When thinking about policy, I always try and start with ‘Classical thinking’ and then identify the frictions that take us away from that solution.
The key problem with the portfolio balance argument the Fed (and other central banks) have used to justify the efficacy of balance sheet policies is that the taxpayer owns the central bank, so we are just shifting the risk around rather than reducing net private sector risk.
As with all ‘Ricardian equivalence’ type theories, I am ambivalent on this one. Just as I doubt that folks know much about the tax-debt mix, I suspect they know little of the risks that have been assumed by their central bank (a previously cautious money issuer that’s now operating like a hedge fund).
The reason these theories are useful is that the equilibriums they describe appear to act as attractors. In the longer run, agents may figure it out for ordinary folks … tax agents help us manage our future tax liabilites, and financial managers help us manage the risks to our wealth.
Peter headed the SOMA portfolio at the FRBNY, and did a stint at the US Treasury, so he (of all people) understands what’s going on … and rather than being squeezed into taking risk by QE (the ‘portfolio balance’ effect) he’s being pushed away from it (the ‘Ricardian balance’ effect):
it is time to face the simple truth that, as they approach zero, lower interest rates will not automatically create more credit and more economic activity but, rather, run the significant risk of perversely discouraging the lending and investment that we need