Alan Blinder Concedes My Point On IOER

I’ve taken heat from Keynesians for claiming that we aren’t in a liquidity trap. My contention is that the primary reason inflation is low is because the Fed has been paying interest on excess reserves, keeping that money parked at the Fed and preventing it from bidding up prices. If the Fed really wanted to get serious about intentionally creating inflation, it could stop paying interest on excess reserves or even flip the rate negative and charge a penalty to keep funds stored with the Fed.

A number of Keynesians have assured me that I’m delusional and that IOER has nothing to do with why banks aren’t lending reserves. We are in a liquidity trap. Period. And besides, I completely misunderstand the reason for IOER. It’s about setting a floor on the Fed funds rate and definitely NOT about preventing the reserves from flooding the economy.

To those critics I submit this WSJ quote from Princeton economist and Keynesian Alan Blinder who actually wants the reserves to flood into the economy:

Unless you are part of the tiny portion of humanity that dotes on every utterance of the Federal Open Market Committee, you probably missed an important statement regarding the arcane world of “excess reserves” buried deep in the minutes of its Oct. 29-30 policy meeting. It reads: “[M]ost participants thought that a reduction by the Board of Governors in the interest rate paid on excess reserves could be worth considering at some stage.”

As perhaps the longest-running promoter of reducing the interest paid on excess reserves, even turning the rate negative, I can assure you that those buried words were momentous.[…]

If the Fed turned the IOER negative, banks would hold fewer excess reserves, maybe a lot fewer. They’d find other uses for the money. One such use would be buying short-term securities. Another would probably be lending more, which is what we want.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s