How to Make Quantitative Easing More More Easy (on the Poor): Fed Shorting Commodities
Here is another one from our 'mad scientist' department, which I hope you might help me with.
So, as you know, two rounds of quantitative easing (QE), and now one recent round of 'twist,' have worked quite well in driving down yield hence bringing down borrowing costs. Once we see serious fiscal policy, then - which tax cuts, in the present debt deflationary environment, emphatically are not - we should have the makings of full forceful stimulus. Both blades of the scissors will be operating.
The Fed, I'll likely be criticized for saying, has been masterful in its innovation since 2008, ensuring adequate liquidity when most needed and thereby averting what loomed as a real calamity. If there's one respect in which these innovations can be faulted, however, it's surely in respect of the effect that QE has wrought on commodity prices.
As Dan Alpert, Nouriel Roubini and I have shown elsewhere, QE-induced credit did find its way in significant measure into commodity prices. And those of course hurt people in the lower and middle intervals of the income spectrum disproportionately. They also antagonize China and other rapidly developing nations, with whom ideally we'd like to get on better in the interest of cooperatively working out much less dysfunctional international trade and currency arrangements.
What, then, to do? Should we forgo QE, twist, and other possible future monetary policy innovations, and with them their salutary effects? I think that I might have a better idea.
The better idea is not to innovate less with monetary policy, but to innovate more. If central bank policy works an unintended side effect in the form of price-pusing commodity speculation, why not have the central bank counter-speculate at the same time? That's right, *short* commodities. That way you neutralize the unintended effect, while preserving the intended one.
Now, some might of course quarrel with the notion of the central banks' dealing in something other than Treasury securities. But that fight has long since been lost, as I'll remind you just below. And what's more, central banks in centuries past dealt in more than government securities anyway - bills of exchange, for example.
What do I mean in saying the Treasurys-only battle has long since been lost? Well, since 2008, to take the most obvious example, the Fed has of course held mortgage-backed securities in addition to Treasuries. And it has done so precisely in order to put a floor under them.
But where you can act to put a floor into place, you likewise can act to put up a ceiling. And that is what shorting commodities would do. It would stabilize prices of items whose prices we very much want stabilized, and would do so from that direction - the top - we most need while easing's underway.
This is not as radical an idea as you might think, by the way. For one thing there's already the precedent of dealing in more than Treasurys - as the bill of exchange and MBS examples already illustrate. But for another thing there are multiple instances of proposal and practic alike, whereby commodity prices themselves are stabilized by means of fluctuating stockpiles of the commodities themselves.
Ever heard of the strategic oil reserves? How about 'government cheese'? And, in what was surely one of the most visionary proposals of all, the same fellow who once designed and advocated a much more helpful IMF and World Bank than the institutions we ended up with - J. M. Keynes - advocated a global commodity reserve as well. And he did so precisely in order to end the subjection of impoverished countries to the vagaries of volatile global commodities markets.
If you think about it, none of this is all that surprising. Monetary policy conducted by open market operations in Treasurys is meant to stabilize prices - usually consumer prices. Monetary policy conducted by augmented operations in MBS is meant to stabilize prices too - mortgage prices. And 'strategic' oil and other commodity reserves often are used, and in some cases are expressly designed to be used, with a view to stabilizing yet other prices - commodity prices.
All we'd be doing, then, in having our central banks short commodities while easing up credit, would be having them do what they're always expected to do - stabilize prices. And that mandate's all the more needful when central banks aim to stabilize or buttress financial institutions and employment as well by easing up credit.
So what think you? Sound sensible?
Robert Hockett is Professor of Law at Cornell University, where he teaches, researches, and writes in the fields of domestic and transnational financial law and economics.
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