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COMMENT Jason Cummins Greenwood, Hanson, Rudolph, and Summers argue that the Treasury and Federal Reserve should cooperate in managing the federal debt. At first glance, that seems perfectly reasonable. After all, what’s the downside from cooperating to promote the common good? The prima facie case comes from responses to the Great Recession, when it appeared the Treasury and Fed were operating at cross-purposes. Treasury was lengthening the average maturity of the federal debt while the Fed’s asset purchases were shortening duration in an effort to stimulate the economy . One could argue, as the authors do, that Treasury blunted the impact of the Fed’s program or at least made it so the Fed had to do more. At a minimum , the argument goes, one part of the government should have been working with the other part to achieve shared aims. That sounds good in theory. What about in practice? Unfortunately, a closer examination of the history of such cooperation suggests considerable room for skepticism, both in terms of the pluses and minuses. To explore the negatives, go back to an earlier era of cooperation between the Treasury and the Fed. According to Robert Bremner in Chairman of the Fed,24 Fed Chairman William McChesney Martin made certain the Johnson administration was “apprised about the thinking within the FOMC,” the policymaking Federal Open Market Committee. That sounds like the kind of coordination Greenwood and others advocate. In practice, such efforts were the precursor to the Great Inflation of the 1970s. In the fall of 1965, the Fed moved to raise rates after fifty-eight months of expansion. President Lyndon B. Johnson, always colorful in his delivery, said to Martin, “I’m scheduled to go into the hospital tomorrow for a gall bladder operation. You wouldn’t raise the discount rate while I’m in the hospital , would you?” Martin dutifully replied, “No, Mr. President, we’ll wait until you get out of the hospital.” 24. Bremner (2004). Debt Management Conflicts, U.S. Treasury and Federal Reserve 83 84 R. Greenwood, S. G. Hanson, J. S. Rudolph, and L. H. Summers Delaying monetary policy tightening for a gall bladder operation may seem trivial. But, LBJ went volcanic when Martin did raise rates: “How can I run the country and the government if I have to read on a news-service ticker that Bill Martin is going to run his own economy?” That comment captures the essence of the tension between the executive branch and the Fed—they won’t always be able to easily agree to a joint statement on the strategy for managing the government’s debt. Or, if they do, the risk is that one side becomes subordinate to the other. Indeed, Martin was soon called down to the LBJ ranch to get dressed down for raising rates. The First Lady even got into the act when he arrived, saying, “I hope that you have examined your conscience.” According to Bremner’s account, Martin received the full LBJ treatment. The president asked the Secret Service to leave the room and then began pummeling the Fed chair, shoving him against the wall and saying, “Martin, my boys are dying in Vietnam, and you won’t print the money I need.” We know how the story unfolded from there: Martin did print the money LBJ needed, and economic performance suffered from the inflationary spiral that followed. These examples are not unique. They occurred in the United States in every decade after World War II, until Fed Chairman Paul Volcker established the de facto independence of the Fed as an inflation-targeting central bank. Turning to the other side of the ledger, let’s examine the positives from cooperation. The authors say that Operation Twist—when the Treasury and Fed together tried to lower long-term interest rates while holding short-term rates constant—was perhaps the best example of the potential for working in concert. As it was recently when short-term rates hit zero, the Fed was constrained in the early 1960s in its use of the short rate as a policy instrument. The authors argue that during Operation Twist, in contrast to the recent period, the Fed was able to complement its own actions with the secured cooperation of the Treasury to alter the maturity structure of new debt issuance. The authors cite Eric Swanson’s25 study of Operation Twist as having a “significant impact.” Statistically significant, yes. Economically significant, perhaps not so much. Swanson finds...


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