Cross Purposes

September 30th, 2014 11:43 pm | by John Jansen |

Larry Summers was Barack Obama’s first choice to be Chairman of the Federal Reserve upon the departure of the late and lamented Ben Bernanke. But Mr Summers in various professional incarnations antagonized both the powerful and those with powerful protectors and was passed over for Ms Yellen.

Mr Summers is still making waves as is evidenced by this article at the NYTimes Upshot. Mr Summers is co author of a paper which holds that the Treasury’s extension of its maturities has partially offset the salutary results of the Fed’s purchases of long term securities and the consequences of the QE are less beneficial than they would have been ceteris paribus.

The article notes that the Administration began this policy while Mr Summers was its chief cook,bottle washer and formulator of economic policy.

Via the NYTimes:

Lawrence Summers, the former chief economic adviser to President Obama, said on Tuesday that the Treasury Department had undermined the Federal Reserve’s stimulus campaign and that doing so was a large and expensive mistake.

The facts are straightforward: The Fed has been trying to reduce the supply of long-term Treasury securities. The Treasury, meanwhile, has been issuing relatively more long-term debt and less short-term debt. In effect, one arm of the government has been draining the bathtub while the other adds water.

In a paper presented Tuesday at the Brookings Institution, Mr. Summers and three co-authors argued that the crosswinds had reduced the Fed’s impact by about a third, slowing growth and leaving more Americans jobless.

Mr. Summers is not the first person to suggest this is a little crazy, but two things set him apart: The administration began the policy in question while he was still its top economic official. Moreover, since leaving the administration, he has campaigned loudly for the government to issue even more long-term debt, to support increased spending on roads, airports and other crumbling infrastructure.

On Tuesday, Mr. Summers, who at one point was widely assumed to be Obama’s top choice to be Fed chairman, brushed aside those apparent contradictions. He embraced the role of a provocateur who was, in effect, criticizing his former colleagues — not least the former Treasury secretary Timothy Geithner. The two old friends have aired several disagreements since leaving the administration.

The Fed has sought to stimulate the economy by purchasing large quantities of long-term Treasury securities. The campaign, which is scheduled to end in October, aims to force investors to buy other kinds of debt and, in the face of increased competition, to accept lower interest rates from the borrowers.

During the same period, the Treasury has greatly increased its issuance of long-term debt. Mary John Miller, until recently the Treasury official responsible for debt issuance, said the average duration of government debt, historically about 58 months, fell to 48 months during the crisis and has risen to 68 months.

Mr. Summers and his co-authors calculate that the Fed’s campaign reduced long-term rates by 1.37 percentage points, but that the Treasury’s debt policies put back 0.48 of those points.

“It seems very odd that the Federal Reserve is taking actions that have the effect of substantially reducing the duration of the debt held by the public at a time when the Treasury is arguing that it is in taxpayers’ interest to extend the duration of the debt at a rapid pace,” the paper said. “Moreover, the Federal Reserve has done so without formally acknowledging any of the considerations invoked by the Treasury. Similarly, the Treasury is taking steps that in the judgment of the Fed are contractionary.”

The Treasury certainly has had its reasons. Issuing long-term debt lets the government lock in low interest rates, which could save taxpayers a lot of money. It also reduces the amount of short-term debt that must be rolled over, potentially at higher rates, during periods of uncertainty about whether Republicans in Congress will vote to raise the debt ceiling.

But Mr. Summers and his colleagues argued that the Treasury and the Fed should coordinate management of the debt, perhaps by issuing an annual report describing a shared strategy.

(Mr. Summers was listed as the fourth author on the paper, which he wrote with three other Harvard economists. But he was the outsize personality; organizers joked they expected him to consume half of the three-hour session.)

Representatives of the Fed and Treasury, on a subsequent panel, rejected both the findings of the Harvard paper and the proposal for more coordination.

Jerome H. Powell, a Fed governor who served as the Treasury official responsible for debt issuance during the George H.W. Bush administration, questioned whether coordination would have meaningfully cut interest rates. “Given the very low level of rates over this period, it is not clear to me that a slightly more negative term premium would have produced materially different real economy results,” he said.

And Mr. Powell said increased coordination was “fraught with risk,” because it could give the Treasury greater influence over the course of monetary policy.

Jason Cummins, chief United States economist at Brevan Howard, said in a response to the paper that the Fed and Treasury had coordinated more closely at various times in the past, and the results were almost always unfortunate. He recounted the story of President Johnson’s summoning the Fed’s chairman, William McChesney Martin, to his Texas ranch, slamming him against the wall and telling him, “Martin, my boys are dying in Vietnam, and you won’t print the money I need.”

Mr. Summers, reliably pugnacious, characterized his opponents in remarks at the Brookings event as “central bank independence freaks” and said it was “at the edge of absurd” to suggest that debt management coordination would substantially erode the Fed’s independence.

He has a point, in the sense that the Fed’s independence has always sounded more impressive than it is.

Indeed, the Fed and the Treasury already coordinate extensively. Mr. Summers recalled that in the 1990s, when he himself was Treasury secretary, the two agencies held a regular “debt management meeting.” Ms. Miller said the meeting still took place under a less descriptive name. The Fed chairwoman, Janet Yellen, and the Treasury secretary, Jacob Lew, have a regular lunch. Their staffers work together on a wide range of issues.

And that raises the question of why Mr. Summers, in his time as an administration official, did not press for more conversations about this issue. On Tuesday, he said only that he had objected lightly, but that he did not pursue the point.

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