Monetary Policy: Giving vs. Buying Redux
By David Henderson
The Fed doesn’t expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on the cheap), minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.
This is from Mark Spitznagel, “How the Fed Favors the 1%,” Wall Street Journal, April 19, 2012. This is confused on a few levels. I’ve written about this before and so you can see it in more detail here. The basic idea behind my critique is that it’s important to distinguish between giving and buying.
A couple of things specifically:
1. The term “capital transfers.” A transfer is usually thought of as a transfer: giving wealth to someone with nothing in return. Spitznagel understands that and so he tries to justify the idea that the Fed gets less in return. How? By “overpaying.” How does he know the Fed is overpaying? He doesn’t say. How about “lending to them on the cheap?” He’s on potentially firmer ground here. But I would like to see more.
2. The Fed “lowers their reserve requirements.” Well, it sometimes does. But that’s a reduction of a tax. It’s not a handout.