Federal Reserve Made Record Profit in 2009: Report
Jan. 12 (Reuters) — The U.S. Federal Reserve made record profits in 2009 and will return $45 billion to the U.S. Treasury, after its efforts to prop up the economy created a windfall for the government, the Washington Post reported.
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It’s like having the job of driving the bus and fixing it when it breaks, and much of the election was about who can fix the broken bus and how they are going to do it.
This bus can be immediately fixed by anyone who knows how it actually works and what it needs to get rolling again.
We suffer from a lack of demand which is easily remedied by an immediate fiscal response.
Quantitative easing, for example, is at best like installing a second battery to give the car more power. It completely misses the point.
He didn’t just show up for the job-
He volunteered for the job insisting he could fix the economy.
He pushed the TARP (as a Senator and a candidate) not recognizing giving capital to banks was nothing more than regulator forbearance and instead believed it was deficit spending.
His stimulus package came after the automatic stabilizers hiked the deficit to muddle through levels and has proven far too small to keep millions from losing their jobs and their homes.
And now the talk has turned to deficit reduction after proclaiming on multiple occasions “the US government is out of money”
which is like moving forward with the engine at idle speed not understanding that his foot on the brake is keeping the bus from getting up to cruising speed.
Obama and his administration is in this way over their heads.
Unfortunately, the mainstream opposition is probably worse.
Risking overstatement, McCain’s proposal was to not have a bus driver.
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Risk of ‘quantitative easing’ which does nothing, both in theory and now in practice, but no ‘risk’ of ‘VAT holiday’ – eliminating the value added taxes – which would end the recession and lower prices?
And they are largely energy independent, as least in the short term.
UK: GDP SURPRISES ON THE DOWNSIDE; RISK OF MORE QE
The range of forecasts for GDP in Q3 was from unchanged to up
0.7% qoq. Not a single forecaster had expected negative growth,
but today’s figures showed the economy continuing to contract in
Q3. Growth has been negative now for 6 straight quarters – some-
thing we have never seen before in the UK. Output is down by 6%
since the peak – a similar fall to the contraction we saw in the
early 1980s recession. In its August Inflation Report, the BoE
had been forecasting growth of roughly 0.1% for Q3 – in other
words this is a 0.5pp downside surprise. This will, all things
being equal, raise the amount of spare capacity in the economy
and push down on the Bank’s inflation forecasts going forward.
The chance of more QE in Nov has been increased substantially.
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Like depository institutions in the United States, foreign banks with large dollar-funding needs have also experienced powerful liquidity pressures over the course of the crisis. This unmet demand from foreign institutions for dollars was spilling over into U.S. funding markets, including the federal funds market, leading to increased volatility and liquidity concerns. As part of its program to stabilize short-term dollar-funding markets, the Federal Reserve worked with foreign central banks–14 in all–to establish what are known as reciprocal currency arrangements, or liquidity swap lines. In exchange for foreign currency, the Federal Reserve provides dollars to foreign central banks that they, in turn, lend to financial institutions in their jurisdictions. This lending by foreign central banks has been helpful in reducing spreads and volatility in a number of dollar-funding markets and in other closely related markets, like the foreign exchange swap market. Once again, the Federal Reserve’s credit risk is minimal, as the foreign central bank is the Federal Reserve’s counterparty and is responsible for repayment, rather than the institutions that ultimately receive the funds; in addition, as I noted, the Federal Reserve receives foreign currency from its central bank partner of equal value to the dollars swapped.
Looks like they still fail to recognize these dollar loans are functionally unsecured.
The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses. As best we can tell, the programs appear to be having their intended effect. Most notably, 30-year fixed mortgage rates, which responded very little to our cuts in the target federal funds rate, have declined about 1-1/2 percentage points since we first announced MBS purchases in November, helping to support the housing market.
Correct on this count. Treasury purchases are about interest rates and not quantity.
Currency and bank reserves together are known as the monetary base; as reserves have grown, therefore, the monetary base has grown as well. However, because banks are reluctant to lend in current economic and financial circumstances, growth in broader measures of money has not picked up by anything remotely like the growth in the base. For example, M2, which comprises currency, checking accounts, savings deposits, small time deposits, and retail money fund shares, is estimated to have been roughly flat over the past six months.
Correct here as well, where he seems to recognize the ‘base’ is not causal. Lending is demand determined within a bank’s lending criteria.
The idea behind quantitative easing is to provide banks with substantial excess liquidity in the hope that they will choose to use some part of that liquidity to make loans or buy other assets.
Here, however, there is an implied direction of causation from excess reserves to lending. This is a very different presumed transmission mechanism than the interest rate channel previously described.
Such purchases should in principle both raise asset prices and increase the growth of broad measures of money, which may in turn induce households and businesses to buy nonmoney assets or to spend more on goods and services.
Raising asset prices is another way to say lowering interest rates, which is the same interest rate channel previously described.
In a quantitative-easing regime, the quantity of central bank liabilities (or the quantity of bank reserves, which should vary closely with total liabilities) is sufficient to describe the degree of policy accommodation.
The degree of policy accommodation is the extent to which interest rates are lower than without that accommodation, if one is referring to the interest rate channel, which at least does exist.
The quantity of central bank liabilities would measure the effect of the additional quantity of reserves, which has no transmission mechanism per se to lending or anything else, apart from interest rates.
However, the chairman is only defining his terms, and he’s free to define ‘accommodation’ as he does, though I would suggest that definition is purely academic and of no further analytic purpose.
Although the Federal Reserve’s approach also entails substantial increases in bank liquidity, it is motivated less by the desire to increase the liabilities of the Federal Reserve than by the need to address dysfunction in specific credit markets through the types of programs I have discussed. For lack of a better term, I have called this approach “credit easing.”11 In a credit-easing regime, policies are tied more closely to the asset side of the balance sheet than the liability side, and the effectiveness of policy support is measured by indicators of market functioning, such as interest rate spreads, volatility, and market liquidity. In particular, the Federal Reserve has not attempted to achieve a smooth growth path for the size of its balance sheet, a common feature of the quantitative-easing approach.
Here he goes back to his interest rate transmission mechanism which does exist. But the implication is still there that the quantity of reserves does matter to some unspecified degree.
As we just saw in slide 6, banks currently hold large amounts of excess reserves at the Federal Reserve. As the economy recovers, banks could find it profitable to be more aggressive in lending out their reserves, which in turn would produce faster growth in broader money and credit measures and, ultimately, lead to inflation pressures.
When he turns to the ‘exit strategy’ it all goes bad again. Banks don’t ‘lend out their reserves.’ in fact, lending does not diminish the total reserves in the banking system. Loans ‘create’ their own deposits as a matter of accounting. If the banks made $2 trillion in loans tomorrow total reserves would remain at $2 trillion, until the Fed acted to reduce its portfolio.
Yes, lending can ‘ultimately lead to inflation pressures’ but reserve positions are not constraints on bank lending. Lending is restricted by capital and by lending standards.
Under a gold standard loans are constrained by reserves. Perhaps that notion has been somehow carried over to this analysis of our non convertible currency regime?
As such, when the time comes to tighten monetary policy, we must either substantially reduce excess reserve balances or, if they remain, neutralize their potential effects on broader measures of money and credit and thus on aggregate demand and inflation.
Again, altering reserve balances will not alter lending practices. The Fed’s tool is interest rates, not reserve quantities.
Although, in principle, the ability to pay interest on reserves should be sufficient to allow the Federal Reserve to raise interest rates and control money growth, this approach is likely to be more effective if combined with steps to reduce excess reserves. I will mention three options for achieving such an outcome.
More of the same confusion. Yes, paying interest will be sufficient to raise rates. However a different concept is introduced, raising interest rates to control ‘money growth’ rather than, as previously mentioned, raising rates to attempt to reduce aggregate demand. Last I read and observed the Fed has long abandoned the notion of attempting control ‘money growth’ as a means of controlling aggregate demand. The ‘modern’ approach to monetarism that prescribes interest rate manipulation to control aggregate demand does not presume the transmission mechanism works through ‘money supply’ growth, but instead through other channels.
First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements (reverse repos) with financial market participants, including banks, the GSEs, and other institutions.
Reverse repos are functionally nothing more than another way to pay interest on reserves.
Second, using the authority the Congress gave us to pay interest on banks’ balances at the Federal Reserve, we can offer term deposits to banks, roughly analogous to the certificates of deposit that banks offer to their customers. Bank funds held in term deposits at the Federal Reserve would not be available to be supplied to the federal funds market.
This is also just another way to pay interest on reserves, this time for a term longer than one day.
Third, the Federal Reserve could reduce reserves by selling a portion of its holdings of long-term securities in the open market.
Back to the confusion. The purpose of the purchase of long term securities was to lower long term rates and thereby help the real economy. Selling those securities does the opposite- it increases long term rates, and will presumably slow things down in the real economy.
However, below, he seems to miss that point, and returns to assigning significance to ‘money supply’ measures.
Each of these policy options would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy.
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>
> (email exchange)
>
> On Thu, Oct 8, 2009 at 7:55 AM, wrote:
>
> Check Blanchflower comments … he’s pretty good on the deficit and QE as well.
>
Yes, refreshing!
Blanchflower Says Now Is Not the Time to Cut Government DeficitOct. 8 (Bloomberg) — Former Bank of England policy maker David Blanchflower said it was too soon to cut Britain’s deficit and its debt. “Clearly you need to control the debt, but now?,†he said in an interview with Bloomberg Television today. “I don’t really think so.â€
Blanchflower also said the aim of quantitative easing was to raise some asset prices and to restore confidence.
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>
> On Thu, Aug 20, 2009 at 4:11 AM, Marshall wrote:
>
> Maybe the BofE is having problems because it is looking at this through the wrong
> monetary paradigm. All QE is doing is switching one form of debt term structure
> for another, not actually contributing to aggregate demand. If they figured that
> out, they wouldn’t be “struggling” here.
>
True, hopefully this is what it takes, globally, to finally recognize with a non convertible currency the direction of causation is from loans to deposits and reserves, and that at the macro level banking is in no case reserve constrained, for all practical purposes.
And from there it hopefully follows that govt. spending is in no case inherently revenue constrained. But I suppose that could take another hundred years at the current pace of discovery.
> >
> > I would make it even simpler. QE per se does NOTHING to contribute to aggregate
> > demand and should therefore be stopped and replaced by fiscal policy which does
> > contribute to aggregate demand. Ironically, the last BOE minutes showed King
> > voted for increasing QE purchases beyond what most other MPC members were
> > prepared to support, yet this is the same guy who has railed against the
> > government’s “excessive” spending.
> >
> > But, you’re right. At the current pace of discovery, we might not get there until
> > our grandchildren are 6 feet under.
> >
Bank struggles to gauge if QE is taking effect
By Norma Cohen
August 20 (FT) — The Bank of England’s monetary policy committee appears united in the conviction that its unconventional approach to boosting Britain’s economy has -further to run.
But by how much, for how longand, crucially, knowing when enough is enoughare much thornier questions, judging by the debate revealed in the minutes of its latest meeting this month.
After the Bank announced its surprise move to increase the gilts purchase programme to £175bn – raising the authorised amount by a further £25bn – most analysts chalked it up as an “insurance” measure, an added fillip just in case the massive cash injections to date fell short of what was needed.
But now it emerges that the MPC is deeply concerned about whether the nascent recovery suggested by a range of recent economic indicators is sustainable – particularly since there is little evidence that the £125bn spent between March and the end of July has delivered additional lending.
“The aim of the MPC’s programme of asset purchases was to boost nominal spending to ensure that it was consistent with meeting the inflation target in the medium term,” the minutes noted. That is another way of saying that the MPC wants to offset the collapse in demand by making money cheaply and easily available, hoping that households and businesses will spend it and ward off a deflationary spiral.
Yes, not realizing funding is always easily available to the banking system at the policy rate.
However, just how the gilts purchases would achieve that is the subject of much debate. Judging the efficacy of the programme is equally problematic. After all, the MPC is engaged in a policy untested in the UK, or indeed in almost any other developed economy.
By one key measure, there is little sign that the purchases, known as quantitative easing, are having any effect. There is little sign that the M4 money supply – the broadest measure of money flowing through the economy – is expanding.
Brian Hilliard, an economist at Société Générale, said that in theory QE ought to be effective. “If you are a monetarist, a deficiency of nominal spending can be righted by injecting a given sum,” he said. Through various channels, that money should work its way through the economy and help boost demand for goods and services.
If anyone knows him, please send this along. There are no ‘various channels.’
The minutes note that an expansion in money supply would help the MPC determine when or whether QE was working. However, the committee acknowledges that there is “unlikely to be a simple, straightforward mapping between asset purchases, monetary growth and nominal spending”. That may be one way of explaining the fact that, despite huge cash injections, M4 showed only insipid growth between the first and second quarters of 2009.
Not true either. That can come from increased borrowing due to govt. deficit spending, technical shifts in liabilities, and other things unrelated to QE.
Michael Saunders, an economist at Citigroup, noted the reference in the minutes to a pick-up in broad money growth in the second quarter – to a 3.7 per cent annualised rate from a 3.3 per cent rate in the first quarter. The growth, he said, amounted to a quarterly expansion in M4 of roughly £1.8bn. “So £125bn of QE has caused broad money growth to accelerate by £1.8bn. That’s a pretty poor rate of return,” he argued.
He could use an email as well.
It didn’t even cause that. And it’s not a ‘rate of return’ because it isn’t an investment.
Equally, it is not clear how the MPC is deciding how much money it should inject into the economy. In the minutes of its March meeting, the MPC estimated that since the UK’s output gap – the shortfall between what the economy could produce and what it is actually producing – was about 5 per cent of gross domestic product, an equivalent amount should be injected through QE. In round numbers, that amounted to £75bn, the sum initially authorised.
As if there was some channel for that to actually happen.
One disclosure that emerges from the minutes of this month’s meeting is that the MPC has abandoned that numerical equation. There is no discussion within them on how to judge the additional sums needed for QE. The impact of a cash injection of £175bn, compared with the £200bn favoured by Mr King, is not spelt out.
Mr. King needs this emailed to him as well. He seems further off the mark than any of the others.
There is general agreement that looking at money supply alone to gauge the success of QE may produce too narrow a perspective. A recent analysis of the Bank’s QE programme by the International Monetary Fund concluded that, by many measures, it was having beneficial effects, but it also noted that there was uncertainty on how to judge such success.
“The significant uncertainty surrounding the transmission of QE – explicitly acknowledged by the MPC – would seem to caution against relying too much on any such numerical assumptions,” the IMF concluded.
And another email to the IMF, thanks!
Bernanke seems to at least recognize that the channel of consequence is the adjustment of long term interest rates, and not the quantity of reserves, though the FOMC hesitates to fully go there by setting a target term structure of rates and letting the quantity of reserves adjust.
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Note written by an ‘in paradigm’ associate:
Growth in the size of the Fed’s balance sheet indicates that it is acting as a financial intermediary, but it doesn’t say anything useful about real economic activity or prospects for inflation. Even when the Fed buys Treasury debt from the private sector in return for cash, it is only substituting one financial claim on government for another of identical nominal value. This transaction doesn’t change the net financial assets of the private sector – so there is no obvious economic impact. Similarly, the Fed can encourage or even require banks to hold more and more excess reserves, but to what end ? Bank lending is not constrained by a lack of reserves, it is limited by capital ratios and the opportunity set for profitable lending. In this context, reserve growth increases gross balance sheets, but has no economic consequences.
What might be said about quantitative easing (QE), is that the Fed has to bid up bond prices (forcing yields down)in order to acquire Treasuries in the secondary market. At the margin, this has the potential to induce changes in portfolio preferences and push investors into more risky assets. So, QE might have some second order effects on financial assets prices, but still no logical or direct connection to generalized price inflation.
Some potential causes of inflation going forward might include sustained fiscal stimulus of sufficient proportion to more than offset the spontaneous decline in private sector demand that we are witnessing. If this were to use up existing capacity, then the probability for inflation goes up. Furthermore, even before we reach full capacity domestically, some of the growth in aggregate demand will leak overseas. Many of our imports have low elasticities and their prices could rise quickly. The most obvious example is crude oil. This would result in upward pressure on reported inflation even with broader economic growth below trend. In other words, a partial recovery of aggregate demand without energy policy reform could be inflationary.
I would hasten to add that none of this is original thinking and most of it is common sense. I found it odd that so many of the brilliant and successful people that you assembled last week relied on vague notions of “monetarism” or “Keynesianism” to frame their views and reverted to jargon rather than analysis to argue their points.
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Thanks, they all have it wrong regarding quantitative easing.
Net financial assets of the non government sectors remain unchanged.
There is no ‘monetary’ consequence apart from the resulting somewhat lower long term interest rates.
And the idea that it helps delays fiscal responses that do help.
Europe needs its politicians to drive a new fiscal stimulus
by Julian Callow
Mar 31 (FT) — As international pressure intensifies on the European Central Bank to print money by adopting a programme of aggressive asset purchases, it is worth questioning whether Europe has got its priorities in the right order. So far, the ECB has been doing most of the heavy lifting in terms of injecting stimulus into the euro area.
Looking ahead, it is preferable that opportun- ities to undertake radically further fiscal easing are fully exploited before requiring the ECB to go down the route taken by the Federal Reserve, Bank of England and Swiss National Bank (ie. undertaking “pure” quantitative easing via extensive asset purchases financed by the creation of new central bank money).
This implies quantitative easing is more powerful than fiscal and should be saved for last. Not true.
In short, if the euro area is to err on the side of being a little reckless in terms of policy,
Quantitative easing is totally tame, not reckless. It’s just part of the CBs role in setting the term structure of risk free rates.
it is preferable this be in a fiscal, rather than monetary, direction.
For the eurozone, with the national governments credit sensitive agents, fiscal is unfortunately the reckless pass under current institutional arrangements.
This is for three reasons.
First, well devised and appropriately targeted fiscal incentives can prove very efficient, both in terms of stimulating demand and even in timeliness. For example, a modest €1.5bn scheme to encourage new car purchases via subsidies to scrap older cars (just 0.06 per cent of German GDP) has already led to about 350,000 new orders being placed in Germany. That represents 11 per cent of German registrations last year.
Yes, fiscal works!
Second, the fiscal framework is much better established, including a possible exit strategy.
Just the thought of an exit strategy shows a lack of understanding of how aggregate demand works and is managed by fiscal policy. It also shows deficit myths are behind the statement.
For decades, economists have built up a good understanding of fiscal multipliers and lags. The cost of such measures is transparent,
There is no ‘cost’, only nominal ‘outlays’ by government.
unlike a strategy of central bank asset purchases, where the impact and exit strategy are uncertain and future costs are obscured.
Yes, few understand this simply thing. It’s about price (interest rates) and not quantities.
Third, for the euro area there is a particular reason why aggressive quantitative easing could prove hazardous.
It can’t be hazardous.
This results from the unique status of the ECB and euro as icons of European integration. Even though it may have happened more than 80 years ago, the collective memory of the hyperinflation experienced by Germany and Austria during the 1920s – and of its consequences, which ultimately gave birth to the euro – still casts a long shadow over European perceptions of paper money.
The mainstream believe that it is inflation expectations that cause inflation, and we pay the price via their errant analysis.
Here, we should not forget that, in contrast to the dollar, the pound and the Swiss franc, the euro has been in physical cash circulation for only seven years. As well, it is worth noting that the proportion of EU citizens saying they tend not to trust the ECB has tended to shift upwards – to 31 per cent in the most recent survey (autumn 2008), the highest in EMU’s history. This compares with 48 per cent saying that they tend to trust the ECB (source: Eurobarometer 70).
In short, were the ECB to adopt a strategy of aggressively printing money through an extensive asset purchase programme, this would risk significantly undermining the euro’s credibility, particularly if this strategy was not well communicated.
Credibility is way overrated!
That said, the ECB is in a neighbourhood where most of its peers have embarked on a strategy of aggressively printing money.
The term ‘printing money’ is a throwback to the gold standard and fixed FX in general where the CB prints convertible currency in excess of reserves. This has no applications with today’s non convertible currency.
This risks pushing up the euro on a trade-weighted basis further, at least in nominal terms, which would represent another negative shock to euro area exporters. In this context, if fiscal policy was used more aggressively as a means of providing new stimulus to the economy, it should seek in part to compensate businesses whose outlook could be further weakened by currency appreciation.
Increasing deficits does not strengthen a currency. If it did Zimbabwe would have the word’s strongest currency.
Without doubt, reaching agreement on sufficiently robust fiscal stimulus in Europe is harder to accomplish than a policy of leaving the bulk of policy stimulus up to the ECB.
True. And too bad the ECB doesn’t have any policy variables at hand to add to aggregate demand.
The measures, rather than having a small committee to determine the appropriate level of stimulus, must be decided by politicians, who face political constraints and competing interests. But the transparency that gives a strategy of fiscal stimulus its rel>ative appeal also hampers the ability of politicians to execute it. Also, we are presented with an adverse starting position, with the euro area budget deficit likely this year to be close to 6 per cent of GDP.
That’s the good news. The automatic stabilizers are causing the deficits to grow to the point where they will trigger a recovery. Hopefully before the point where the national governments become insolvent trying to fund themselves.
Nonetheless, this should not mean that the aggressive use of additional fiscal stimulus is insuperable. We have lived through desperate times, which call for desperate measures. Central banks, including the ECB, have already responded with far-reaching measures. In order to stimulate economic recovery in Europe, its political leaders need to take up the baton.
Europe could also assist its cause by several other measures. For one thing, it seems odd that the European Commission has launched “soft” excessive deficit procedures against several euro area countries. As well, European governments, including the European Commission, could do a much better job of outlining to the rest of the world, in a clear and concise way, the details of their stimulus actions so far. For, encompassing the full range of monetary and financial system support measures, these are far from being negligible – with the discretionary fiscal stimulus measures alone amounting to about 1 per cent of euro area GDP in 2009.
Julian Callow is chief European economist at Barclays Capital
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FACTBOX: What is quantitative easing?
Tue Dec 16, 2008 3:30pm EST
NEW YORK (Reuters) – The Federal Reserve on Tuesday cut its target for overnight interest rates to zero to 0.25 percent, bringing it closer to unconventional action to lift the economy out of a year-long recession.
“The message is they’re instituting quantitative easing on a fairly large scale,” said Doug Roberts, chief investment strategist at Channel Capital Research.com.
Under quantitative easing, central banks flood the banking system with masses of money to promote lending.
Central banks exchange non or low interest bearing assets- reserve balances- for longer term higher yielding securities.
Since lending is in no case ‘reserve constrained’, the ‘extra’ reserves do nothing for lending.
The purchase of the longer dated securities results in lower longer term rates than otherwise. The lower borrowing rates may or may not alter aggregate demand.
The lower rates for savers definitely lowers aggregate demand.
They usually do this when lowering official interest rates no longer is effective because they already are at or near zero.
True!
The central banks add cash by buying up large quantities of securities — government debt, mortgages, commercial loans, even stocks — from banks’ balance sheets,
Yes.
giving them plenty of new money to lend.
No, they already and always have infinite ‘money to lend’.
Available funds are not a constraint for the banking system.
The constraints are regulated asset quality and capital requirements that are expressed in the rates bank charge.
Not the total quantity of funds available.
It is a tool used by Japan earlier this decade to combat deflation and stimulate the economy.
Didn’t work then either. It was fiscal policy that kept them afloat, though not a large enough deficit to sustain output at full employment levels.
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