Re: Kelso's Fed proposal and Inflation

["Charles W. Upton" <cupton@kent.edu>]

----- Original Message -----
From: Keith Wilde <kwilde@magi.com>
To: <ownership@cog.kent.edu>
Sent: Tuesday, November 09, 1999 7:36 PM
Subject: Re: Kelso's Fed proposal and Inflation


> At the end of his comments to David S., Charles said this:
>
> >Actually, this is not a new idea.  It is something called the "real
bills"
> >doctrine, and was once followed by the FED in its infancy.  Should the
Fed
> >readopt this policy it would make no difference.  It would simply be a
> >rearrangement of assets.
> >
>
> Could you please embellish this a little. Do you mean that if re-adopted
it
> would make no difference to the FED (just a re-arrangement of its assets),
> or that it would make no difference to the ownership strategies under
> consideration?
>
There are a lot of seconf order effects.  Monetary expansion takes place
when the FED via an open market operation buys bonds for newly created
money.  These days, it buys back govt bonds.  If it went in and bought up
private securities, the money supply would still expand.

As far as the banks are concerned, it would make no difference either.  To a
first approximation, a new car loan is just like a govt bond (I hasten to
say to a first approximation because there are differences due to risk, tax
effects, default risks, etc.)  Suppose, for instance the 87th national bank
sells a  $100 govt bond to the FED. It then has $100 available for lending
to whomever it wishes.  If the 87th national bank sells a $100 used car loan
to the FED, it then has $100 available....
>
>
> Keith Wilde
> Canada Pension Plan
> Ottawa
> kwilde@magi.com
> 613 990-8125 (office)
> 613 747-6847 (res)