Tags: Blinder | Fed | rates | exit

Blinder: Fed’s Exit from Easing Won’t be Calamity

Wednesday, 13 Mar 2013 12:08 PM

By Dan Weil

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Many commentators have warned of disaster when the Federal Reserve finally exits from its massive easing operation — surging interest rates and huge financial losses for the Fed.

But Alan Blinder, former Fed vice chairman, sees no need for panic.

“The Fed built a big balance sheet by buying assets,” he writes in The Wall Street Journal. “It will shrink this balance sheet by selling assets and by letting assets run off as they mature.”

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The Fed’s balance sheet is now more than $3 trillion, adding more than $2 trillion since the onset of the financial crisis five years ago.

Fed Chairman Ben Bernanke “has noted repeatedly that, when the time for exit from super-easy monetary policy comes, the Fed can induce banks to hold on to more reserves by paying higher interest rates on those reserves,” Blinder says.

“The more reserves the banks keep idle at the Fed, the less the Fed's balance sheet must shrink.”

But some are concerned that raising rates on bank reserves would cause losses for the Fed and that its sale of bonds would cause losses for everyone else by driving bond prices down.

As for the central bank, “the Fed isn't a private corporation that seeks profits and goes out of business once its net worth turns negative,” Blinder says.

And as for bondholders, whenever rates come back to normal, they will face losses, he says.

“As I have argued for some time, the Fed should reduce the interest rate it pays on the roughly $1.7 trillion of banks' excess reserves. If it did so, banks would keep less cash on deposit at the Fed,” Blinder states.

“The liberated funds would probably flow mainly into the money markets, but some would probably find their way into increased lending — which would give the economy a little boost.”

Meanwhile, Steve Forbes, chairman of Forbes Media, maintains the central bank isn’t accomplishing anything with its easing.

“The government [Fed] is making it easier to borrow money for mortgage-backed securities and the like, and small businesses, households have a hard time getting credit,” he tells CNBC. That’s why the economy only grew 2.5 percent in 2010, 2.0 percent in 2011, and 1.5 percent last year, he says.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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