Some stuff » creation

What is quantitative easing

admin — Fri, 20 Mar 2009 07:32:15 +0000

When I first looked this up last year, no good explanation came about, so let me explain in my own words.

According to my understanding, I don’t think what the Fed buys (Treasury issued debt vs. other things) is the heart of the distinction in defining quantitative easing at all. The Fed is just like any bank. In the most harmless and normal case, the Fed uses its own equity to buy and sell assets. A step away from that, the Fed can loan out its assets in exchange for other assets. Another step away from that — and the Fed has been doing this since last October — is to absorb deposits and make loans using those deposits. Since this last step is multipliable, it is credit creation, and the exact amount created can be quantitatively targetted by the Fed; this is exactly what is meant by “quantitative easing”.

Is this printing money? It isn’t any different than normal bank credit creation if you simply view the Fed as another bank. The only difference is the Fed isn’t subject to reserve ratios or capital leverage requirements (e.g. it’s extremely levered), so it can, not necessarily will, create credit much too imprudently.

The Fed can acquire bad assets no matter what asset it takes. US debt may be one such bad asset but is it really worse than the rest of the stuff? By definition, the Fed is buying all of them at rates above what they are worth when marked to market. But the idea is this is for longer term benefit and hence not imprudent.

I think the outcry about the Fed buying government bonds rather than other assets is the Fed’s special relationship with the Treasury and the potential for abuse. The Fed has a chummy depositor who will never participate in a run on it, and that is the Treasury. And such a depositor will get any amount of money it needs to deposit with the Fed by issuing debt that even if nobody wants, the Fed will happily buy. The metaphorical printing press is in two pieces, mediated by the accounting trick that is permanent debt issuance. So if the two collude, they can put the printing press together and make it work. Whether such collusion is or is not happening is debatable, as there is no sharp line to cross. Everybody is still happy to leave their deposits with the Fed and presumably still believes the Fed (or the government) that the Treasury means to retire these debts eventually, to unwind these positions.

But if this economy doesn’t turn better soon, these assumptions will become untenable.

credit creation

admin — Tue, 11 Mar 2008 20:14:03 +0000

So finally, the Fed is taking home loans onto its balance sheet, a tool Bernanke proposed years ago to combat deflation. (Interesting, the list of reflationary tools proposed were: drop short-term interest rate, cap long-term rate, buy private debt, buy foreign debt, tax cut, and government purchases; so there are just a few more options left.)

Fed Easing Liquidity in Funding Markets

By Jeannine Aversa, AP Economics Writer

The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers — big Wall Street investment firms and banks that trade directly with the Fed — with 28-day loans of Treasury securities, rather than overnight loans. They would pledge other securities — including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac — as collateral for the loans of Treasury securities. Fed officials said that’s the first time they’ll be accepting mortgage-backed securities through this type of lending program.

Unfortunately, that does tend to make the Fed less credit-worthy, say if the banks were unable to repay their 28-day debts. And since the Fed is where the government keeps its money:

U.S. Treasuries Riskier Than German Debt, Default Swaps Show

By Abigail Moses

March 11 (Bloomberg) — The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.

synthetic genome

admin — Thu, 24 Jan 2008 18:13:58 +0000

all over the news today.

Scientists have built the first synthetic genome by stringing together 147 pages of letters representing the building blocks of DNA.

The researchers used yeast to stitch together four long strands of DNA into the genome of a bacterium called Mycoplasma genitalium. They said it’s more than an order of magnitude longer than any previous synthetic DNA creation. Leading synthetic biologists said with the new work, published Thursday in the journal Science, the first synthetic life could be just months away — if it hasn’t been created already.

“We consider this the second in our three-step process to create the first synthetic organism,” said J. Craig Venter, president of the J. Craig Venter Institute where scientists performed the study, on Thursday during a teleconference. “What remains now that we have this complete synthetic chromosome … is to boot this up in a cell.”

This is what they actually did. Looks like an interesting application of TAR cloning in yeast (another link) — normally used for sequence selection — which itself is a significant extension of the YAC toolset.

I guess small artificial genomes are a practical reality now, but TAR cloning is really the key here, allowing a less restrictive abstraction of the join operation to be implemented. Nice.