Tuesday, August 10, 2010
Journalists pretending to be experts in monetary policy
Here are some of the things I heard on Fox today.
In one instance a guest who is a regular on Fox and sometime anchor said of the Fed's decision today:
"What the Fed does is buy bonds from banks, which puts more money in the banking system in the hopes that the banks will then lend that money out."
This is a totally misinformed view of monetary operations, the Fed, rate setting and banking, among other things.
The Fed buys securities largely from the public, not the banks. Those purchases result in the addition of reserves to the banking system. The Fed adds reserves when it wants to bring interest rates down--usually the overnight rate, however, the Fed has the prerogative of setting rates all along the term structure, so buying bonds means they are targeting long-term rates lower.
It is NOT to give more money to banks so that they can lend it out. That's ridiculous.
Banks do not make loans with their reserves. Loans are merely accounting entries on the books of the banks and the very creation of a loan also creates reserves. This means banks are NEVER lending constrained due to reserves. Banks have the same ability to lend whether there is $1 dollar of excess reserves in the system or $1 trillion. THE SAME!
The guy totally didn't know what he was talking about, but how would anyone watching that know? He's seen as a guy on TV talking, so people think he must know what he's talking about.
In another instance a host said, "The Fed perhaps is buying bonds to show approval of the Government's fiscal policy and because of that it has decided to give the government some more funding."
This is wrong, wrong, wrong!
However, it is thought to be true because it plays into the widely held belief that the Fed "monetizes the government's debt."
Again, the Fed buys or sells securities to manipulate the level of reserves in the banking system. That's the mechanism by which it sets interest rates, which is the Fed's only real function--that and regulatory oversight.
The government does not need the Fed to buy its bonds (nor anybody else, for that matter) to get money to pay for whatever it needs if it is paying in its own currency. Moreover, the bonds purchased from the public by the Fed HAVE ALREADY BEEN BOUGHT by the public with money provided by government spending itself. Only by spending more than it takes in can the government provide the public with the funds to purchase bonds, or pay taxes for that matter.
Again, rididculously misinformed, but stated with authority as if it were absolute fact.