Should the Fed Buy Munis?
Mike Konczal floats a very interesting idea emailed to him by Richard Clayton, the Research Director of Change To Win (my bold for quick scanning).
under Section 14 b 1 the Fed has the authority to purchase any obligation of a state or local government of 6 months maturity or less. This provision seems clearly to permit a mass refinancing of state and local government debt at the current 6 month interest rate (very close to 0), which would save state and local gov’ts approximately $75 billion a year (going by the flow of funds #s for state and local interest payments). Moreover, since state and local govts do the bulk of infrastructure investing, the fed could create a program to fully fund such investment through purchases of newly issued 6 month bonds
I really love this idea (the alternative being the very iffy notion of the Fed buying REITs, ETFs, etc.), but I do wonder if it’s practical. Munis would have to issue new bonds, and they’d be in the position of having to roll them over six months hence. Could they do that? Would the Fed still be there in six or twelve months? Could the whole distributed machinery really be built quickly? Would muni managers get on board? Would the political pressure on the Fed resisting what looks like a very fiscal move make it difficult to implement? Is there a large and liquidly trading existing stock of short-term munis out there that the Fed could just buy (pushing down short-term muni rates)? Those are just a few of many questions that come mind. Thoughts?
Cross-posted at Asymptosis.
better than anything the Fed is doing now…
but 6 months isnt going to buy much infrastructure; it takes that long just to execute a shovel ready chuckhole repair…
& we have major interstate infrastructure problems that need to be addressed, too…we’ve passed 9, going on 10 stop gap surface transportation bills since 2008…one of these days we’ll wake up & discover we’re living in a third world country…
Buying munis would require the Fed to accept default risk that is not present with Treasuries or govt gauranteed MBS. Seperately, the Fed would implicitly be subsidizing states to varying degress, which verges on fiscal policy. Lastly, if the Fed promised indefinite roll-overs, state and local govts would have little reason to worry about limiting spending. I’d expect deficits and the size of govt to increase considerably.
I have recommended this since the crisis. Someone recently pointed out that states and cities do not borrow for operating expenses, but if that is not constitutional, they could do that too, I expect.
Also, states should charter state-run banks. That way they could borrow very cheaply from the Fed, and make loans to stimulate their own economies.
I have recommended this since the crisis. Someone recently pointed out that states and cities do not borrow for operating expenses, but if that is not constitutional, they could do that too, I expect.
Also, states should charter state-run banks. That way they could borrow very cheaply from the Fed, and make loans to stimulate their own economies.
I have recommended this since the crisis. Someone recently pointed out that states and cities do not borrow for operating expenses, but if that is not constitutional, they could do that too, I expect.
Also, states should charter state-run banks. That way they could borrow very cheaply from the Fed, and make loans to stimulate their own economies.
We want spending and the size of government to increase. That’s the whole point to buying munis rather than MBS or Treasuries. Bernanke is already engaged in fiscal policy, from the sidelines, calling on Congress to spend (though not out loud). Buying munis would allow him to put his policy money where his policy mouth is.
As to risk, well Bagehot’s rule had to do with lending, not asset purchases. Keeping borrowers honest avoids moral hazard of a particular type. We don’t need the Fed to run a riskless portfolio. The Fed doesn’t owe anybody money that it can’t print up on demand, so risk to the Fed’s balance sheet is the wrong risk to fixate on. The risk that workers will be unused or underused for year on end is the more important risk.
State and local budget have been a drag of historic proportions during the recession and recovery. Necessary government services have been cut. A policy that could reverse both of these is well worth considering.
You may want spending and government size to increase but not everyone does. I’d much prefer govt increase the deficit by streamlining spending and reducing taxes by a larger amount. I’m current reading Warren Mosler’s Seven Deadly Innocent Frauds which has several ideas to this effect.
As for the Fed’s balance sheet, I’m not worried about insolvency (since that can’t happen), but rather the political fallout if a state or local government were to default on loans from the Fed. If there is no recourse, other states and localities would be incentivized to follow the same course. Would there be a limit to how much munis the Fed buys? If so, how does it decide which munis to purchase?