Now, one of the risks that Jeremy Stein, Esther George, and company fear is that if the Federal Reserve buys up all the safe, long-term paper that banks needing to report profits so their CEOs can keep their jobs will have a hard time making the three cents per dollar of liabilities, and they will do things we won't understand and take risks we don't understand until it's too late, and then they will get into big trouble. And, this time, the political political climate will besuch that we cannot bail out the banks again. And then we have Great Depression II. That is the risk that the Stein wing is trying to insure against.Or such is my inference. But I don't know whether that's the tail risk that is driving Federal Reserve decisions right now or not--they aren't being terribly communicative. And if that is not the risk that is driving their decision-making, I don't see what significant tail risk from the Federal Reserve having a larger balance sheet is. If people get sick of holding cash, it can always raise the interest rate on the reserves by a little bit. I the prices of the bonds it holds fall, it can always hold them to maturity--it is the ultimate, patient, long-term investor.
EZRA KLEIN ON JANET YELLEN, SEXISM, AND THE FEDERAL RESERVE SUCCESSION by DeLong
As somebody who had an office next to Janet Yellen's in the period between when the Clinton administration ended and she was installed as president of the San Francisco Fed, let me say that she is plenty smart.
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