Tuesday, November 2, 2010

Bizarre-Statement -of- the-Month Club

This month's winner is our friend Laurence Meyer, former Fed Governor and forecaster, previously discussed here, who wins for this statement, from today's Wall Street Journal (sorry if you don't have a subscription):
Former Fed governor Laurence Meyer, now a private consultant, estimated the Fed would need to buy $5.25 trillion of new assets if it wanted to accomplish the equivalent of cutting short-term interest rates by 4.25 percentage points, about what Mr. Meyer's model indicates is needed now.
This is funny on several dimensions. First, the guy has a model that is giving him a policy conclusion: short term interest rates should drop by 4.25 percentage points, which obviously is not feasible. Second, after making that statement, he's asking us to put some confidence in his prediction that what is "needed now" is $5.25 trillion in asset purchases by the Fed. Third, what exactly does he think that a more-than-tripling of the size of the Fed's balance sheet will accomplish and why is a $5.25 trillion asset purchase somehow equivalent to a non-feasible decrease of 4.25 percentage points in the fed funds rate?


  1. Steve,
    I think that the calculation is based on the (linear) estimates of the previous impact of buying $300b long-term Treasury bonds on 10 years yields.

    MA estimated that 300b lowered these yields by roughly 9 bp. Then
    $500 billion -- > -15 bp, which, they argue, is what -60 bp in the Funds rate would do.

    These back-of-the-envelope calculations are contained in a note titled: "Brother, Can You Spare $5 Trillion? LSAPs and the Prescribed Funds Rate" that circulated last week. The note itself had a quite skeptical tone which, perhaps, got lost in the WSJ article.

  2. So much for WSJ reporting. Maybe he's saying he thinks this is unlikely to accomplish much. I might consider revoking the award.

  3. Steve,
    Surely his statement about short term interest rates in like Rudebusch's calculations about what the short term interest rate would be under a Taylor rule. It's just a way quantifying how binding the zero lower bound is.
    Meyer is not a genius but he's not THAT stupid.

  4. Yes, it's just like Rudebusch, and just as goofy.