Lex Haris

Aug 30

Jackson Hole 2010: What the Fed said about lowering rate on reserves

A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System.


Inside the Fed this rate is known as the IOER rate, the “interest on excess reserves” rate. The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero.


On the margin, a reduction in the IOER rate would provide banks with an incentive to increase their lending to nonfinancial borrowers or to participants in short-term money markets, reducing short-term interest rates further and possibly leading to some expansion in money and credit aggregates.


However, under current circumstances, the effect of reducing the IOER rate on financial conditions in isolation would likely be relatively small.


The federal funds rate is currently averaging between 15 and 20 basis points and would almost certainly remain positive after the reduction in the IOER rate. Cutting the IOER rate even to zero would be unlikely therefore to reduce the federal funds rate by more than 10 to 15 basis points.


The effect on longer-term rates would probably be even less, although that effect would depend in part on the signal that market participants took from the action about the likely future course of policy.


Moreover, such an action could disrupt some key financial markets and institutions. Importantly for the Fed’s purposes, a further reduction in very short-term interest rates could lead short-term money markets such as the federal funds market to become much less liquid, as near-zero returns might induce many participants and market-makers to exit.


Aug 16

Fitch reaffirms AAA (but also seems to issue warning)

But I read it as them saying, this is your last chance.

Nice things:

The affirmation of the US ‘AAA’ sovereign rating reflects the fact that the key pillars of US’s exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to ‘shocks’.

The fiscal profile of the US government has deteriorated sharply and is set to become an outlier relative to ‘AAA’ peers. The overall level of general government debt, which includes debt incurred by states and local governments, is estimated by Fitch to reach 94% of GDP this year, the highest amongst ‘AAA’ sovereigns. However, federal government indebtedness is lower than in other major ‘AAA’-rated central governments. Fitch estimates that federal debt held by the public will be equivalent to approximately 70% of GDP this year compared to around 75% for the UK (‘AAA’) and France (‘AAA’).

Fitch currently projects federal debt held by the public and gross general government debt stabilising in the latter half of the decade at 85% and 105% of GDP, respectively, higher than for any other currently ‘AAA’-rated sovereign. In Fitch’s opinion, this is at the limit of the level of government indebtedness that would be consistent with the US retaining its ‘AAA’ status despite its underlying strengths.

  In the event that the Joint Select Committee is unable to reach an agreement that can secure support from Congress and the Administration, Fitch would be less confident that credible and timely deficit-reduction strategy necessary to underpin the US ‘AAA’ sovereign rating and Stable Outlook will be forthcoming despite the USD1.2trn of automatic cuts that would follow.

Aug 15

Fun debt facts

Of the total gross federal debt of $13.6 trillion in 2010, $4.6 trillion was owed by the Treasury to these government trust funds and only $9 trillion to the public, which included international investors (47 percent), domestic private investors (36 percent), the Federal Reserve (9 percent) and state and local governments (8 percent).

From Uwe Reinhardt’s column in NYT (August 15, 2011)

Aug 01

CBO: How the we get to $2.1 trillion

From CBO’s score of the Debt Ceiling Compromise: (Aug. 1, 2011)


Step 1: $917 billion
Caps on discretionary spending

$741 billion in spending
$156 billion in reduced interest costs


What the caps would be:

2012 Discretionary Spending (Budget Authority - proposed): $1.043 trillion
2012 Discretionary Spending outlays: $1.267 trillion
2012 Discretionary Spending Outlays (Proposed): $1.241 trillion
2012 Change in outlays in proposal is enacted: $25 billion

2021 Discretionary Spending: $1.234 trillion

2021 Discretionary Spending outlays: 1,391
2021 Discretionary Spending Outlays (Proposed): 1,278

2021 Change in outlay in proposal is enacted: -112


Step 2: $1.2 trillion
Legislation from the joint committee, that would either
a) develop new deficit reduction ideas or
b) automatically enforce additional discretionary and defense cuts.

If no deal is reached:

2013: Cut defense and non-defense by the appropriate percentages required to reach the target for that year

2014 – 2021: Additional caps.

Medicaid and Social Security and other safety net programs would be exempt.
Medicare cuts would be capped at 2%

Jul 28

Who’ll get paid

How the math might work: The Bipartisan Policy Center estimates that Treasury will be short by about $134 billion for the month of August.

That cash deficit will build steadily throughout the month.

So, on Aug. 3, for instance, the center estimates that Treasury will take in $12 billion in revenue and have to pay out $32 billion, creating a $20 billion cash deficit. Among the biggest bills due that day: $23 billion for Social Security payments, $2.2 billion for Medicare and Medicaid payments, and $1.8 billion due to defense vendors.

On Aug. 4, the group estimates that the cash deficit will increase to $26 billion, with only $4 trillion in revenue coming in, compared to $10 billion in bills, the largest of which would be for Medicaid and Medicare.

Come Aug. 5, the cash deficit grows another $5 billion to $31 billion.

By Aug. 15, the Bipartisan Policy Center estimates that the running cash deficit will hit $74 billion. That day the Treasury will take in an estimated $22 billion in revenue and have to pay out roughly $41 billion. The biggest bill that day is a $30 billion interest payment.
"Who’ll get paid": CNNMoney

Jul 22

Grover clarifies position on Bush tax cuts

From an Op-Ed by Gover Norquist in the New York Times, July 22, 2011

"My position, and the implications of the pledge regarding such “temporary” tax cuts, is clear. If there were no vote in Congress and taxes rose automatically, then no politicians would have voted for higher taxes and no elected official would have broken his or her pledge.

"But that is different from supporting a plan by some Democrats that would end some or all of these lower tax rates, higher per-child tax credits and the A.M.T. patches…"

Jul 14

4 thoughts on debt ceiling debate

1) Response to idea that rating agencies don’t matter because they’ve been wrong before and don’t have the best analysts: The good news, you don’t have to be very good at math to know that someone won’t get paid in August. And that means default.  


2) Why we need to raise the debt ceiling AND get a long-term plan.
If you don’t raise the debt ceiling, you get a short-term downgrade.

If you don’t do a long-term deal, you also get put on a warning.


3) Impact of spending cuts
Even if bond markets stay calm, you’re cutting spending by 40%.


4) Answer to folks who say we can get by just paying interest and principal on bonds:

S&P and Fitch say any non-payment could count as default. Bernanke said it well too: “Whether default is on securities, or on obligations to Medicare recipients, it’s a default of some kind.” (CNNMoney, July 14)

Jul 13

The Moody’s warning

Here are notes from the Moody’s note (July 13, 2011), in which it placed the U.S. bond rating on review for possible downgrade. It laid out two issues:

1) Short-term, not raising the debt ceiling raises the risk (albeit small) of reduced payments on bonds.

2) Long-term, Moody’s said the U.S. needs a plan for deficit reduction.

What Moody’s did not get into: What if the U.S. does not raise the debt ceiling, but keeps making interest payments while missing other obligations.

Here are key sections from the note:

Moody’s Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade.

 prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default.

If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.

Jul 07

Defining tax increases is proving tricky

“I can tell you exactly how many angels can fit on the head of a pin, but I have no idea what a tax increase is,” said Douglas Holtz-Eakin. Bloomberg, July 7, 2011

Parsing the “news” on budget talk progress

Republicans still say “no new taxes”. Eric Cantor as quoted in the NYT:

“If the president wants to talk loopholes, we’ll be glad to talk loopholes,” Mr. Cantor said. “We have said all along that preferences in the code are not something that helps economic growth over all. But, listen, we are not for any proposal that increases taxes. Any type of discussion should be coupled with offsetting tax cuts somewhere else.”

My take: So this doesn’t really seem like a shift. Everybody has said they are for tax-code simplification. The question has always been whether we use it to raise revenue and lower debt.

WSJ’s (generous) take: Adding to the sense of progress in the debt talks, which had seemed stalled just a few days ago, House Majority Leader Eric Cantor (R., Va.) said Republicans would consider scaling back tax breaks identified by the White House.

Although Mr. Cantor called for corresponding tax cuts, his comments mark the first time the GOP has opened the door to proposals from Mr. Obama that would tackle the thorny issue of taxation, the biggest stumbling block in Washington’s bid to come up with a deficit-cutting deal.

In his Wednesday comments, Mr. Cantor said: “If the president wants to talk loopholes, we’ll be glad to talk loopholes….We’ve said all along that preferences in the code aren’t something that helps economic growth overall.”

What Bernie Sanders wants, as quoted in NYT:

Senator Bernard Sanders, independent of Vermont, urged the president not to yield to Republican demands to reduce the deficit by cutting hundreds of billions of dollars from Medicare, Medicaid and other domestic spending. He said that “the president has got to demand that at least 50 percent of deficit reduction come from revenues,” including higher taxes on the wealthy and large corporations.


How NYT played Boehner’s position:

Officials said Mr. Boehner suggested that he was open to the possibility of $1 trillion or more in new revenue that would be generated by addressing tax issues already raised in the talks, like killing breaks for the oil and gas industry, eliminating ethanol subsidies and ending preferential treatment for corporate jets.

Aides to Mr. Boehner said that no tax increases were on the table and that he had not agreed to the expiration of any tax cuts.

Progress on Social Security (WSJ):

A senior administration official said: “Reports that we are putting Social Security on the table tomorrow are inaccurate. The president does not think it is a major driver of the deficit, but has always been open to ways to strengthen the program in a balanced fashion.”