Tags: allan | Meltzer | Fed | Needs | bad | bank | bernanke

Meltzer: Fed Needs a 'Bad Bank' to Curb Inflation

Friday, 08 Apr 2011 09:11 AM

Economist Allan Meltzer says the Federal Reserve is blind to inflation because it doesn't know where to look.

"Mr. Bernanke tells us that inflation won't be a problem as long as unemployment remains at an unacceptable level," Meltzer writes in The Wall Street Journal. "But considerable research shows that this reasoning is badly flawed."

One solution is for the Fed to create its own version of a "bad bank" funded with the $180 billion of its long-term government debt and more than $1 trillion of its mortgage-backed securities into a separate entity.

bernanke200.jpg
Ben Bernanke (Getty photo)
The long-term government debt and mortgage-backed securities would be the new bank's assets, and the $1 trillion in Fed-created "excess" bank reserves as a result of quantitative easing would become the liabilities of the bad bank.

The Fed would commit not to sell any of the bad bank's mortgage-backed securities and Treasurys until they mature.

“Almost half of the Fed's currently held assets, more than $1 trillion, have 10 or more years until maturity, so all of them would be off the table as far as financing inflation during the gradual economic recovery,” Meltzer says.

As the mortgages mature and are paid off, the bad bank's assets would decline, a reduction that would also decrease, though that would be years away.

The Financial Times reports that, based on the minutes of its last monetary policy meeting, the Fed will not taper off its current $600 billion round of asset purchases as they come to an end in June, and that “almost all” members of the Federal Open Market Committee “saw no need” for a taper like that used when the Fed finished its earlier rounds of asset purchases in 2009 and 2010.




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Economist Allan Meltzer says the Federal Reserve is blind to inflation because it doesn't know where to look. Mr. Bernanke tells us that inflation won't be a problem as long as unemployment remains at an unacceptable level, Meltzer writes in The Wall Street Journal. But...
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2011-11-08
Friday, 08 Apr 2011 09:11 AM
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