Comments on: Why an MBS-Treasury swap is better policy than the Treasury twist

By: Arvind Krishnamurthy

Arvind Krishnamurthy — Wed, 08 Aug 2012 17:45:16 +0000

John, you make a good point, thanks. But keep in mind that almost all central banks engage in activist policy as they are setting a key asset price, the fed funds rate. I think what you are really getting as is whether the Fed should be doing more activism, given all of the stimulus they have already provided. Plausibly the benefits of a QE3 are much less than there were in QE1, and perhaps the costs as you outline are high enough that they should not act — which is what they have chosen for now.

By: John

John — Wed, 08 Aug 2012 00:07:45 +0000

This is nice work and the conclusion is reasonable. The only thing I would question is why we all assume that such activist Fed policy is appropriate at this point. In fact, the uncertainty caused by unconventional policy is likely not positive. Instead of letting markets clear, the Fed is purposefully manipulating prices for these assets and causing capital misallocation by definition. . Is a homeowner well served longer term by a subsidized rate if a few years later rates are higher and a house is underwater? This is more a policy question and not a criticism of your work which is valid.