21 ms·

For the first time, the Fed is losing money

284 points by lxm 4y ago

jarym 4y ago
They ZIRPed themselves and are now in a hole that a lot of people warned them about and they kept brushing off criticism. I am fairly sure there's only one way the Fed-created excess since the GFC will end: with another tax payer bailout.
Aunche 4y ago
>Like all central banks, the Federal Reserve was designed to make money for the government from its monopoly on issuing currency. Ah yes. The obscure third of the Fed's dual-mandate.
- alxmng 4y ago
  That quote is really bad for a newspaper that calls itself Wall Street journal. It screams “I don’t know anything about macroeconomics”
slv77 4y ago
Operating losses means that the Federal Reserve is paying out interest to banks in excess of the amount that it is earning in interest. Historically that wasn’t possible because the Federal Reserve didn’t pay interest on reserves. It has to do so now because its balance sheet is so large due to QE that it can’t influence rates by shrinking its balance sheet. This is significant because the losses are born by the taxpayer which violates the constitutional mandate that all spending is approved by the house. The Fed is sidestepping this by booking the operating losses in an accrual account to be booked against future interest earned.
Jeema101 4y ago
>This is because the Fed’s trillions of dollars of long-term investments yield 2% but cost 4.6% to finance. This statement isn't exactly true because the cost to finance the purchases of Treasuries during quantitative easing was not 4.6% when the purchases were made. They would be losing money only if they were now selling those Treasuries at market rate, but they aren't doing that - they're just letting them roll off the balance sheet as they reach maturity.
- lxgr 4y ago
  How can an "investment cost the Fed" anything? Are they talking about the interest paid on Fed deposits? I thought most central bank assets were short-term repos, or is this different for the Fed? Are these outright owned assets from QE?
- nr378 4y ago
  Post-QE, the Fed now has to pay interest on it's excess reserves[1] in order to achieve it's Federal Funds rate. This costs the Fed real money, and it no longer collects enough money on the interest paid on it's assets (given they're lower yielding assets than the current target rate) to offset this cost. They are losing money regardless of what they do with their bond assets - they would simply lose even more money if they tried to sell their bond assets below purchase price/book value. [1] https://en.wikipedia.org/wiki/Excess_reserves https://en.wikipedia.org/wiki/Excess_reserves
paulette449 4y ago
It amazes me how many of the commenters seem to think that this is a piece by WSJ journalists. It's not, it's an Opinion piece by two members of the same right wing think tank (American Enterprise Institute). Whether you agree or disagree with the article is a separate matter, but knowing whether it was written though a lens of journalism or advocacy is important, imho.
nr378 4y ago
In order to affect monetary policy, the Fed now pays 4.9% interest[1] on $3.03trn of reserve balances[2], which is now costing them approx $150bn/yr run rate. Just 12 months ago they paid 0.15%. This $150bn cost is a consequence of quantitative easing massively expanding reserve balances, and those reserve balances still existing in a period of high inflation which is being fought with high interest rates. The obvious solution is quantitive tightening to shrink the quantity of reserves, however there's justifiable concern about the effects this could have on the still-fragile banking system. This is real money to the US taxpayer. The Fed used to remit $100bn a year to the US treasury, which it has now stopped doing. Instead, the Fed is sending this money to the US commercial banks which hold US reserves. [1] https://fred.stlouisfed.org/series/IORB https://fred.stlouisfed.org/series/IORB [2] https://fred.stlouisfed.org/series/BOGMBBM https://fred.stlouisfed.org/series/BOGMBBM
- jarym 4y ago
  And all that money they're paying in interest... how do they argue that those interest payments won't find its way back into the economy and further fuel inflation?
  - than3 4y ago
    Likely because its being held at the top at one of the primary dealers until they choose to use some of it. Maybe there's an agreement that they won't use it?
    - Ancalagon 4y ago
      Proof that trickle-down is a farce!
      - doubleg72 4y ago
        Idk if this is sarcasm or if you really don't know what trickle down is.
  - RockyMcNuts 4y ago
akiselev 4y ago
https://archive.ph/OAwCB https://archive.ph/OAwCB
dredmorbius 4y ago
Archive / paywall: <https://archive.is/OAwCB https://archive.is/OAwCB>
almost_usual 4y ago
It’s about $100 billion in annual revenue the federal government loses out on. https://www.lynalden.com/broke-federal-reserve/ https://www.lynalden.com/broke-federal-reserve/
- nwiswell 4y ago
  Absolutely nothing compared to how much the federal government is "earning" because inflation is running hotter than the average rate of interest on Treasury bonds. At a 7% rate of inflation and a 2% average interest rate, it amounts to over a trillion dollars a year discharged in terms of real debt owed to the public.
  - throw123123123 4y ago
    This is true, and yet, deficit is still growing. Welcome the united states of Argentina.
    - JumpCrisscross 4y ago
      > yet, deficit is still growing The deficit always grows in nominal terms because of inflation. Scaled properly [1], the deficit isn't great, but it's improving and far from unprecedented. [1] https://fred.stlouisfed.org/series/FYFSGDA188S https://fred.stlouisfed.org/series/FYFSGDA188S
    - PaulDavisThe1st 4y ago
      Kevin Drum has a chart or two for that: https://jabberwocking.com/yes-of-course-big-deficits-are-due-to-tax-cuts/ https://jabberwocking.com/yes-of-course-big-deficits-are-due...
    - quickthrower2 4y ago
      Almost all money is debt. The system only works this way.
yazaddaruvala 4y ago
What does it even mean for The Fed to have "negative equity capital"? Firstly, is this "equity" a short term book value vs long term book value thing? Secondly, they can literally print money. > the Federal Reserve has suffered operating losses of about $42 billion since September 2022 Between 2020 and 2022 they quantitatively eased $2TT+, and then over the last 12 months have actively quantitatively tightened $0.500 TT [0]. $0.042 TT is literally change to them. They can chose at any time to pay it off by stopping the quantitative tightening. Even a quantitative easing at this level would be inconsequential. Who is benefiting from a scary headline like this? or am I totally misunderstanding something? [0] https://www.statista.com/statistics/1121416/quantitative-easing-fed-balance-sheet-coronavirus/ https://www.statista.com/statistics/1121416/quantitative-eas...
- pid-1 4y ago
  > Secondly, they can literally print money. That's a great solution for everything as long as one doesn't care about inflation.
- jerf 4y ago
  "Secondly, they can literally print money." It is important, even very important, to realize that this merely changes the laws of economics to which they are subject, at least as people generally imagine them. It does not immunize them against the laws of economics. It does not mean they can just do anything without consequence, or with the full power to select the consequences. This is in the class of "things that sound obvious when I say them", but I can see that a lot of people seem to throw an exception here and terminate all execution. Having negative equity matters, even if you can print money. It just may matter differently. "or am I totally misunderstanding something?" I would say, you're not so much "misunderstanding" something as not realizing that there's a whole complex of interacting systems hiding behind your "but they can just print money" that needs understanding. Whether those systems are deliberately obscured is a matter of some debate, but they certainly don't go out of their way to educate you about these systems. Everything is far more complicated and interconnected then you appear to be seeing.
  - phaedrus 4y ago
JumpCrisscross 4y ago
Nothingburger. It’s as valid to be concerned about these accounting losses as it would be to suggest that by removing a source of income from the Treasury it’s fighting inflation.
- slackerchews 4y ago
  hey, i dont know much about central banking/economics, but i feel like i know enough to know that I know nothing. it seems that this topic produces the lowest-quality, highest-confidence responses of any on this board. You and a few others seem to be the only posters with an proper understanding of the topic. But I could be wrong - you may be as dumb as me. Could you point me in the direction of some resources that can help me be literate in this topic? I have already read the BoE paper that gets passed around here.
  - pjc50 4y ago
    > it seems that this topic produces the lowest-quality, highest-confidence responses of any on this board. If you have this insight, you're already ahead of the game. The background of orthodox macroeconomics, and the rationale for raising rates in response to inflation, comes from Keynes: https://en.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Money https://en.wikipedia.org/wiki/The_General_Theory_of_Employme...
  - vishnugupta 4y ago
    If you've read BoE paper then I guess you are already at the 90th percentile. Here are some interesting rabbit holes I've found to be useful. 1. Central Banking 101 [1]. A terrific no non-sense book. The author is an ex-central banker. 2. Same author's blog[2] and twitter[3] handle is full of good insights and details. 3. Lyn Alden[4] writes well but know that she is biased towards Bitcoin which sort of clouds her writings once in a while. [1] https://www.goodreads.com/book/show/56863052-central-banking-101 https://www.goodreads.com/book/show/56863052-central-banking... [2] https://fedguy.com https://fedguy.com [3] https://twitter.com/FedGuy12 https://twitter.com/FedGuy12 [4] https://www.lynalden.com https://www.lynalden.com
fallingknife 4y ago
> Monetary policy was all but assured to generate Fed profits prior to 2008. That changed once the Fed started paying banks interest on their reserve balances and making large open market purchases of long-maturity Treasurys and mortgage-backed securities The Fed is currently paying banks 4.9% on their reserves (this rate was always 0% before 2008). and they pay you close to 0% on your checking account. When some people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed (https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...). The banking system is pretty much a value destroying subsidy sink at this point.
- gruez 4y ago
  >The Fed is currently paying banks 4.9% on their reserves (this rate was always 0% before 2008). and they pay you close to 0% on your checking account. Get a better bank then. There's half a dozen that's paying 4.5% or more: https://www.investopedia.com/best-high-yield-savings-accounts-4770633 https://www.investopedia.com/best-high-yield-savings-account... > When some people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed (https://www.chicagobooth.edu/review/safest-bank-fed-wont-san https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...). The banking system is pretty much a value destroying subsidy sink at this point. Yet the banks listed above don't seem to have much trouble existing.
  - JumpCrisscross 4y ago
    > people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed Matt Levine summarized the Fed's points well [1]. They're sensible reasons, though I suspect they could be solved with the right policy treatment. (For example, limiting depositors to natural persons and paying a lower interest rate on reserves.) [1] https://www.bloomberg.com/opinion/articles/2019-03-08/the-fed-versus-the-narrow-bank https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
    - 4y ago
heythere22 4y ago
https://archive.is/Y5e8a https://archive.is/Y5e8a
ar9av 4y ago
I saw this last night, I found an article from some smart PhD dude who is a Yale prof and a former federal reserve governor, it explained what would happen if the fed lost money. Nothing much, unless they lose a lot of money for a long period of time.
- slv77 4y ago
  There is a difference between monetary policy and fiscal policy. Monetary policy is set by the Federal Reserve while fiscal policy is set by Congress (as laid out in the constitution) The activist Fed under “the courage to act” Bernanke and more recently under Powell moved from the realm of monetary policy to fiscal policy. By massively expanding the Feds balance sheet with mortgage bonds the Federal Reserve massively increased the value of housing and lowered mortgage payments for existing homeowners. Prior to 2008 the Fed only bought US government securities so any market distortions it caused the benefit accrued to the Government. As the Fed is now having to pay interest on reserves and higher inflation it is making the cost of those decisions more apparent. Now, if Congress had said in 2008 that they wanted to write checks for a a couple of trillion dollars per year to homeowners and pay for it with a 10% tax (inflation) that would mostly benefit the old and wealthy and hit the young and poor the hardest they would be within their constitutional power to do so. It is unlikely that Congress would ever do so but the Federal Reserve made that decision. That makes me uncomfortable.
- kyrra 4y ago
  I think the point the authors of the article were trying to make was that the Fed has operated for 90 years and never lost money. We've been through multiple financial crisis and not been in the situation. They are implying the current said is doing a poor job of running things.
  - autoexec 4y ago
    > We've been through multiple financial crisis and not been in the situation. It's not as if any of those previous financial crises are comparable to what we're going through now though. These are very different times where we're coming out of unprecedented events. Maybe the Fed really is doing poorly, but I can't exactly remember a time in my life when everybody loved the Fed and what they were doing either. Is there some kind of golden age when everything was being handled correctly and we didn't have problems that we should be trying to go back to?
ur-whale 4y ago
https://archive.is/Y5e8a https://archive.is/Y5e8a
jacknews 4y ago
So even the fed is in trouble from this psychotic obsession with inflation (that isn't really even there, or at least is not 'normal' inflation, IMHO), and using interest rates to bludgeon demand.
- hn_throwaway_99 4y ago
  > that isn't really even there, IMHO Do you not buy stuff?
  - spaceman_2020 4y ago
    In his world, everyone probably has tech bro salaries
ktsakas 4y ago
The fed doesn't really care if it loses money, but when it has a profit it gives it back to the government. So loses for the fed means the government gets less revenue. Also these loses accumulate and until the are offset by profits no more money can be given to the government. That combined with high interest payments on government debt will make the debt ceiling vote a lot harder.
blindriver 4y ago
What is the consequence of this? Does it matter or is this just "funny money" being lost?
- epgui 4y ago
  I'm pretty sure you can safely ignore a lot or most of this article. This is not my area of expertise, but from what little I understand, it miscontextualizes a lot of true facts and abuses a few words (semantics is everything) to give the wrong impression about what central banks are, how they work, what the incentives are, what metrics mean and which ones matter. I could be wrong, but I'd wager if we had a handful of economists in the comments section they'd generally agree, but would have a much better explanation than me.
mo_42 4y ago
So the banks had bonds in their balance sheets that went down in price because of the rising interest rates. If they are in need for money, they sell them quickly but don’t get 100%. So basically not all checking account money can be satisfied. In my understanding, this brought down SVB. The Fed took over these bonds for 100% as a measure of stabilization. There is no issue here because bonds will be repaid for 100% most probably. Basically the Fed is taking over temporary losses of the banks. When the bonds are repaid the negative equity will vanish.
- jkhdigital 4y ago
  No, this isn’t a mark-to-market loss, as the article clearly states—these are operating losses, literally more cash flowing out than flowing in. This is because the Fed is trying to raise short-term interest rates, and to do this effectively it has to be willing to pay out its own interest target. These interest payments now exceed the interest it receives on its portfolio of government bonds and mortgage-backed securities. If this goes on for long enough then the Fed’s equity will become negative.
vishnugupta 4y ago
> This is because the Fed’s trillions of dollars of long-term investments yield 2% but cost 4.6% to finance. "..to finance", but finance from where!? It's not as if Fed is a household where it has to get money from somewhere at 4.6% interest and invest it. What am I missing here!?
- neilwilson 4y ago
  The Fed is the central bank. It artificially sets the price for money higher than the zero it would tend to naturally (given that money is essentially costless to produce). So they have decided to finance their liabilities at 4.6% while only receiving 2% on the assets they hold. The 2.6% difference is funded by creating new money, which the Fed believes will reduce inflation. You couldn't make it up.
  - qeternity 4y ago
    This is an overly simplistic take. The other way to frame this is that they are levered 40x in removing liquidity from the system. By spending 2.6% they can remove trillions from the economy and slow the velocity of money.
VirusNewbie 4y ago
The fed’s shareholders are who again?
- htag 4y ago
  It doesn't issue shares. Instead of answering to shareholders the Federal Reserve answers to congress. Congress has granted the Federal Reserve quite a bit of autonomy, but law established the Federal Reserve and law can modify or abolish it.
  - VirusNewbie 4y ago
    this is not accurate.
  - casefields 4y ago
    “ Member banks hold stock in the Federal Reserve Banks and earn dividends.” https://www.stlouisfed.org/in-plain-english/who-owns-the-federal-reserve-banks https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...
1000ennium 4y ago
[flagged]
rkagerer 4y ago
Reminds me of Prachett's Making Money, where the Mint is barely breaking even.
gjpolly 4y ago
BRICS is the new reserve currency. America pushed too hard on bad policies, poor public sector services, unaffordable health care, and lower education standards... there's no coming back from that.
- pjc50 4y ago
  The idea that Brazil will have a more stable currency than the dollar is a hilarious inversion of reality.
- madspindel 4y ago
  > BRICS is the new reserve currency and then you say: > America pushed too hard on bad policies, poor public sector services, unaffordable health care, and lower education standards... there's no coming back from that. Yes, because BRICS doesn't have any of these issues... USD will be the reserve currency because even if United States has its own problems, it is still better than the rest of the world.
  - gjpolly 4y ago
    America as a reserve currency is based on debt. BRICS (from what I understand) is based on assets.
- X6S1x6Okd1st 4y ago
  What's the current exchange rate for that currency??
- axo11 4y ago
  BRICS economy is as strong as US economy is. If the US financially collapses, so will BRICS.
- yourusername 4y ago
  I don't think people are lining up to store their value in Rand, Real, Roebels or Rupees (but maybe Yuan). I know the US is devaluing the dollar all the time but still if i have to choose between keeping my savings in Rand or US Dollars that is a easy choice. But i'd take Krugerrands over Dollars.
dkrich 4y ago
Let me preface this by stating that I am not a crypto enthusiast and do not own any crypto. One thing that’s been fascinating to me as this banking crisis has unfolded is that the same people who swear cryptocurrencies have no intrinsic value and are therefore worthless continuously say “there is no problem because the government can simply create as much money as it wants out of thin air.” So they are implicitly saying that any currency has value because people believe it has value but don’t extend that generosity towards other assets where there is a clearly demonstrated group ascribing value to it. It’s also somewhat disconcerting that the government seems to show less and less restraint in exchange for instant gratification and short term benefits and as holders of its currency you really have no say as to how it is managed. Emergency measures are there for just that, emergencies, but it seems the bar for what qualifies for an emergency gets lower and lower.
- dmn322 4y ago
  What most people don't realize about this covid-related inflation is that it was a different beast... it wasn't due to excess demand, it was due to restricted supply. The fed using interest rates to beat inflation down could make sense when unemployment is at 2% in a normal economy, but when we're still experiencing global supply chain issues, you don't raise the rates. That's not the right way to beat inflation. Suppliers need loans to keep their doors open and expand capacity again. Raising the interest rates restricts access to these loans, and the shortages just stick around longer. Of course the people running the show know that, but they're using the excuse to raise rates to consolidate their share of the economy even though they know what will happen. The other thing that was driving the inflation was rich people using the PPP loans to speculate. If the goal was really just to control inflation, the fed rate isn't the only way. They could also have made the tax rate more progressive like it was in the 50s and 60s. But of course they haven't gone there in a long time.
  - JKCalhoun 4y ago
    Maybe what's needed is a rejiggering of the supply chains instead. Shorter chains. i.e. bring back the local supply that we sold overseas decades ago. Obviously the fed can't make that change, but I was reacting to your implication that we just need to get back to where we were before Covid. I feel we were already losing altitude before Covid, the overhead airbags had already deployed. And just to further derail the conversation, was it really Covid itself that caused the supply chain disruption? Perhaps I could be convinced that somehow Covid got us into the current mess but I guess it would still follow then that if a Covid-like pandemic could take out the global economy for (checks watch) 3 years and counting, the problem still ultimately comes down to a dependency on an obviously fragile supply chain.
throwaway19423 4y ago
Just watched the latest Ray Dalio video on the SVB collapse, and it got me thinking. We lived under zero rates for so long, how many investments made during those years are now underwater? When rates are 0, any risk adjusted return greater than that is profitable. SVB's situation was odd (had they not had a liquidity crunch, would we have found out they were in trouble? Mark to Market vs. Mark to Maturity). What about the broader economy? Like .. regular public companies or pension funds or whatever. Isn't everyone in the same situation where they don't have cash but rather, they have assets. But now, cash pays a high return (5%ish). Why not just sit on cash (or require risk adjusted returns to be in excess of 5 %)? What am I missing? If the concern is valid, how will this play out?
- bradleyjg 4y ago
  This is the entire reason the Fed manipulates rates in the first place. When it wanted to accelerate growth, it cuts the risk free rate which pushes investment into riskier assets like equities. When it wants to slow the economy, because of elevated inflation, it increases the risk free rate which acts to pull money away from riskier assets like equities. That’s not a concern, that’s the system working as designed.
  - throwaway19423 4y ago
    You are right of course. The fed wants businesses to stop/slow down investing and only prioritize high returning projects. But since rates went up so quickly, are various sectors really prepared? E.g unsophisticated home buyers who got ARMS clear ly were not. It was shocking to see SVB make a similar mistake .. but was it really a mistake? In hindsight, if you had crappy assets (e.g. low yielding MBS), as soon as the fed started tightening you should have sold off your assets (albeit making a small loss). Are people really doing that? It seems the expectation was that rates would go down again in a year (mid 2024) so it seems people just "let it ride". I guess the equivalent argument works for a house too but transaction costs are high (and you need a place to live in the interim). Someone could have sold their house right as tightening began and bought the house back once rates stabilized.
DueDilligence 4y ago
[dead]
daedlanth 4y ago
[dead]

284 points by lxm 4y ago

They ZIRPed themselves and are now in a hole that a lot of people warned them about and they kept brushing off criticism. I am fairly sure there's only one way the Fed-created excess since the GFC will end: with another tax payer bailout.

Aunche 4y ago

>Like all central banks, the Federal Reserve was designed to make money for the government from its monopoly on issuing currency. Ah yes. The obscure third of the Fed's dual-mandate.

alxmng 4y ago
That quote is really bad for a newspaper that calls itself Wall Street journal. It screams “I don’t know anything about macroeconomics”

slv77 4y ago

Operating losses means that the Federal Reserve is paying out interest to banks in excess of the amount that it is earning in interest. Historically that wasn’t possible because the Federal Reserve didn’t pay interest on reserves. It has to do so now because its balance sheet is so large due to QE that it can’t influence rates by shrinking its balance sheet. This is significant because the losses are born by the taxpayer which violates the constitutional mandate that all spending is approved by the house. The Fed is sidestepping this by booking the operating losses in an accrual account to be booked against future interest earned.

Jeema101 4y ago

>This is because the Fed’s trillions of dollars of long-term investments yield 2% but cost 4.6% to finance. This statement isn't exactly true because the cost to finance the purchases of Treasuries during quantitative easing was not 4.6% when the purchases were made. They would be losing money only if they were now selling those Treasuries at market rate, but they aren't doing that - they're just letting them roll off the balance sheet as they reach maturity.

lxgr 4y ago
How can an "investment cost the Fed" anything? Are they talking about the interest paid on Fed deposits? I thought most central bank assets were short-term repos, or is this different for the Fed? Are these outright owned assets from QE?
nr378 4y ago
Post-QE, the Fed now has to pay interest on it's excess reserves[1] in order to achieve it's Federal Funds rate. This costs the Fed real money, and it no longer collects enough money on the interest paid on it's assets (given they're lower yielding assets than the current target rate) to offset this cost. They are losing money regardless of what they do with their bond assets - they would simply lose even more money if they tried to sell their bond assets below purchase price/book value. [1] https://en.wikipedia.org/wiki/Excess_reserves https://en.wikipedia.org/wiki/Excess_reserves

paulette449 4y ago

It amazes me how many of the commenters seem to think that this is a piece by WSJ journalists. It's not, it's an Opinion piece by two members of the same right wing think tank (American Enterprise Institute). Whether you agree or disagree with the article is a separate matter, but knowing whether it was written though a lens of journalism or advocacy is important, imho.

nr378 4y ago

In order to affect monetary policy, the Fed now pays 4.9% interest[1] on $3.03trn of reserve balances[2], which is now costing them approx $150bn/yr run rate. Just 12 months ago they paid 0.15%. This $150bn cost is a consequence of quantitative easing massively expanding reserve balances, and those reserve balances still existing in a period of high inflation which is being fought with high interest rates. The obvious solution is quantitive tightening to shrink the quantity of reserves, however there's justifiable concern about the effects this could have on the still-fragile banking system. This is real money to the US taxpayer. The Fed used to remit $100bn a year to the US treasury, which it has now stopped doing. Instead, the Fed is sending this money to the US commercial banks which hold US reserves. [1] https://fred.stlouisfed.org/series/IORB https://fred.stlouisfed.org/series/IORB [2] https://fred.stlouisfed.org/series/BOGMBBM https://fred.stlouisfed.org/series/BOGMBBM

jarym 4y ago
And all that money they're paying in interest... how do they argue that those interest payments won't find its way back into the economy and further fuel inflation?
- than3 4y ago
  Likely because its being held at the top at one of the primary dealers until they choose to use some of it. Maybe there's an agreement that they won't use it?
  - Ancalagon 4y ago
    Proof that trickle-down is a farce!
    - doubleg72 4y ago
      Idk if this is sarcasm or if you really don't know what trickle down is.
- RockyMcNuts 4y ago

akiselev 4y ago

https://archive.ph/OAwCB https://archive.ph/OAwCB

dredmorbius 4y ago

Archive / paywall: <https://archive.is/OAwCB https://archive.is/OAwCB>

almost_usual 4y ago

It’s about $100 billion in annual revenue the federal government loses out on. https://www.lynalden.com/broke-federal-reserve/ https://www.lynalden.com/broke-federal-reserve/

nwiswell 4y ago
Absolutely nothing compared to how much the federal government is "earning" because inflation is running hotter than the average rate of interest on Treasury bonds. At a 7% rate of inflation and a 2% average interest rate, it amounts to over a trillion dollars a year discharged in terms of real debt owed to the public.
- throw123123123 4y ago
  This is true, and yet, deficit is still growing. Welcome the united states of Argentina.
  - JumpCrisscross 4y ago
    > yet, deficit is still growing The deficit always grows in nominal terms because of inflation. Scaled properly [1], the deficit isn't great, but it's improving and far from unprecedented. [1] https://fred.stlouisfed.org/series/FYFSGDA188S https://fred.stlouisfed.org/series/FYFSGDA188S
  - PaulDavisThe1st 4y ago
    Kevin Drum has a chart or two for that: https://jabberwocking.com/yes-of-course-big-deficits-are-due-to-tax-cuts/ https://jabberwocking.com/yes-of-course-big-deficits-are-due...
  - quickthrower2 4y ago
    Almost all money is debt. The system only works this way.

yazaddaruvala 4y ago

What does it even mean for The Fed to have "negative equity capital"? Firstly, is this "equity" a short term book value vs long term book value thing? Secondly, they can literally print money. > the Federal Reserve has suffered operating losses of about $42 billion since September 2022 Between 2020 and 2022 they quantitatively eased $2TT+, and then over the last 12 months have actively quantitatively tightened $0.500 TT [0]. $0.042 TT is literally change to them. They can chose at any time to pay it off by stopping the quantitative tightening. Even a quantitative easing at this level would be inconsequential. Who is benefiting from a scary headline like this? or am I totally misunderstanding something? [0] https://www.statista.com/statistics/1121416/quantitative-easing-fed-balance-sheet-coronavirus/ https://www.statista.com/statistics/1121416/quantitative-eas...

pid-1 4y ago
> Secondly, they can literally print money. That's a great solution for everything as long as one doesn't care about inflation.
jerf 4y ago
"Secondly, they can literally print money." It is important, even very important, to realize that this merely changes the laws of economics to which they are subject, at least as people generally imagine them. It does not immunize them against the laws of economics. It does not mean they can just do anything without consequence, or with the full power to select the consequences. This is in the class of "things that sound obvious when I say them", but I can see that a lot of people seem to throw an exception here and terminate all execution. Having negative equity matters, even if you can print money. It just may matter differently. "or am I totally misunderstanding something?" I would say, you're not so much "misunderstanding" something as not realizing that there's a whole complex of interacting systems hiding behind your "but they can just print money" that needs understanding. Whether those systems are deliberately obscured is a matter of some debate, but they certainly don't go out of their way to educate you about these systems. Everything is far more complicated and interconnected then you appear to be seeing.
- phaedrus 4y ago

JumpCrisscross 4y ago

Nothingburger. It’s as valid to be concerned about these accounting losses as it would be to suggest that by removing a source of income from the Treasury it’s fighting inflation.

slackerchews 4y ago
hey, i dont know much about central banking/economics, but i feel like i know enough to know that I know nothing. it seems that this topic produces the lowest-quality, highest-confidence responses of any on this board. You and a few others seem to be the only posters with an proper understanding of the topic. But I could be wrong - you may be as dumb as me. Could you point me in the direction of some resources that can help me be literate in this topic? I have already read the BoE paper that gets passed around here.
- pjc50 4y ago
  > it seems that this topic produces the lowest-quality, highest-confidence responses of any on this board. If you have this insight, you're already ahead of the game. The background of orthodox macroeconomics, and the rationale for raising rates in response to inflation, comes from Keynes: https://en.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Money https://en.wikipedia.org/wiki/The_General_Theory_of_Employme...
- vishnugupta 4y ago
  If you've read BoE paper then I guess you are already at the 90th percentile. Here are some interesting rabbit holes I've found to be useful. 1. Central Banking 101 [1]. A terrific no non-sense book. The author is an ex-central banker. 2. Same author's blog[2] and twitter[3] handle is full of good insights and details. 3. Lyn Alden[4] writes well but know that she is biased towards Bitcoin which sort of clouds her writings once in a while. [1] https://www.goodreads.com/book/show/56863052-central-banking-101 https://www.goodreads.com/book/show/56863052-central-banking... [2] https://fedguy.com https://fedguy.com [3] https://twitter.com/FedGuy12 https://twitter.com/FedGuy12 [4] https://www.lynalden.com https://www.lynalden.com

fallingknife 4y ago

> Monetary policy was all but assured to generate Fed profits prior to 2008. That changed once the Fed started paying banks interest on their reserve balances and making large open market purchases of long-maturity Treasurys and mortgage-backed securities The Fed is currently paying banks 4.9% on their reserves (this rate was always 0% before 2008). and they pay you close to 0% on your checking account. When some people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed (https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...). The banking system is pretty much a value destroying subsidy sink at this point.

gruez 4y ago
>The Fed is currently paying banks 4.9% on their reserves (this rate was always 0% before 2008). and they pay you close to 0% on your checking account. Get a better bank then. There's half a dozen that's paying 4.5% or more: https://www.investopedia.com/best-high-yield-savings-accounts-4770633 https://www.investopedia.com/best-high-yield-savings-account... > When some people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed (https://www.chicagobooth.edu/review/safest-bank-fed-wont-san https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...). The banking system is pretty much a value destroying subsidy sink at this point. Yet the banks listed above don't seem to have much trouble existing.
- JumpCrisscross 4y ago
  > people tried to open a competing bank that would pass through this interest rate to depositors the were denied a license by the Fed Matt Levine summarized the Fed's points well [1]. They're sensible reasons, though I suspect they could be solved with the right policy treatment. (For example, limiting depositors to natural persons and paying a lower interest rate on reserves.) [1] https://www.bloomberg.com/opinion/articles/2019-03-08/the-fed-versus-the-narrow-bank https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...
  - 4y ago

heythere22 4y ago

https://archive.is/Y5e8a https://archive.is/Y5e8a

ar9av 4y ago

I saw this last night, I found an article from some smart PhD dude who is a Yale prof and a former federal reserve governor, it explained what would happen if the fed lost money. Nothing much, unless they lose a lot of money for a long period of time.

slv77 4y ago
There is a difference between monetary policy and fiscal policy. Monetary policy is set by the Federal Reserve while fiscal policy is set by Congress (as laid out in the constitution) The activist Fed under “the courage to act” Bernanke and more recently under Powell moved from the realm of monetary policy to fiscal policy. By massively expanding the Feds balance sheet with mortgage bonds the Federal Reserve massively increased the value of housing and lowered mortgage payments for existing homeowners. Prior to 2008 the Fed only bought US government securities so any market distortions it caused the benefit accrued to the Government. As the Fed is now having to pay interest on reserves and higher inflation it is making the cost of those decisions more apparent. Now, if Congress had said in 2008 that they wanted to write checks for a a couple of trillion dollars per year to homeowners and pay for it with a 10% tax (inflation) that would mostly benefit the old and wealthy and hit the young and poor the hardest they would be within their constitutional power to do so. It is unlikely that Congress would ever do so but the Federal Reserve made that decision. That makes me uncomfortable.
kyrra 4y ago
I think the point the authors of the article were trying to make was that the Fed has operated for 90 years and never lost money. We've been through multiple financial crisis and not been in the situation. They are implying the current said is doing a poor job of running things.
- autoexec 4y ago
  > We've been through multiple financial crisis and not been in the situation. It's not as if any of those previous financial crises are comparable to what we're going through now though. These are very different times where we're coming out of unprecedented events. Maybe the Fed really is doing poorly, but I can't exactly remember a time in my life when everybody loved the Fed and what they were doing either. Is there some kind of golden age when everything was being handled correctly and we didn't have problems that we should be trying to go back to?

ur-whale 4y ago

https://archive.is/Y5e8a https://archive.is/Y5e8a

jacknews 4y ago

So even the fed is in trouble from this psychotic obsession with inflation (that isn't really even there, or at least is not 'normal' inflation, IMHO), and using interest rates to bludgeon demand.

hn_throwaway_99 4y ago
> that isn't really even there, IMHO Do you not buy stuff?
- spaceman_2020 4y ago
  In his world, everyone probably has tech bro salaries

ktsakas 4y ago

The fed doesn't really care if it loses money, but when it has a profit it gives it back to the government. So loses for the fed means the government gets less revenue. Also these loses accumulate and until the are offset by profits no more money can be given to the government. That combined with high interest payments on government debt will make the debt ceiling vote a lot harder.

blindriver 4y ago

What is the consequence of this? Does it matter or is this just "funny money" being lost?

epgui 4y ago
I'm pretty sure you can safely ignore a lot or most of this article. This is not my area of expertise, but from what little I understand, it miscontextualizes a lot of true facts and abuses a few words (semantics is everything) to give the wrong impression about what central banks are, how they work, what the incentives are, what metrics mean and which ones matter. I could be wrong, but I'd wager if we had a handful of economists in the comments section they'd generally agree, but would have a much better explanation than me.

mo_42 4y ago

So the banks had bonds in their balance sheets that went down in price because of the rising interest rates. If they are in need for money, they sell them quickly but don’t get 100%. So basically not all checking account money can be satisfied. In my understanding, this brought down SVB. The Fed took over these bonds for 100% as a measure of stabilization. There is no issue here because bonds will be repaid for 100% most probably. Basically the Fed is taking over temporary losses of the banks. When the bonds are repaid the negative equity will vanish.

jkhdigital 4y ago
No, this isn’t a mark-to-market loss, as the article clearly states—these are operating losses, literally more cash flowing out than flowing in. This is because the Fed is trying to raise short-term interest rates, and to do this effectively it has to be willing to pay out its own interest target. These interest payments now exceed the interest it receives on its portfolio of government bonds and mortgage-backed securities. If this goes on for long enough then the Fed’s equity will become negative.

vishnugupta 4y ago

> This is because the Fed’s trillions of dollars of long-term investments yield 2% but cost 4.6% to finance. "..to finance", but finance from where!? It's not as if Fed is a household where it has to get money from somewhere at 4.6% interest and invest it. What am I missing here!?

neilwilson 4y ago
The Fed is the central bank. It artificially sets the price for money higher than the zero it would tend to naturally (given that money is essentially costless to produce). So they have decided to finance their liabilities at 4.6% while only receiving 2% on the assets they hold. The 2.6% difference is funded by creating new money, which the Fed believes will reduce inflation. You couldn't make it up.
- qeternity 4y ago
  This is an overly simplistic take. The other way to frame this is that they are levered 40x in removing liquidity from the system. By spending 2.6% they can remove trillions from the economy and slow the velocity of money.

VirusNewbie 4y ago

The fed’s shareholders are who again?

htag 4y ago
It doesn't issue shares. Instead of answering to shareholders the Federal Reserve answers to congress. Congress has granted the Federal Reserve quite a bit of autonomy, but law established the Federal Reserve and law can modify or abolish it.
- VirusNewbie 4y ago
  this is not accurate.
- casefields 4y ago
  “ Member banks hold stock in the Federal Reserve Banks and earn dividends.” https://www.stlouisfed.org/in-plain-english/who-owns-the-federal-reserve-banks https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...

1000ennium 4y ago

[flagged]

rkagerer 4y ago

Reminds me of Prachett's Making Money, where the Mint is barely breaking even.

gjpolly 4y ago

BRICS is the new reserve currency. America pushed too hard on bad policies, poor public sector services, unaffordable health care, and lower education standards... there's no coming back from that.

pjc50 4y ago
The idea that Brazil will have a more stable currency than the dollar is a hilarious inversion of reality.
madspindel 4y ago
> BRICS is the new reserve currency and then you say: > America pushed too hard on bad policies, poor public sector services, unaffordable health care, and lower education standards... there's no coming back from that. Yes, because BRICS doesn't have any of these issues... USD will be the reserve currency because even if United States has its own problems, it is still better than the rest of the world.
- gjpolly 4y ago
  America as a reserve currency is based on debt. BRICS (from what I understand) is based on assets.
X6S1x6Okd1st 4y ago
What's the current exchange rate for that currency??
axo11 4y ago
BRICS economy is as strong as US economy is. If the US financially collapses, so will BRICS.
yourusername 4y ago
I don't think people are lining up to store their value in Rand, Real, Roebels or Rupees (but maybe Yuan). I know the US is devaluing the dollar all the time but still if i have to choose between keeping my savings in Rand or US Dollars that is a easy choice. But i'd take Krugerrands over Dollars.

dkrich 4y ago

Let me preface this by stating that I am not a crypto enthusiast and do not own any crypto. One thing that’s been fascinating to me as this banking crisis has unfolded is that the same people who swear cryptocurrencies have no intrinsic value and are therefore worthless continuously say “there is no problem because the government can simply create as much money as it wants out of thin air.” So they are implicitly saying that any currency has value because people believe it has value but don’t extend that generosity towards other assets where there is a clearly demonstrated group ascribing value to it. It’s also somewhat disconcerting that the government seems to show less and less restraint in exchange for instant gratification and short term benefits and as holders of its currency you really have no say as to how it is managed. Emergency measures are there for just that, emergencies, but it seems the bar for what qualifies for an emergency gets lower and lower.

dmn322 4y ago
What most people don't realize about this covid-related inflation is that it was a different beast... it wasn't due to excess demand, it was due to restricted supply. The fed using interest rates to beat inflation down could make sense when unemployment is at 2% in a normal economy, but when we're still experiencing global supply chain issues, you don't raise the rates. That's not the right way to beat inflation. Suppliers need loans to keep their doors open and expand capacity again. Raising the interest rates restricts access to these loans, and the shortages just stick around longer. Of course the people running the show know that, but they're using the excuse to raise rates to consolidate their share of the economy even though they know what will happen. The other thing that was driving the inflation was rich people using the PPP loans to speculate. If the goal was really just to control inflation, the fed rate isn't the only way. They could also have made the tax rate more progressive like it was in the 50s and 60s. But of course they haven't gone there in a long time.
- JKCalhoun 4y ago
  Maybe what's needed is a rejiggering of the supply chains instead. Shorter chains. i.e. bring back the local supply that we sold overseas decades ago. Obviously the fed can't make that change, but I was reacting to your implication that we just need to get back to where we were before Covid. I feel we were already losing altitude before Covid, the overhead airbags had already deployed. And just to further derail the conversation, was it really Covid itself that caused the supply chain disruption? Perhaps I could be convinced that somehow Covid got us into the current mess but I guess it would still follow then that if a Covid-like pandemic could take out the global economy for (checks watch) 3 years and counting, the problem still ultimately comes down to a dependency on an obviously fragile supply chain.

throwaway19423 4y ago

Just watched the latest Ray Dalio video on the SVB collapse, and it got me thinking. We lived under zero rates for so long, how many investments made during those years are now underwater? When rates are 0, any risk adjusted return greater than that is profitable. SVB's situation was odd (had they not had a liquidity crunch, would we have found out they were in trouble? Mark to Market vs. Mark to Maturity). What about the broader economy? Like .. regular public companies or pension funds or whatever. Isn't everyone in the same situation where they don't have cash but rather, they have assets. But now, cash pays a high return (5%ish). Why not just sit on cash (or require risk adjusted returns to be in excess of 5 %)? What am I missing? If the concern is valid, how will this play out?

bradleyjg 4y ago
This is the entire reason the Fed manipulates rates in the first place. When it wanted to accelerate growth, it cuts the risk free rate which pushes investment into riskier assets like equities. When it wants to slow the economy, because of elevated inflation, it increases the risk free rate which acts to pull money away from riskier assets like equities. That’s not a concern, that’s the system working as designed.
- throwaway19423 4y ago
  You are right of course. The fed wants businesses to stop/slow down investing and only prioritize high returning projects. But since rates went up so quickly, are various sectors really prepared? E.g unsophisticated home buyers who got ARMS clear ly were not. It was shocking to see SVB make a similar mistake .. but was it really a mistake? In hindsight, if you had crappy assets (e.g. low yielding MBS), as soon as the fed started tightening you should have sold off your assets (albeit making a small loss). Are people really doing that? It seems the expectation was that rates would go down again in a year (mid 2024) so it seems people just "let it ride". I guess the equivalent argument works for a house too but transaction costs are high (and you need a place to live in the interim). Someone could have sold their house right as tightening began and bought the house back once rates stabilized.

DueDilligence 4y ago

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daedlanth 4y ago

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