Liveblogging World War II: January 11, 1943
Quote of the Day: January 12, 2013

There Is Something I Do Not Understand About Kansas City Fed President Esther George's Reasoning Here

The Fed's current Quantitative Easing ∞ program involves its buying risky bonds--thus diminishing the pool of risky assets that the private sector can hold. Esther George objects because… it does not make complete sense to me:

Michael S. Derby; 2013 Fed Voter George Warns of Risks in Current Policy: As she prepares to take on a direct role in setting monetary policy this year, the leader of the Federal Reserve Bank of Kansas City….

We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances… [that would] hamper attainment of the [Federal Open Market Committee's] 2 percent inflation goal in the future…. [M]onetary policy, by contributing to financial imbalances and instability, can just as easily aggravate unemployment as heal it….

She noted that prices for bond, farmland, high yield and leveraged loans “are at historically high levels,” and if there were to a big correction in those prices, it could be “destabilizing and cause employment to swing away from its full-employment level and inflation to decline to uncomfortably low levels.”… The policy maker said the Fed buying of Treasury and agency mortgage bonds “almost certainly” increases the risk of calamity when the time comes to shrink the size of the balance sheet…

Because there is less in the way of risky assets for the private sector to hold--and because that pushes prices of risky assets up and returns on risky assets down--QE ∞ actually makes private-sector portfolios riskier? Is that the argument?

It could be--the world is a surprising place, and lots of things can happen. But my first thought would be that a world in which the Federal Reserve takes risk off of private-sector balance sheets and onto the government's balance sheet is one in which the private sector is holding not more-risky but less-risky portfolios…