How the Fed “Went Broke”
lynalden.com
lynalden.com
The Fed's actual goals are: (1) to maximize employment as much as possible, while (2) keeping prices reasonably stable (i.e., not rising too much each year), and (3) promoting the stability of the financial system as much as possible.
If they conclude that they have to raise rates much higher and continue to withdraw liquidity from financial markets to bring inflation under control, they will do it -- even if it means inflicting a painful recession.
Huh. Do you know if they consider quality of employment in there as well? 'Cuz if not, that plus Goodhart's law would, uh, explain some things.
Saw a meme today or yesterday, something like:
Them, celebrating: We've created thousands of jobs!
Me: And I need three of them to pay my bills!
They have to have two counter-acting goals in order to not become a paperclip maximization machine.
In conjunction with most surfaces, they can be used as musical instruments, akin to drumsticks or fingerpicks. Being much cheaper than recorders, they would serve as an excellent way to instill a sense of rhythm into children.
If you bend them in a certain way, they make quite satisfying and very stable hangers. Who among us has not needed to hang something in place before?
If you put one in the back of a TV, you can pick up plenty of ASTV channels, most likely including your local news. This is deeply good for public education and awareness.
If you put one in a radio, you can pick up radio channels. Without too much effort, they could also be used to replace the tuners and volume knobs on one.
They work very well as stands for all sorts of things if slightly deformed, which can be deeply useful.
You can use sufficiently large ones (known in most markets by the affectionate moniker of "jumbo" paper clips) to teach people how to tie knots, in a manner that requires less mechanical dexterity than most rope.
If you peel the end of one out, it makes a delightful pinhole puncher, which is very useful for certain styles of photography.
This isn't even getting into all of the remarkable ways you can use them with paper!
And if you're paperless, it would be hard to think of a more efficient way of making the perfect-sized USB stick keychain for precisely your amount of USB sticks.
Please do not slander paperclips; we need a paperclip maximizer for the good of society, and little would be a better short-term goal for AI research.
Balance comes from opposing forces.
Nowadays, when I see something unbalanced, I first look for missing forces (and then look for outsized forces).
Only around the property of income, seeking a state of stagnation. If your boss is now whipping you to keep you in line where he previously wasn't, that would be beyond their purview. There are supposed to be other organizations to control for those concerns.
I think it's of sufficient quality (for the fed) if that employment leads to state coffers being sufficiently filled, without the wheels coming off the bus during their tenure or their immediate successor's tenure.
As you said - needing/having three jobs isn't really legible to the people at the Fed, so there's no visible problem!
In practice, does it matter? The Fed operates with impunity and can effectively do what ever it's members prefer.
https://markets.businessinsider.com/news/stocks/robert-kapla...
"Dallas Fed President Robert Kaplan made million-dollar stock trades in Tesla, Amazon"
In short, the Fed pays its profit to the Treasury department by law. When the Fed is making a loss instead of a profit, then things start to get weird, and all sorts of problems can arise. One side effect in an increase in the federal deficit on the order of $100 billion per year.
I'm ready for $10 and $100 coins and avoid the fed notes.
Federal Reserve buys coins from US Mint at face value. Coins work now, and large denomination coins are a solution within existing framework.
Why on earth would anyone make a chart like that?
The government could show its support for the dollar by simply giving the Fed enough bonds to keep it solvent. Equivalently, just let it print government bonds the same way it prints money.
Either way the point is that the government has to show that it will eventually use higher taxes if needed to prevent hyperinflation.
Fed profits and losses are arcane. The markets gambled the Fed would ease off because it would miss its soft landing. Raising rates while preserving employment is extremely difficult. To everyone’s surprise, the Fed is managing it. That economic strength, together with persistent core inflation, means higher rates for longer than some thought.
Yes. Employment is growing, unemployment is steady, growth is positive and inflation has at least stabilised.
> The books are cooked to all hell
Which books? The Fed’s?
They literally changed the definition of 'recession' for political convenience. You really think the economy is booming right now like whats being claimed? Every admin manipulates BLS collection data to make unemployment look good.
They did no such thing.
https://www.forbes.com/sites/leonlabrecque/2019/03/25/what-i...
https://www.nationalreview.com/corner/it-depends-what-the-de...
https://www.washingtonpost.com/politics/2019/08/21/fact-chec...
Acknowledgement as the 'popular definition' by St Louis fed in 2009 which uses an even less generous definition than two quarters to define it: "“significant decline in economic activity spreading across the economy, lasting more than a few months.”"
https://files.stlouisfed.org/files/htdocs/pageone-economics/...
Spin cycle:
https://www.cnbc.com/2022/07/29/white-house-goes-on-offense-...
https://www.foxbusiness.com/economy/recession-biden-yellen-d...
https://fortune.com/2022/07/29/wikipedia-recession-definitio...
https://dailycaller.com/2022/07/28/wikipedia-change-definiti...
You just disproved your own claim. The government/ fed definition of recession has not changed since 2009. You claimed it changed in 2022.
The 2009 link says "The committee considers a wide range of indicators with particular emphasis on payroll employment and several measures of domestic production and income, such as gross domestic product, gross domestic income, and industrial."
https://investor.vanguard.com/investor-resources-education/n...
Do you think they are also part of this vast conspiracy to trick you, or is it possible you are just confused and never understood economics or the definition of recession as well as you thought?
Here's Fidelity in december 2012 "We do not believe that the US is in recession, but instead experiencing a late-cycle expansion, which has historically led to positive returns for stocks and bonds."
https://www.fidelity.com/learning-center/wealth-management-i...
Is Fidelity also part of a vast conspiracy to trick you, or is it more plausible you just don't understand economics so well?
Maybe the issue isn't so much that the definition has changed, as modern events have revealed you never understood the definition in the first place, or that 2009 paper you cited?
Less than you seem to think. The Fed, SSA, SBA, FDIC and CFPB are independent agencies. Many data are provided by private sources, e.g. ADP. And the statistical agencies, while legally dependent, are fiercely independent and competitive (i.e. when one starts being co-opted, the others publicly disagree).
Moreover, there are hundreds of billions of private dollars which take these data seriously. Is every one of them is in on the conspiracy or duped?
Simply because something is claimed independent does not mean it is immune to politics and human nature.
Betting one way and being wrong is much worse than betting the other way and being wrong.
If you gamble "they will" and get it wrong, you lose a lot more than if you gamble "they won't" and get it wrong.Also, Oxford Comma or GTFO :)
And, even in that hypothetical, it would still depend on what interest rate you can get in dollars vs. what interest rate you can get in, say, Swiss Francs.
The leaders of other countries don't stuff dollars into the proverbial mattress because our central-bank T-sheet looks good. They do it because if their country goes into civil war and their currency becomes worthless, they perceive our currency as least likely to do that next. It's our demonstrated force projection, our vast multinational business reach, our entanglement into the IMF (the dollar being the currency used to pay IMF debts), and a couple centuries of relatively stable democracy that pins the value of the dollar.
The January 6 insurrection did more damage to the international perception of the dollar than anything the Federal Reserve is doing.
Even without the ability to directly fire folks and nominal ‘independence’ that definitely delayed rate hikes and made inflation much worse.
If politicians had direct control, the whole countries economy would be whipsawed by whatever directly benefited the current office holder.
As-is, it’s indirectly the case, hah.
It's not like democracies take a long view of things very frequently, but neither does the fed, at least not directly (maybe through said regional ownership).
[https://www.federalreserve.gov/faqs/about_14986.htm] disagrees.
They’re a weird semi-governmental entity.
The regional feds are privately owned by 'member banks'
https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...
It's actually a really ambiguous topic to research, as ownership stakes are basically never published. Someone supposedly did a FOIA and got the list of ownership shares for the NY fed, but its sourcing was dubious though it seemed legit enough. The names made sense and it lined up with a lot of verifiable historical facts. Banks of ownership for the NY Fed were systemically important banks like Citi, JP Morgan and BNY Mellon, few others iirc.
Read and evaluate for yourself: https://wallstreetonparade.com/2019/11/these-are-the-banks-t...
1) Those shares are not controlling in any way, but they do pay dividends. And those shares are for all member banks.
So it is a way for the Federal reserve to push any 'profit' from lending to the banks who paid the interest in.
2) They do vote for some directors (6 of 9) for the sub-banks, but those directors do not control things like interest rates or other policy decisions. That is done by the Board of Governors, which is controlled by the US Gov't.
* For your second link, that website looks like infowars had it's head explode all over the room. I'll pass.
I agree that website looks like shit, but what it says is sourced and lines up with the public history of the fed.
How about neither. The Fed was created in 1913 and can be abolished.
The only constitutional federal military is the Army and Navy! (Article 1, Section 8)
Or just recognize that it was created because of a long history of severe painful crises, and considered the 'least bad' option compared to JP Morgan having to bail out the US Economy (and hence wielding incredible power). [https://www.crf-usa.org/images/pdf/jpmorgan.pdf]
The devil you know, or the devil you don't.
https://constitution.congress.gov/browse/essay/artI-S8-C12-1...
"To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years"
Maybe we could amend the Constitution if we want the standing army.
But what are the consequences? Do those consequences make us vulnerable?
[https://www.reuters.com/article/us-usa-fed-trump-tweets/trum...]
This wasn't that many years ago!
The fed wasn’t in his crosshairs at first, but when they started to raise rates…
Trump and his family has extensive real estate ties, and those were having trouble due to the rising rates.
So then he started threatening them, and miraculously, they took a break. Which seems to have helped his son in law avoid bankruptcy at the minimum.
Weird, huh?
>> That serves as the source of financing for banks
I think they meant to say funding but regardless it’s wrong either way. A bank doesn’t use deposits to fund/finance loans it makes. A bank is licenced to create money from nothing in order to originate loans. This loan making activity is not constrained by deposits (money stored at the bank by other customers) nor by reserves (special money that cant be spent in the economy and is stored in the commerical bank’s account at the central bank). There are legal controls that mean loan making activity is constrained by a bank’s capital (this is what Basel I, II, III etc are all about). The definition of capital is very particular and complicated but a fair summary could be it’s the money invested in the bank by shareholders. Higher capital requirements increase shareholder risk and decrease public risk.
the author goes on to write the following without seeming to notice the incongruence:
>> Bank of America (BAC) as an example, they have $3.051 trillion in assets and $2.778 trillion in liabilities
(simplifying) BAC has issued $3tn loans but only has $2.7tn in deposits - so what did the author think they meant by “financing”?
To be clear the story here with BAC is more complicated than just loans and deposits but in the interests of not writing a wall of text…
>> Liabilities of the Federal Reserve consist mainly of bank deposits
this is unfortunate wording, it makes it sound like deposits by you or me. The money stored at the fed by commercial banks is different than dollars or pounds; its “reserves”. You can’t spend reserves in the economy like you can with normal money.
>> If a central bank loses its independence, and for example a president can tell the central bank to do whatever he wants, then a country has basically lost its guardrails against hyperinflation
I think this is a reference to Turkey and mis-understanding the bigger picture. Specifically the fact that hyperinflation is partly a function of money supply (and partly a function of money velocity) and that money supply is increased in two ways: commercial banks issuing loans (as above this is constrained by capital requirements) and secondly by expansionary fiscal policy - that is the government spending into the economy to consume on its own behalf. Neither of these is guard trailed by monetary policy.
NB: fiscal policy = government, monetary policy = central bank.
I think this comment is getting long enough, i’ll wrap it up there.
The Fed didn't "go broke" none of this really matters because the Fed's job isn't to make profit, it's to manage the money supply. The 'losses' here just indicates an outflow from one part of their operation but it's meaningless out of context.
[edit] To be clear this article is actually pretty good, and comes to roughly the same conclusion. My statement that she's a crank has to do with her voodoo economics/mental gymnastics in support of Bitcoin.
You're engaging in a blatant ad hominem attack on someone who's constantly producing high quality research on a variety of topics - seems pretty uncalled for.
If you're asking for sources, try an intro level macroeconomics textbook.
The 'attempt to remain solvent' assumes that an insolvent bank isn't instantly marked as 'a fraudulent store of assets', in the same way that a parking garage that 'takes joyrides in its customers cars' can't really be called a 'properly functioning parking garage', even if most of the customers don't generally get inconvenienced by the joyriding.
Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money, and in 'old times' was regarded as uninteresting, simple fraud, and the responsible parties were stripped of their banking certifications and publically shamed for the crime of stealing their customers assets.
The fed is not to be taken seriously, though it can hurt you if you run afoul of it, and everyone who is affected by the dollar is kinda running afoul of it right now. :(
Banks don’t lend deposits. They create deposits through loans. Understanding that is far more fundamental than anything about the Fed.
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
* https://rationalreminder.ca/podcast/132
In may countries even reserves (requirements) are not needed:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
Of course it could come from numerous other sources (e.g. interbank lending) but the naive view also agrees that banks deal with a variety of financial instruments.
It’s more complicated than that. If i use a loan to pay you and we’re both using the same bank, it’s no different to marking down the number in column A and marking up column B.
It’s only when we’re at different banks it changes, now my bank needs enough reserves to transfer to your bank. It can never not have enough reserves though because the central bank will always and without limit, lend it however much reserves it needs via the discount window.
Long way to say the money doesn’t have to come from anywhere.
>> interbank lending
not in a post GFC world, that’s one of the reasons we have the reserves situation today.
This all has happened before which people often forget. Eg it’s common for people to think Quantative easing is a new concept and yet its only the term is new, the idea is as old as banking systems.
Similarly the central bank could loan nothing and the commerical bank could loan millions.
Define "cash".
What the central bank gives to banks is not the money you and I use: what is given is not something that can be turned around and used in a business loan or a residential mortgage.
What the central bank 'gives' banks is simply a credit in their reserve account for inter-bank settlements. And having more reserves makes little difference in the creation loans, as (as mentioned before) some places don't even have reserve requirements:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
Nope, not deposits. Inter-bank settlements occur via reserves, which banks (generally) get from the central bank, but also borrowing from other banks.
They are for first approximations. Someone leading a life with the deposits-lent-out-as-loans model will generally navigate the financial system fine, just like someone ignorant of general relativity or, frankly, time zones, can live happily. But the simple model breaks down when you consider how banks interact with each other, and what happens in crises. It totally disintegrates when you get to the central bank.
The US is a huge outlier and it's hard to predict how things like "The central bank running a deficit" end up impacting the psyche of the financial decision-makers of the world.
Isn’t this just fractional-reserve banking?
> Isn’t this just fractional-reserve banking?
Yes, and it is no longer a thing, and it has not been for a while. Tobin call this the "Old View" in 1963:
* https://elischolar.library.yale.edu/cowles-discussion-paper-...
For how things actually work in recent decades see:
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...