{"id":140657,"date":"2010-01-05T10:51:29","date_gmt":"2010-01-05T15:51:29","guid":{"rendered":"http:\/\/blogs.wsj.com\/economics\/2010\/01\/05\/economist-argues-fed-debt-purchases-boost-lending\/"},"modified":"2010-01-05T10:51:29","modified_gmt":"2010-01-05T15:51:29","slug":"economist-argues-fed-debt-purchases-boost-lending","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/140657","title":{"rendered":"Economist Argues Fed Debt Purchases Boost Lending"},"content":{"rendered":"

As economists begin to tweak their models and paradigm to account for the surprising virulence of the recent financial crisis, Harvard University<\/strong>\u0092s Andrei Shleife<\/strong>r<\/a> is offering an justification for what Federal Reserve<\/strong> Chairman Ben Bernanke <\/strong>calls \u0093credit easing\u0094 — the Fed\u0092s purchase of trillions of dollars worth of Treasury debt and mortgage-backed securities. It is, Shleifer argued at a presentation at the American Economic Association<\/strong> in Atlanta, the best way to get banks to resume lending.<\/p>\n

In a crisis, the price of securities — mortgate-backed, Treasury debt, packages of loans, etc. — fall to fire sale prices, well below fundamental values, he says. Banks with the wherewithal to make new loans or buy securities that prefer to buy securities because the opportunity for profit is so tempting. (See Goldman Sachs<\/strong> and J.P. Morgan Chase <\/strong>profits from securities trading in the recent quarter.) \u0093Because asset prices are out of whack,\u0094 he said, \u0093injecting capital into banks doesn\u0092t restart lending.\u0094 Banks simply use the money \u0093to buy underpriced securities\u0085 to speculate.\u0094<\/p>\n

\u0093Financing of new investment by banks [via lending to business] is always competing with speculation. If speculation is more attractive, it is going to draw the attention of banks,\u0094 he argued.<\/p>\n

The solution: The Fed or the government should buy a lot of securities, so many of them that the price rises and the banks no longer find them attractive for speculation and lend instead. (Of course, those banks who hold securities before the Fed or government intervene will benefit from rising prices.) Shleifer said massive purchases of securities by the Fed isn\u0092t targeted on an individual institution — a plus, he says — and he said the purchases work best if they are highly rated securities rather than removing toxic assets from the banks\u0092 books, as the Bush Treasury initially proposed.<\/p>\n

Gary Gorton<\/strong><\/a>, a Yale University<\/strong> economist, criticized the Shleifer argument, observing, among other things, that there are many reasons that banks, particularly big wholesale banks in the securitization business, would rather buy assets than make loans. He said it wasn\u0092t plausible that banks would raise equity capital — including that provided by the government — for the purpose of buying more securities. Moreover, he said, the Fed and Treasury purchases, large as they were, probably weren\u0092t large enough to get the banks to sell all the securities that they wanted to sell.<\/p>\n

The Shleifer presentation drew on a paper he and the University of Chicago<\/strong>\u0092s Robert W. Vishny<\/strong> wrote last year titled \u0093Unstable Banking<\/a>.\u0094<\/p>\n

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As economists begin to tweak their models and paradigm to account for the surprising virulence of the recent financial crisis, Harvard University\u0092s Andrei Shleifer is offering an justification for what Federal Reserve Chairman Ben Bernanke calls \u0093credit easing\u0094 — the Fed\u0092s purchase of trillions of dollars worth of Treasury debt and mortgage-backed securities. It is, […]<\/p>\n","protected":false},"author":850,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-140657","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/140657","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/850"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=140657"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/140657\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=140657"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=140657"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=140657"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}