M3: This Is What Bernanke (And Others) Have To Say

Monday, December 05, 2005

In order to keep my coverage of the burial of US M3 data complete I have discovered last weekend that Federal Reserve chairman designate has given a long answer in writing to an inquiry of US Senator Jim Bunning in connection with Bernanke's hearing before the Committee on Banking Housing and Urban Affairs on November 15. The letter to Bunning was posted to the web by the Wall Street Journal on November 21.
From Bernanke's answer to Bunning:
Bunning's question: It is my understanding the Federal Reserve has decided to halt disclosure to the public of its M3 findings and report. The findings of the M3 report provide pertinent information to the public - from economists to investors and to industries which all use M3 report findings for economic forecasting, investing, and business decisions. You have advocated a "more open" Federal Reserve under your command. Will you work to reverse this policy and commit to keeping the M3 report and its findings available and open to the public? What is the rationale and reasoning by the Federal Reserve to keep the M3's information from the public?

Bernanke's answer: My understanding is that the Federal Reserve decided to discontinue publication of the monetary aggregate M3 because the costs of collecting and processing the underlying data were judged to exceed the benefits. The Federal Reserve will not withhold the M3 data from the public; rather, it will no longer collect and assemble that information. The Federal Reserve will continue to collect data for and publish the monetary aggregates M1 and M2 and their components.
The benefits of continuing to publish M3 appear to be minimal, because M3 has not been actively used in the formulation of U.S. monetary policy and, at least within the Federal Reserve, has not been found to have much value for economic forecasting. Discontinuing publication of M3 will allow the Federal Reserve to terminate certain reporting forms that currently must be filled out by depository institutions, lowering the costs of such institutions. Costs at the Federal Reserve Banks and the Board will similarly be reduced as these particular reports will no longer need to be processed and analyzed.
I view the periodic reappraisal of the costs and benefits of reports as a useful discipline to ensure that the reporting burden on financial institutions is kept to a minimum.

Runaway M3

GRAPH: US M3 resumed its steep upward path in the week to November 21, rising $43 billion after staying essentially flat in the three weeks before. Looking at seasonally adjusted M3 data one observes a pattern that M3 always grows strongest at the beginning of the second half of the month. Data: Fed St. Louis
I still do not buy the argument that cost reasons were the main driver behind the burial of M3, a figure that showed another sharp uptick recently. I also don't buy the argument that M3 will be discontinued because it it not a figure the Fed relies on in its monetary policy decisions. If we were to apply these reasons we could ultimately do away with hundreds of other statistics - most prominent example the Consumer Price Index CPI, which the Fed pretends not to look closely at, favoring the "core" rate instead - that are not looked at save for a handful of researchers.
Having read a lot about M3 I can credit Tim Iacono who writes the very informative blog "The Mess That Greenspan Made" with taking the discussion a good step further. While his recent post "M3, 'Moneyness', and Conspiracy Theories" is another excellent roundup (the first one being "M3, We Hardly Knew You")of commentator's contributions to the topic, a (sadly) anonymous commenter came up with a brilliant idea. Being faced with the fact that M3 is not anymore the broadest monetary aggregate because of the growing sector of asset backed securities (ABS) this bright mind came up with the idea to create a monetary aggregate M4 that would include more investment innovations. Where can I subscribe to this one?

1 comment

Anonymous said...

Great article! One of the reasons they don't want to compile M3 data is that it goes against their beliefs or theories on any particular econonmy. Those who believe in Austrian economics may want to use this data but those say in Keynesian don't buy into it. It's like trying to get a muslim to convert to Atheism or Catholicism...just not gonna happen.

29 May, 2010 08:11

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