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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,

• 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
    I'm not an expert on economics, but I think it's obvious on first principles. The constraint on the ability to print money is its devaluation. If the Fed is in a position it would want to both tighten the money supply and print money, this seems like the central bank equivalent of a chess position with the King in check.
• throw0101b 4y ago
  > Secondly, they can literally print money. They can print reserves, which is only usable with-in the Fed's inter-bank settlement system. The actual money in the economy is created by banks through issuing credit: > Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans. * https://www.bankofengland.co.uk/explainers/how-is-money-created https://www.bankofengland.co.uk/explainers/how-is-money-crea...
• gruez 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. My interpretation of "the fed losing money" is "the fed bought some bonds when interest rates were low, interest rates went up, and now they're worth less, so they took a loss". It's true that they can print more money and therefore won't ever go bankrupt from this, but irrespective of that they're still losing money in an accounting sense. >Who is benefiting from a scary headline like this? or am I totally misunderstanding something? The headline is "the fed losing money", not "the fed is going bankrupt". You'd really have to be hysterical to think that the headline is scary.
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  • saxonww 4y ago
    As a layperson, "For the First Time, the Fed is Losing Money" as a headline from the Wall Street Journal is concerning. A lot of people are going to see that headline, and read just the first couple of paragraphs - not gonna pay for a subscription - and their takeaway in what they perceive of this economic climate is going to be that the Federal Reserve is on its way to insolvency. It doesn't really matter if that's even possible. Is it possible? I don't know if it is or not. I agree with the GP that it's a scary headline. I wouldn't call myself hysterical; I'm not hyperventilating or anything. The issue with the headline is not with people who understand finance, it's with people who don't but know enough to see the WSJ as an authority. They won't notice that it's an opinion piece, and they don't really know enough to understand if this is actually a problem or not.
    • spaceman_2020 4y ago
      If something has never ever happened in the history of an institution, but was happening now, it deserves being written about, no?
    • dkrich 4y ago
      It absolutely can happen. Not necessarily that they become insolvent to the point of closing up shop because they can borrow from the treasury (so long as the debt ceiling gets raised sufficiently) but they are basically already there. They are paying more than they are taking in and are having a shortfall to the treasury.
• csomar 4y ago
  > Secondly, they can literally print money. This keeps getting repeated all over the internet... but the FED doesn't just "print" money. It creates money, loan it to some counter-party, and that counter-party has to return it. If the counter-party doesn't return the money, the FED losses money. They can print money to themselves, but that doesn't offset the losses.
  • gruez 4y ago
    >This keeps getting repeated all over the internet... but the FED doesn't just "print" money. It creates money, loan it to some counter-party, and that counter-party has to return it. That sounds like a pointless nitpick to me "ackshually the fed doesn't print money because everything is done digitally and no printing is actually done". What you described can be pretty much summed as "the fed prints money which it then uses to buy assets".
    • SllX 4y ago
      He doesn’t mean digitally in lieu of printing notes. Banks create money by accepting deposits and making loans. Here is a more detailed explanation of the process: http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch13-17 http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch13-1...
      • Scarblac 4y ago
        But printing it is also creating it? I don't see the difference in meaning you suggest.
        • SllX 4y ago
          I provided the link with minimal commentary because the concept of money is one of those black magic things that is difficult for me to explain because it does put me out of my depth trying to keep the technical jargon straight and I’m never 100% sure about my own grasp; but making my best effort in good faith to try and explain it and keeping it as simple as is possible for me: a printed dollar is just a representation of $1, specifically it is a $1 Federal Reserve bank note documenting a dollar that is backed by the financial assets that are pledged as collateral by the Fed’s owners. Wikipedia says this is mostly Treasury Notes (debt instruments of the US government) and mortgage agency securities (relying on Wikipedia again, these are securities issued by Ginnie Mae, Fannie Mae, Freddie Mac or the Federal Home Loan banks). What’s important to understand to make any sense of this is that when the bank issues you a loan, that sits on their Balance Sheet as an asset, and on your balance sheet as a liability, so when the bank issues you say $50K in the form of a Loan so you can buy a car and it is deposited into your account, USD$50,000.00 was created as money, but that doesn’t mean $50K of notes was printed. What changed is the following: the Bank’s assets increased by $50K balanced against its liability accounts, and your liabilities increased by $50K balanced against your asset accounts until you pay the money back. There’s a lot more money than there is currency in circulation, and currency represents one type of money. It’s not a difference of one being physical and one being digital because all of it is documented somewhere whether it’s a PDF of a loan agreement and resulting statements or the cocaine-coated bills and coins in your pocket; they’re subtly distinct concepts of put another way, money is intangible but can be created and bank notes and promissory notes are tangible forms of it documenting money and can be printed. Taking it back to the Fed, actual paper money in circulation is considered a liability against the Fed’s assets which are other people’s (well, institution’s really) debts to the Federal reserve, and I think this is the point where I have to stop because I’m already out of my depth and taking it much further will put me way out into the deep end. Corrections and expansions from others welcome. Also note that somebody replied to me above with a link to the Bank of England talking about money creation. I haven’t had the chance to read it, but it’s probably worth checking out as well.
• OscarCunningham 4y ago
  Dollars are a liability of the Fed. If they were to print dollars and keep them then that would increase both sides of the balance sheet without changing the amount of equity.
  • Iwan-Zotow 4y ago
    you know that coins are minted by gvnmnt, not Feds?
  • User23 4y ago
    Not really. Reserves are a liability of the Fed. The only way a private citizen gets a hold of them is Federal Reserve Notes. Private citizens can also hold dollars in coins, which are not a liability of the Fed. And of course the money deposited in a bank account isn’t reserves either. In that case reserves don’t even enter the picture unless you withdraw notes or write a check that’s cashed at another bank. And that last point is the 10,000 pound gorilla in the room that almost everyone ignores. The Fed’s primary mandate is not, as is commonly stated, to control inflation and unemployment. Rather, it is maintaining the operational integrity of the payments system. And they absolutely have to do that or people will not be able to transact in dollars. And of course the party that transacts more dollars than anyone else by far happens to be the one that created the Fed and can reorganize or destroy it if the Fed is foolish enough to create the political will to do so.
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• phendrenad2 4y ago
  The Fed operates like any other investor, except it gets to spend money that doesn't technically exist. This actually has worked out great for the Fed because despite creating money from thin air, the US economy has been growing so quickly that the assets they have bought using this thin-air money has increased in value. Now, with the economy slowing, inflation taking value out of investment vehicles, and interest rates being hiked, their assets are no longer increasing in value. This is just another window into the current inflation/interest crisis.
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  • darwinwhy 4y ago
    When I think of an investor, I think of someone who picks and choses specific companies or sectors of the market to invest in. I'm curious what the Fed's tools allow it to invest in specific companies or sectors other than the economy as a whole. Can they get more targeted than an individual bank? Or is that the limit of their targeting power?
    • lbotos 4y ago
      https://www.newyorkfed.org/markets/pomo_landing.html https://www.newyorkfed.org/markets/pomo_landing.html They have a trading desk. I can’t find the doc now but early pandemic there was some uproar that the desk started to buy “junk” aka things that weren’t worth the price paid.
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      • emkemp 4y ago
        The trading desk is not for investing by the Fed. That's for influencing interest rates based on inflation/deflation concerns and overall employment. Investors buy or sell securities to earn a profit. Not the Fed.
• neilwilson 4y ago
  The Fed sets the interest rate for the liability side of their balance sheet. So they have deliberately decided to pay out interest by creating money in an attempt to reduce inflation. Still think putting up interest rates stops prices rising?[0] [0]: https://economicsfromthetopdown.com/2023/02/04/do-high-interest-rates-reduce-inflation-a-test-of-monetary-faith/ https://economicsfromthetopdown.com/2023/02/04/do-high-inter...
  • esoterica 4y ago
    Your blog just has a bunch of charts showing that high interest rates are correlated with high inflation and gets the direction of causality wrong. Has it ever occurred to you that maybe the correlation exists because governments respond to high inflation with high interest rates? Not because the latter causes the former? Is there a name for this general type of fallacy where defect A results in mitigating response B, but people see the correlation and wrongly conclude that B causes A instead? Examples: 1. Building more apartments "causes" higher rents 2. Covid lockdowns "cause" more excess deaths 3. Higher incarceration rates "cause" higher crime
    • neilwilson 4y ago
      Yes they do, but that doesn’t mean what has been done has any actual effect. It’s just an auto correlated belief. There is no Down regulation effect. In effect the mythical causations you quote are precisely what economists believe To them more people in prison does cause more gun crime. https://economicsfromthetopdown.com/2023/02/19/interest-rate https://economicsfromthetopdown.com/2023/02/19/interest-rate...
    • 123pie123 4y ago
      Did you know that approx 40% of all the people who have looked at a red flag will get cancer
    • chalst 4y ago
      You claim without argument that Blair Fix gets the direction of the causality wrong. In fact he talks about both directions and argues for his interpretation. You've failed to identify a fallacy.
• jevgeni 4y ago
  A Murdoch-owned newspaper publishes something scary that a lay person would link to current admin spending...
• Dalewyn 4y ago
  >Who is benefiting from a scary headline like this? My wider, lay understanding of this is that the powers-that-be (hereafter "PTB") do not like the FRB's interest rate hikes, so from the PTBs' perspective: 1. Create fear and more fear and further fear among the public in the hopes of triggering further bank runs ("ohnoes the gov can't bailout savings no more!") and other fiscal destruction. 2. FRB is eventually forced to reconsider their current (read: undesirable) fiscal plans. Ideally go back to zero interest rates? 3. ???? 4. PTBs PROFIT once more? All journalism is propaganda and exist strictly to benefit someone out there, so I would be particularly skeptical if that propaganda is also fearmongering.
  • wolfi008 4y ago
    > All journalism is propaganda Such a derogatory statement detached from reality. It's like saying all health professionals are out there to get your money by keeping you as sick as possible. Or all teachers are out to indoctrinate your kids. Or all firefighters are arsenists. I have quite a few journalists as friends or acquaintances, and many of them are the most honest people I know, with strong ethics and admireable ideals. Of course there are bad apples out there. In any profession. But your statement is just ridiculous.
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    • bryanlarsen 4y ago
      Bad apples is a very apt term. A few bad apples spoils the bunch. You can have thousands of apples in a barrel, but a couple of bad ones can quickly make the whole barrel worthless. For example, the New York Times makes the right call on integrity vs profits, access, etc dozens of times a day for years. Then one time 20 years ago they make the wrong call vis a vis Iraq weapons of mass destruction, and they've almost completely destroyed their integrity. Seems unfair, but as a consumer we can no longer trust them, and probably never should have.
      • boringg 4y ago
• dkrich 4y ago
  The fed has a balance sheet that consists of bonds of varying maturities mostly. During covid the balance sheet exploded as they bought all sorts of mbs securities and bonds to loosen liquidity. By definition that was basically the exact opposite of what a rational person would do acting in his own best interests, but it’s what they did at first to restore order to credit markets and then after that because they thought that’s what people wanted them to do. But now those bonds have gone massively underwater because of their own policy- they have drastically raised interest rates on shorter duration bonds while simultaneously stopped buying bonds. So the value of the assets they hold is drastically diminished. But the fed also borrows money on the short end from banks through the reserve program. Banks keep excess reserves at the fed and the fed pays them interest. In a normal environment that’s not a problem because long bonds usually yield more than short bonds. But because the fed loaded up on low yield bonds they have a negative carry so they are losing money now. Normally they would pay the excess to the treasury but now they have to borrow from it. The interesting thing is that this is basically what sank svb but on a much larger scale. The difference is obviously that the government can print its own money.
  • JumpCrisscross 4y ago
    > the fed also borrows money on the short end from banks through the reserve program The Fed doesn’t borrow reserves. That it even pays interest on them is at its discretion.
• jkhdigital 4y ago
  The headline is a simple statement of fact. And I think the article does a reasonably good job of stating facts without too much speculation about the potential consequences. I think most educated adults would agree that the facts being reported here are indeed newsworthy, especially considering all the other things that manage to make the editorial cut.
• jwarden 4y ago
  Negative equity capital simply means that on the Fed's balance sheet, equity (assets - liabilities) is negative. The Fed's operates on the same fundamental accounting principles as any other organization, so it has assets, liabilities, and equity ("book value"). Its total assets (such as government bonds) is actually slightly higher than its liabilities (e.g. the value of deposits by other banks), but not by much, so it's book value tends to be quite small. The book value represents the net investment made by the owner of Federal Reserve banks.