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How the Fed “Went Broke”
- deleted 4y ago[deleted]
- MR4D 4y agoThis is a great article. Lyn goes in depth, and does a pretty good job of explaining something that's fairly intricate. 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.
- landemva 4y agoThat profit is after expenses for flights, parties, conferences, consultants, etc. I'm ready for $10 and $100 coins and avoid the fed notes.
- SQueeeeeL 4y agoComplaining about the abborant behaviors of individuals belies the actual problem. Even if the FED were all on their "best behavior" we'd still be in a very bad position from the weird mixing of business and government.
- landemva 4y agoComplaining ... I offered a solution. Federal Reserve buys coins from US Mint at face value. Coins work now, and large denomination coins are a solution within existing framework.
- SQueeeeeL 4y agoI mean, not using bills isn't really a practical solution. Legally dissolving the Fed or making a committee with only the instruction to print money would be better.
- deleted 4y ago[deleted]
- JumpCrisscross 4y agoIt also drives home that financial illiteracy amongst voters regarding this “loss” is the primary threat, not the loss per se.
- Ancalagon 4y agoThis is why everyone - tech companies, the market, myself - gambled (and apparently lost) and continues to guess that the Fed wouldn’t raise interest rates further.
- LatteLazy 4y agoIf you gamble they will and get it wrong you lose a lot more than if you gamble they won't and get it wrong.
- Ancalagon 4y agoWhat?
- LatteLazy 4y agoWhat I said? Betting one way and being wrong is much worse than betting the other way and being wrong.
- Invictus0 4y agoWhat you said wasn't English
- OkayPhysicist 4y agoIf you gamble "they will" and get it wrong, you lose a lot more than if you gamble "they won't" and get it wrong.
- helf 4y agoThis is why punctuation is always important. Also, Oxford Comma or GTFO :)
- deleted 4y ago[deleted]
- throwaway5947 4y agoIt’s a cynical take, but I always thought the real reason for central bank independence is so the finance sector can exercise more political leverage and be safer during busts, for politicians it was mostly a technocratic headache they happily remissed. People always talk about independence as some high minded ideal but I don’t see the benefit in practice.
- lazide 4y agoYou saw that Trump was explicitly trying to print cash like crazy, right? 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.
- hindsightbias 4y agoWhat McCulley said in 2017: https://www.youtube.com/watch?v=xnYZwxzxd9Y https://www.youtube.com/watch?v=xnYZwxzxd9Y
- corbulo 4y agoNot sure which is better. Ownership of regional feds is private. 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).
- lazide 4y agoCite? [https://www.federalreserve.gov/faqs/about_14986.htm https://www.federalreserve.gov/faqs/about_14986.htm] disagrees. They’re a weird semi-governmental entity.
- corbulo 4y agoThats the national fed. The regional feds are privately owned by 'member banks' https://www.stlouisfed.org/in-plain-english/who-owns-the-federal-reserve-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-that-own-the-new-york-fed-and-its-money-button/ https://wallstreetonparade.com/2019/11/these-are-the-banks-t...
- OscarCunningham 4y agoGood article with very clear accounting. 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.
- yeslibertarian 4y ago[dead]
- rr888 4y agoLyn Alden sounds like an expert but never worked in the financial industry. Either that makes the reports clever outside view or misleading detail of someone who doesn't really understand it. My money is on the latter.
- OscarCunningham 4y agoWas there a particular part you were suspicious of?
- CraigJPerry 4y agoNot the OP but there’s quite a few parts of the article are misleading. For example: >> 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.
- cs702 4y agoThe Fed's reasons for existing have nothing to do with making money, nor with having assets (bond holdings) that exceed its liabilities (monetary obligations). Profits and positive equity are not even goals of the Fed. If you read the Fed board minutes, you'll find that board members don't even discuss profits. 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.
- RangerScience 4y ago> maximize employment 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!
- wonder_er 4y ago> if they consider quality of employment in there as well? 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!
- OscarCunningham 4y agoThe Fed only really has one lever; it's already a bit much to want them to control both inflation and employment.
- rhelz 4y ago>>it's already a bit much to want them to control both inflation and employment. They have to have two counter-acting goals in order to not become a paperclip maximization machine.
- jessaustin 4y agoThis isn't why people use (and hold) dollars. These figures can go up and down without affecting anything real. Paying this much attention to trivial minutia doesn't serve the interests of normal people. When non-Americans stop holding so many dollars, these figures will not be the cause. Rather, it will be due to our unconscionable foreign policy and abusive economic sanctions.
- OscarCunningham 4y agoThey might stop holding dollars for that reason, but they would definitely also stop holding dollars if inflation was high and the Fed had nothing to sell to bring it back down.
- hindsightbias 4y agoWhat non-inflationary currency would they go to?
- OscarCunningham 4y agoIn this hypothetical the dollar has inflation higher than its 2% target, but there are still other major currencies whose central banks haven't gone bankrupt.
- AnimalMuppet 4y agoCentral banks don't go bankrupt. 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.
- Invictus0 4y agoAnd the reason dollars have value is because we have intelligent people in government managing the system and preventing it from going haywire, not because of some sort of magic. It might not matter when you go buy eggs but it's still interesting to see what's going on under the hood.
- wonder_er 4y ago> A commercial bank has a considerable amount of both assets and liabilities. In order to remain solvent, the asset side must exceed the liability side, and they have various regulations placed on them to try to keep them as solvent as possible. 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. :(
- chrisbolt 4y ago> 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 Isn’t this just fractional-reserve banking?
- throw0101a 4y ago>> 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 > 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-series/388/ 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/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
- JumpCrisscross 4y ago> Banks that lend out _deposits_, for loans to others Banks don’t lend deposits. They create deposits through loans. Understanding that is far more fundamental than anything about the Fed.
- BoardsOfCanada 4y ago> However, the chart is flawed because it changes its calculation method mid-chart once it turns negative. The smaller positive numbers show how much the Fed was sending every week (around $2 billion on average) but when it turns negative, it switches to a cumulative calculation and thus falls off like a cliff. Why on earth would anyone make a chart like that?
- bun_at_work 4y agoThe chart is created from the reported data, it's just a side-effect.
- ashika 4y agoi agree its crazy but i thought tfa did a good job explaining why the original chart ended up looking the way it did. regime change in a dataset can expose bad assumptions about relationships between balance sheet items you thought could be summed, etc.
- Eumenes 4y agoRon Paul was right
- arcticbull 4y agoLyn is a bit of a crank. It's unfortunate to see her work posted here. 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.
- Accujack 4y agoWhat do you base this on? Sources?
- arcticbull 4y agoThis article is actually pretty well written, so credit where due, it's all her Bitcoin quackery. I don’t really trust any flat earthers to write physics blogs.
- yuvadam 4y agoShe rarely mentions Bitcoin in her research, and when she does she always sticks to the facts. 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.
- yao420 4y agoRarely mentions? Every other article on her page is about crypto.
- garbagecoder 4y agoAny article about the Federal Reserve that isn't talking about their discount rate is more or less presumptively quackery until proven otherwise. As other commenters have pointed out, this criticism here has nothing to do with what the Fed is for or about. If you're asking for sources, try an intro level macroeconomics textbook.
- xhrpost 4y agoI would assume that the Fed running a deficit would mean that M1 would continue to increase, even with the QE machine turned off. The Fed charts show that doesn't seem to be happening though. Anyone know why?