Friday, May 28, 2010
Is M3 necessary?
The Fed does not produce M3 but some argue that it should, mainly owing to its deflationary implications for the economy and the exclusion of REPO transactions in other first two definitions M1 and M2 (See here). The argument makes sense to me, especially in the context of growing financial innovations in recent times. What do you think?
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I believe that the sudden decision for the Fed to stop reporting M3 in 2006 was problematic for an abundance of reasons, including those that they publicly announced. Firstly, the Fed claimed that M3 was to stop being reported because it was going to save money, an almost laughable explanation, as well as because the measurements tracked by M3 were already being tracked by other indicators. However, as we have already learned, M1 and M2, although accounting for the most liquid and semi-liquid forms of money, do not include " large-denomination ($100,000 or more) time deposits, balances in institutional money funds, repurchase liabilities issued by depository institutions, and Eurodollars held by U.S. residents at foreign branches of U.S. banks and at all banks in the United Kingdom and Canada." The Money Supply as measured by M3 can only be a more accurate measurement of the Money Supply in the United States because it includes M1 and M2, and as the money supply determines inflation, so a less accurate measure of the money supply will cause an uninformed and unaware public to possibly face inflationary times. When the government reports the money supply as measured by M1 and M2, it is only under-accounting for liquid forms of money that are becoming increasingly more important today, especially in the growing innovations in the financial sector. Basically then, the recent reports of the Money Supply are lower than actual, meaning that a reported increase in the money supply as reported by the Fed's measurements of M1 and M2 is actually a much greater increase, meaning a greater inflation than is reported. I think that private reporting of M3 is problematic in that the transition from a governmental entity to a private one means the Fed can conceal the true amount of money creation that occurs. Essentially they can be creating more money and spending this unbeknownst to the public. The Fed should return to publicly producing M3.
ReplyDelete-Javier Janbieh
M3 data should be produced. Hidden Financial information has resulted in closing of financial institutions, lost investments, and lost jobs. Also, there seems to be a deflationary concern. Understanding the status of repo dollars, Eurodollars, etc. would greatly assist with developing monetary policies to counteract deflation and to assist firms and households with future investment decisions. Policies and decisions are only as good as the information available.
ReplyDeleteAvadella White
The M3 is necessary and should be counted by the Fed. The more complete and accurate information about the money supply we can compile, the more appropriate and timely decisions we can make. The fact that the Fed used to collect information on the M3, but stopped for ambiguous reasons (right before a major recession mind you!), indicated some degree of complacency and/or ineptness. According to Gary Gorton’s research, “trillions of dollars were traded in the repo market…a very liquid market.” Since the repurchase agreements are used as private money by banks, but are excluded from both the M1 and M2, it would be very prudent to once again start counting the M3.
ReplyDeleteMichael Kinsley
I dont see any reason why the Fed should use M3 as a monetary aggregate in determining policy measures for several reasons: the potential for an inflated price level, double counting of assets, and foreign bank deposits. M3 has recently proven to be a poor economic indicator because of credit risks and inflated asset prices. Sound familiar. Yes, the subrime meltdown. At the begining of the credit crisis, M3 was surging because consumers and institutions were flooding the money market with credit. consumers and businesses were borrowing money before the credit markets were frozen creating a real distortion of the price level which was followed significant defaltionary risks. in order to get a true understanding of the money supply, one (being the Fed) must distinguish between money that is being borrowed and deposited.
ReplyDeleteBrian Frisch
I believe that M3 should be reported by the Fed, although I can see both sides of this argument. M3 certainly has its flaws; it can double count assets and inflate the price level, but despite this, it can be a valuable look into repo markets and other bank dealings that tend to be less than transparent. Given the caveats of M3, the Fed may choose not to consider the measure when monetary policy is concerned, but they should still collect and publish the data. With the complexity of modern financial markets, absolute transparency is imperative, and I believe in this context M3 is still valuable.
ReplyDelete-Matthew Moore
By Renell Anderson
ReplyDeleteOn March 23, 2006 the Federal Reserve ceased publication of the M3 monetary aggregate.
The US Federal Reserve announced that it would cease publishing M3 data, saying, "[the] M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years",
In a June 2008 speech, U.S. Treasury Secretary Timothy Geithner, then President and CEO of the NY Federal Reserve Bank, described the growing importance of the shadow banking system:
Shadow institutions by definition, do not accept deposits like a depository bank and therefore are not subject to the same regulations. Familiar examples of shadow institutions included Bear Stearns and Lehman Brothers. Other complex legal entities comprising the system include hedge funds, SIVs, conduits, money funds, monolines, investment banks, and other non-bank financial institutions.
"In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion."[2] In other words, lending through the shadow banking system slightly exceeded lending via the traditional banking system based on outstanding balances.
With this information and in light of the amount of money spent via TARP I strongly believe that yes, M3 should be reinstated but only after some for or regulation has been put in place on the shadow institutions.
By Renell Anderson
M3 is not needed. They have not used the data from M3 in Policy making. It is a poor economic predictor. It just isn't as reliable as M1 and M2, so I feel that it isn't needed.
ReplyDeleteNathan Howe
The Federal Reserve on March 23rd 2006 made an announcement that it would no longer publish the M3 monetary aggregate and would also cease publication of large-denomination time deposits, repurchase agreements and euro dollars. The Federal Reserve provided a very unjustifiable reason of not issuing M3 to ‘saving money’ and ‘not providing any additional benefits’. Let’s first see what M1, M2 and M3 are: These are the three different ways the Federal Reserve tracks the money supply and publishes it.
ReplyDelete• M1: includes all forms of liquid money like travelers checks, demand deposits (checking accounts), and other deposits against which checks can be written.
• M2: it includes M1 and savings accounts, time deposits of under $100,000, and balances in retail money market mutual funds.
• M3: tracks the broadest measure of money in the economy and includes M1 and M2, in addition to certificate of deposit accounts over $100,000, deposits of euro-dollars and repurchase agreements
I do not agree with the government’s decision of not publishing the M3 data because:
1. Other major countries around the world track M3 data (or the broad money, as referred by some countries)
2. M3 provides a good data point to verify US GDP number. U.S. M3 money supply as a proportion of gross domestic product (GDP) was above 80% in 2006.
3. As Money Supply is directly related to inflation, an increase in the supply of money would have a direct impact on inflation and through M3 inflation can be tracked in a better way.
4. M3 has risen more than twice as fast as M2 and GDP in recent years (2004-2006), so it makes more sense to track the M3 and study its impact on US GDP, inflation and government debt.
ANTARA MAJUMDER
A steep decline in money supply could be choking the U.S.’s economic recovery, while supporting fears of deflation. While the Fed no longer tracks M3 which is one of the broadest indicators of the U.S. money supply, professional forecasters estimate the index has fallen 9.6% on an annualized basis from February through April; If this isn’t a clear enough proof that M3 is necessary the sharp drop in money supply matches what was last seen during the Great Depression. Looking at another broad measure of U.S. money supply, referred to as the St. Louis Fed’s MZM, which measures assets that can be redeemed at par on demand, money supply has fallen 1.5% since the end of last year.
ReplyDeleteSidney
Petrica Molnar:
ReplyDeleteThe definition says it all for me. "M3 consists of M2, institutional money market mutual funds, time deposits in amounts of $100,000 or more, repurchase agreement liabilities of depository institutions (in denominations of $100,000 or more) on U.S. government and federal agency securities, and Eurodollars."
It is more elaborate and detailed version of what we consider money. The FED can use M3 to get another view of money. It's not like they are saying lets discard M2 and M1 and only regard m3. The more information we have the better we can get a view of how to make fiscal, and monetary policy. We need to know where and how people are moving their money, as technology is advancing and information is more readily available, the definition of money should get more elaborate. It only makes sense.