer your horizon and so the higher the uncertainty the more such risk you take.<br /><br />But the Fed is by nature immune to this type of risk because it can never be forced to sell off its balcnce sheet and can simply hold bonds to maturity and so lock in those higher rates. Especially since all Fed profits are remitted to Treasury anyway.<br /><br />Under QE the Fed is buying high yield instruments and effectively taking them out of the markets and replacing them with low yield ones. In so doing they are changing the risk equations for MARKET INVESTORS but not thereby actually taking on extra risk themselves. Instead from their perspective they are simply hogging the higher yield end of what are considered (by buy and hold investors like central banks) the safest investment in the world.<br /><br />Or maybe as Econoclast's comment suggests that is actually Brad's point. Still I suggest his usage was clumsy and/or misleading.Bruce Webbhttps://www.blogger.com/profile/13222670342780912788noreply@blogger.comtag:blogger.com,1999:blog-4900303239154048192.post-31228485296965049722013-09-19T12:29:25.358-04:002013-09-19T12:29:25.358-04:00Quantitative easing can be seen as "creating ...Quantitative easing can be seen as "creating money" in the sense that it changes the liquidity profile of private-sector assets significantly, i.e., it makes the private sector more significantly liquid. "Money" is nothing but the most liquid of assets.<br /><br />In standard open market operations, the FOMC uses money to buy short-term Treasury bills, which are almost as liquid as what economists define as "money" (and are often used in purchases by corporations). This changes the private sector's degree of liquidity a bit. <br /><br />In contrast, in QE the FOMC uses liquid assets to buy longer-term Treasury bonds and mortgage-backed securities. These are significantly less liquid than T-Bills. This operation can change the private sector's degree of liquidity in a big way. This is especially true if it helps to _create a market for those illiquid assets_ (so that private-sector entities can sell them) when that market may still be shaky in the aftermath of the financial crisis. Remember that one part of 2008 was the refusal of financial institutions to buy assets from each other (since they might be toxic). <br /><br />It's true that the FOMC is also taking risk off the private-sector's table, as Brad DeLong says. But the liquidity dimension shouldn't be ignored.Econoclasthttps://www.blogger.com/profile/08991106027036537594noreply@blogger.com