Should Congress Place a Cap on The Fed’s Balance Sheet? The Demint/Lee Senate Bill S.3240

Confounded Interest ^ | 06/13/2012 | Anthony B. Sanders

[whitedog57]

It is no secret that The Fed is mulling over further monetary stimulus. Whether it is quantitative easing (QE3) or curve twisting (Twist3) remains to be seen.

Senators Jim Demint (R-SC) and Mike Lee (R-Utah) have proposed legislation, S.3240, that caps the balances of reserves of depository institutions. AYO12664

In order to prevent the Federal Reserve from further quantitative easing, Sen. DeMint’s No QE3 amendment would prevent the Fed from expanding its balance sheet again, as well as establishing that the Fed should return the size of its balance sheet to pre-2008 levels.

Wow, THAT is a provocative piece of legislation!

As it stands, The Fed is enabling massive government spending which is financed through additional debt issuance. As long as The Fed purchases U.S. Treasury debt, there is little sense of urgency to cut government spending and debt.

Right now, The Fed is the biggest purchaser of Treasury debt.

Given our staggering debt outstanding that is never paid down (ignore the Clinton pay-down since off balance sheet debt exploded), will The Fed be able to unwind (pay down) their balance sheet?

The Fed does hold agency mortgage-backed securities (MBS) that gradually pay down. And The Fed has been selling their credit sensitive bonds that they had purchased (Maiden Lane). But is the Treasury and other positions that are of concern.

Since 2007, the U.S. Treasury (active) yield curve has dropped considerably.

But unemployment remains stubbornly high.

And M2 Money Velocity remains low as well.

There is no doubt that capping The Fed’s balance sheet will be poorly received in the stock market (which tends to bubble when The Fed engages in monetary stimulus). But is that a good reason to perpetuate The Fed’s enabling of Federal government spending?

[whitedog57]

Interesting proposal by Demint and Lee. Doesn't have a prayer because government is dependent on The Fed to keep its spending spree alive!!!!!!