How the Fed “Went Broke”(lynalden.com)
lynalden.com
How the Fed “Went Broke”
https://www.lynalden.com/broke-federal-reserve/
119 comments
[deleted]
The historical raison d'etre for the Federal Reserve act was principally point 3. Points 1 and 2 have become the central focus or modern Fed "mandate" and generally thought to be beneficent outcomes of a successful #3, besides. If the Fed inflicts too painful of a recession it fails at points 1 and 2, as well.
To be clear, the article does not argue that the fed exists to make money, or anything like that.
"Went broke" applied to the Fed is still a category error.
[deleted]
> maximize employment
Huh. Do you know if they consider quality of employment in there as well? 'Cuz if not, that plus Goodhart's law would, uh, explain some things.
Saw a meme today or yesterday, something like:
Them, celebrating: We've created thousands of jobs!
Me: And I need three of them to pay my bills!
Huh. Do you know if they consider quality of employment in there as well? 'Cuz if not, that plus Goodhart's law would, uh, explain some things.
Saw a meme today or yesterday, something like:
Them, celebrating: We've created thousands of jobs!
Me: And I need three of them to pay my bills!
The Fed only really has one lever; it's already a bit much to want them to control both inflation and employment.
>>it's already a bit much to want them to control both inflation and employment.
They have to have two counter-acting goals in order to not become a paperclip maximization machine.
They have to have two counter-acting goals in order to not become a paperclip maximization machine.
Counterpoint: A paperclip maximizer is a good thing. Paperclips are very useful.
In conjunction with most surfaces, they can be used as musical instruments, akin to drumsticks or fingerpicks. Being much cheaper than recorders, they would serve as an excellent way to instill a sense of rhythm into children.
If you bend them in a certain way, they make quite satisfying and very stable hangers. Who among us has not needed to hang something in place before?
If you put one in the back of a TV, you can pick up plenty of ASTV channels, most likely including your local news. This is deeply good for public education and awareness.
If you put one in a radio, you can pick up radio channels. Without too much effort, they could also be used to replace the tuners and volume knobs on one.
They work very well as stands for all sorts of things if slightly deformed, which can be deeply useful.
You can use sufficiently large ones (known in most markets by the affectionate moniker of "jumbo" paper clips) to teach people how to tie knots, in a manner that requires less mechanical dexterity than most rope.
If you peel the end of one out, it makes a delightful pinhole puncher, which is very useful for certain styles of photography.
This isn't even getting into all of the remarkable ways you can use them with paper!
And if you're paperless, it would be hard to think of a more efficient way of making the perfect-sized USB stick keychain for precisely your amount of USB sticks.
Please do not slander paperclips; we need a paperclip maximizer for the good of society, and little would be a better short-term goal for AI research.
In conjunction with most surfaces, they can be used as musical instruments, akin to drumsticks or fingerpicks. Being much cheaper than recorders, they would serve as an excellent way to instill a sense of rhythm into children.
If you bend them in a certain way, they make quite satisfying and very stable hangers. Who among us has not needed to hang something in place before?
If you put one in the back of a TV, you can pick up plenty of ASTV channels, most likely including your local news. This is deeply good for public education and awareness.
If you put one in a radio, you can pick up radio channels. Without too much effort, they could also be used to replace the tuners and volume knobs on one.
They work very well as stands for all sorts of things if slightly deformed, which can be deeply useful.
You can use sufficiently large ones (known in most markets by the affectionate moniker of "jumbo" paper clips) to teach people how to tie knots, in a manner that requires less mechanical dexterity than most rope.
If you peel the end of one out, it makes a delightful pinhole puncher, which is very useful for certain styles of photography.
This isn't even getting into all of the remarkable ways you can use them with paper!
And if you're paperless, it would be hard to think of a more efficient way of making the perfect-sized USB stick keychain for precisely your amount of USB sticks.
Please do not slander paperclips; we need a paperclip maximizer for the good of society, and little would be a better short-term goal for AI research.
Countries with only an inflation target seem to do fine. To be fair, they don't want to undershoot or overshoot the target, which is sort of like having two goals.
Yup yup.
Balance comes from opposing forces.
Nowadays, when I see something unbalanced, I first look for missing forces (and then look for outsized forces).
Balance comes from opposing forces.
Nowadays, when I see something unbalanced, I first look for missing forces (and then look for outsized forces).
> Do you know if they consider quality of employment in there as well?
Only around the property of income, seeking a state of stagnation. If your boss is now whipping you to keep you in line where he previously wasn't, that would be beyond their purview. There are supposed to be other organizations to control for those concerns.
Only around the property of income, seeking a state of stagnation. If your boss is now whipping you to keep you in line where he previously wasn't, that would be beyond their purview. There are supposed to be other organizations to control for those concerns.
> if they consider quality of employment in there as well?
I think it's of sufficient quality (for the fed) if that employment leads to state coffers being sufficiently filled, without the wheels coming off the bus during their tenure or their immediate successor's tenure.
As you said - needing/having three jobs isn't really legible to the people at the Fed, so there's no visible problem!
I think it's of sufficient quality (for the fed) if that employment leads to state coffers being sufficiently filled, without the wheels coming off the bus during their tenure or their immediate successor's tenure.
As you said - needing/having three jobs isn't really legible to the people at the Fed, so there's no visible problem!
[deleted]
These are the stated goals of the Fed, yes.
In practice, does it matter? The Fed operates with impunity and can effectively do what ever it's members prefer.
In practice, does it matter? The Fed operates with impunity and can effectively do what ever it's members prefer.
Absolutely not, it's beholden to Congress.
This Fed bank Pres was trading $M on non-public inside info before Fed market-moving actions. Will Congress do anything?
https://markets.businessinsider.com/news/stocks/robert-kapla...
"Dallas Fed President Robert Kaplan made million-dollar stock trades in Tesla, Amazon"
https://markets.businessinsider.com/news/stocks/robert-kapla...
"Dallas Fed President Robert Kaplan made million-dollar stock trades in Tesla, Amazon"
This is a great article. Lyn goes in depth, and does a pretty good job of explaining something that's fairly intricate.
In short, the Fed pays its profit to the Treasury department by law. When the Fed is making a loss instead of a profit, then things start to get weird, and all sorts of problems can arise. One side effect in an increase in the federal deficit on the order of $100 billion per year.
In short, the Fed pays its profit to the Treasury department by law. When the Fed is making a loss instead of a profit, then things start to get weird, and all sorts of problems can arise. One side effect in an increase in the federal deficit on the order of $100 billion per year.
It also drives home that financial illiteracy amongst voters regarding this “loss” is the primary threat, not the loss per se.
That profit is after expenses for flights, parties, conferences, consultants, etc.
I'm ready for $10 and $100 coins and avoid the fed notes.
I'm ready for $10 and $100 coins and avoid the fed notes.
Complaining about the abborant behaviors of individuals belies the actual problem. Even if the FED were all on their "best behavior" we'd still be in a very bad position from the weird mixing of business and government.
Complaining ... I offered a solution.
Federal Reserve buys coins from US Mint at face value. Coins work now, and large denomination coins are a solution within existing framework.
Federal Reserve buys coins from US Mint at face value. Coins work now, and large denomination coins are a solution within existing framework.
I mean, not using bills isn't really a practical solution. Legally dissolving the Fed or making a committee with only the instruction to print money would be better.
[deleted]
> However, the chart is flawed because it changes its calculation method mid-chart once it turns negative. The smaller positive numbers show how much the Fed was sending every week (around $2 billion on average) but when it turns negative, it switches to a cumulative calculation and thus falls off like a cliff.
Why on earth would anyone make a chart like that?
Why on earth would anyone make a chart like that?
The chart is created from the reported data, it's just a side-effect.
i agree its crazy but i thought tfa did a good job explaining why the original chart ended up looking the way it did. regime change in a dataset can expose bad assumptions about relationships between balance sheet items you thought could be summed, etc.
Good article with very clear accounting.
The government could show its support for the dollar by simply giving the Fed enough bonds to keep it solvent. Equivalently, just let it print government bonds the same way it prints money.
Either way the point is that the government has to show that it will eventually use higher taxes if needed to prevent hyperinflation.
The government could show its support for the dollar by simply giving the Fed enough bonds to keep it solvent. Equivalently, just let it print government bonds the same way it prints money.
Either way the point is that the government has to show that it will eventually use higher taxes if needed to prevent hyperinflation.
This is why everyone - tech companies, the market, myself - gambled (and apparently lost) and continues to guess that the Fed wouldn’t raise interest rates further.
If you gamble they will and get it wrong you lose a lot more than if you gamble they won't and get it wrong.
Translation: If you gamble that the Fed will raise rates and get it wrong, you lose more than if you wrongly gamble that they will not.
Is this necessarily true? Aren't puts and calls (etc.) symmetrical?
I am not saying it's true or false, but clarifying a wording many misunderstood.
What?
What I said?
Betting one way and being wrong is much worse than betting the other way and being wrong.
Betting one way and being wrong is much worse than betting the other way and being wrong.
What you said wasn't English
If you gamble "they will" and get it wrong, you lose a lot more than if you gamble "they won't" and get it wrong.I don't think tech companies and "the market" even looked that far ahead.
> is why everyone - tech companies, the market, myself - gambled
Fed profits and losses are arcane. The markets gambled the Fed would ease off because it would miss its soft landing. Raising rates while preserving employment is extremely difficult. To everyone’s surprise, the Fed is managing it. That economic strength, together with persistent core inflation, means higher rates for longer than some thought.
Fed profits and losses are arcane. The markets gambled the Fed would ease off because it would miss its soft landing. Raising rates while preserving employment is extremely difficult. To everyone’s surprise, the Fed is managing it. That economic strength, together with persistent core inflation, means higher rates for longer than some thought.
Are they managing it though? The books are cooked to all hell
> they managing it though
Yes. Employment is growing, unemployment is steady, growth is positive and inflation has at least stabilised.
> The books are cooked to all hell
Which books? The Fed’s?
Yes. Employment is growing, unemployment is steady, growth is positive and inflation has at least stabilised.
> The books are cooked to all hell
Which books? The Fed’s?
Government-published economic statistics.
They literally changed the definition of 'recession' for political convenience. You really think the economy is booming right now like whats being claimed? Every admin manipulates BLS collection data to make unemployment look good.
They literally changed the definition of 'recession' for political convenience. You really think the economy is booming right now like whats being claimed? Every admin manipulates BLS collection data to make unemployment look good.
"They literally changed the definition of 'recession' for political convenience"
They did no such thing.
They did no such thing.
Well then I don't think this dialogue is gonna go anywhere. Agree to disagree.
It would help if you explained what they changed it from and to and when maybe.
Widely agreed upon definition prior to 2022:
https://www.forbes.com/sites/leonlabrecque/2019/03/25/what-i...
https://www.nationalreview.com/corner/it-depends-what-the-de...
https://www.washingtonpost.com/politics/2019/08/21/fact-chec...
Acknowledgement as the 'popular definition' by St Louis fed in 2009 which uses an even less generous definition than two quarters to define it: "“significant decline in economic activity spreading across the economy, lasting more than a few months.”"
https://files.stlouisfed.org/files/htdocs/pageone-economics/...
Spin cycle:
https://www.cnbc.com/2022/07/29/white-house-goes-on-offense-...
https://www.foxbusiness.com/economy/recession-biden-yellen-d...
https://fortune.com/2022/07/29/wikipedia-recession-definitio...
https://dailycaller.com/2022/07/28/wikipedia-change-definiti...
https://www.forbes.com/sites/leonlabrecque/2019/03/25/what-i...
https://www.nationalreview.com/corner/it-depends-what-the-de...
https://www.washingtonpost.com/politics/2019/08/21/fact-chec...
Acknowledgement as the 'popular definition' by St Louis fed in 2009 which uses an even less generous definition than two quarters to define it: "“significant decline in economic activity spreading across the economy, lasting more than a few months.”"
https://files.stlouisfed.org/files/htdocs/pageone-economics/...
Spin cycle:
https://www.cnbc.com/2022/07/29/white-house-goes-on-offense-...
https://www.foxbusiness.com/economy/recession-biden-yellen-d...
https://fortune.com/2022/07/29/wikipedia-recession-definitio...
https://dailycaller.com/2022/07/28/wikipedia-change-definiti...
That 2009 link you provided by the St. Louis fed specifically states the fed does not use the popular definition.
You just disproved your own claim. The government/ fed definition of recession has not changed since 2009. You claimed it changed in 2022.
The 2009 link says "The committee considers a wide range of indicators with particular emphasis on payroll employment and several measures of domestic production and income, such as gross domestic product, gross domestic income, and industrial."
You just disproved your own claim. The government/ fed definition of recession has not changed since 2009. You claimed it changed in 2022.
The 2009 link says "The committee considers a wide range of indicators with particular emphasis on payroll employment and several measures of domestic production and income, such as gross domestic product, gross domestic income, and industrial."
I directly acknowledge that in the comment you reply to. Pretty lame to cherrypick the links I provided. The st louis fed recognizes the popular definition. Its definition is even less favorable to the case laid out by Biden admin. There's a clear history of use and a clear change once it became politically convenient. It's completely laid out in the links I provided. Your dispute is with those sources not with me.
Vanguard's chief economist in December 2022 says a recession may occur mid 2023.
https://investor.vanguard.com/investor-resources-education/n...
Do you think they are also part of this vast conspiracy to trick you, or is it possible you are just confused and never understood economics or the definition of recession as well as you thought?
Here's Fidelity in december 2012 "We do not believe that the US is in recession, but instead experiencing a late-cycle expansion, which has historically led to positive returns for stocks and bonds."
https://www.fidelity.com/learning-center/wealth-management-i...
Is Fidelity also part of a vast conspiracy to trick you, or is it more plausible you just don't understand economics so well?
Maybe the issue isn't so much that the definition has changed, as modern events have revealed you never understood the definition in the first place, or that 2009 paper you cited?
https://investor.vanguard.com/investor-resources-education/n...
Do you think they are also part of this vast conspiracy to trick you, or is it possible you are just confused and never understood economics or the definition of recession as well as you thought?
Here's Fidelity in december 2012 "We do not believe that the US is in recession, but instead experiencing a late-cycle expansion, which has historically led to positive returns for stocks and bonds."
https://www.fidelity.com/learning-center/wealth-management-i...
Is Fidelity also part of a vast conspiracy to trick you, or is it more plausible you just don't understand economics so well?
Maybe the issue isn't so much that the definition has changed, as modern events have revealed you never understood the definition in the first place, or that 2009 paper you cited?
[deleted]
This is not an econometric definition. (To the degree it is, the definition contains a free variable regarding the length of the downturn.) Doubting federal statistics or the Fed balance sheet because the White House spins the definition of a downturn is like doubting relativity because Pluto isn't a planet.
You're saying WH Admins have no influence over economic data collection by the federal government?
> WH Admins have no influence over economic data collection by the federal government
Less than you seem to think. The Fed, SSA, SBA, FDIC and CFPB are independent agencies. Many data are provided by private sources, e.g. ADP. And the statistical agencies, while legally dependent, are fiercely independent and competitive (i.e. when one starts being co-opted, the others publicly disagree).
Moreover, there are hundreds of billions of private dollars which take these data seriously. Is every one of them is in on the conspiracy or duped?
Less than you seem to think. The Fed, SSA, SBA, FDIC and CFPB are independent agencies. Many data are provided by private sources, e.g. ADP. And the statistical agencies, while legally dependent, are fiercely independent and competitive (i.e. when one starts being co-opted, the others publicly disagree).
Moreover, there are hundreds of billions of private dollars which take these data seriously. Is every one of them is in on the conspiracy or duped?
Two consecutive quarters of negative real economic growth to... Something else. I'm not sure there ever was a new definition, just a denial of recession.
We're still pouring public resources into armaments manufacturers, some of whose products have reached or theoretically will reach the battle in Ukraine, so the redefinition project was a success!
The bidding right now is driven by the belief that the Fed has lost control over inflation, and the only way to protect your wealth is to chase equities and generate inflation-beating returns.
This isn't why people use (and hold) dollars. These figures can go up and down without affecting anything real. Paying this much attention to trivial minutia doesn't serve the interests of normal people. When non-Americans stop holding so many dollars, these figures will not be the cause. Rather, it will be due to our unconscionable foreign policy and abusive economic sanctions.
They might stop holding dollars for that reason, but they would definitely also stop holding dollars if inflation was high and the Fed had nothing to sell to bring it back down.
What non-inflationary currency would they go to?
In this hypothetical the dollar has inflation higher than its 2% target, but there are still other major currencies whose central banks haven't gone bankrupt.
Central banks don't go bankrupt.
And, even in that hypothetical, it would still depend on what interest rate you can get in dollars vs. what interest rate you can get in, say, Swiss Francs.
And, even in that hypothetical, it would still depend on what interest rate you can get in dollars vs. what interest rate you can get in, say, Swiss Francs.
And the reason dollars have value is because we have intelligent people in government managing the system and preventing it from going haywire, not because of some sort of magic. It might not matter when you go buy eggs but it's still interesting to see what's going on under the hood.
The "magic" is the military that threatens every inch of the globe, the CIA (and other more clandestine organizations) that punish leaders who value the material interests of their people over those of American firms (Allende, Mosaddegh, Magufuli, etc.), the IMF and World Bank who impose austerity as table stakes, and ironclad control over global banking infrastructure. The nerds with their "balance sheets" themselves don't imagine they have any effect on any of this. TFA skirts fairly close to crank territory.
It has more to do with the US's ability to reliably tax its own citizens. Plenty of small countries also have stable currencies, but only the ones with stable governments.
Yes, that is another factor, and shouldn't be underestimated. Government-issued currency exists the moment the government decides it will be accepted for payment of taxes.
Essentially.
The leaders of other countries don't stuff dollars into the proverbial mattress because our central-bank T-sheet looks good. They do it because if their country goes into civil war and their currency becomes worthless, they perceive our currency as least likely to do that next. It's our demonstrated force projection, our vast multinational business reach, our entanglement into the IMF (the dollar being the currency used to pay IMF debts), and a couple centuries of relatively stable democracy that pins the value of the dollar.
The January 6 insurrection did more damage to the international perception of the dollar than anything the Federal Reserve is doing.
The leaders of other countries don't stuff dollars into the proverbial mattress because our central-bank T-sheet looks good. They do it because if their country goes into civil war and their currency becomes worthless, they perceive our currency as least likely to do that next. It's our demonstrated force projection, our vast multinational business reach, our entanglement into the IMF (the dollar being the currency used to pay IMF debts), and a couple centuries of relatively stable democracy that pins the value of the dollar.
The January 6 insurrection did more damage to the international perception of the dollar than anything the Federal Reserve is doing.
Ron Paul was right
I would assume that the Fed running a deficit would mean that M1 would continue to increase, even with the QE machine turned off. The Fed charts show that doesn't seem to be happening though. Anyone know why?
[deleted]
It’s a cynical take, but I always thought the real reason for central bank independence is so the finance sector can exercise more political leverage and be safer during busts, for politicians it was mostly a technocratic headache they happily remissed. People always talk about independence as some high minded ideal but I don’t see the benefit in practice.
[deleted]
You saw that Trump was explicitly trying to print cash like crazy, right?
Even without the ability to directly fire folks and nominal ‘independence’ that definitely delayed rate hikes and made inflation much worse.
If politicians had direct control, the whole countries economy would be whipsawed by whatever directly benefited the current office holder.
As-is, it’s indirectly the case, hah.
Even without the ability to directly fire folks and nominal ‘independence’ that definitely delayed rate hikes and made inflation much worse.
If politicians had direct control, the whole countries economy would be whipsawed by whatever directly benefited the current office holder.
As-is, it’s indirectly the case, hah.
Not sure which is better. Ownership of regional feds is private.
It's not like democracies take a long view of things very frequently, but neither does the fed, at least not directly (maybe through said regional ownership).
It's not like democracies take a long view of things very frequently, but neither does the fed, at least not directly (maybe through said regional ownership).
> Not sure which is better.
How about neither. The Fed was created in 1913 and can be abolished.
How about neither. The Fed was created in 1913 and can be abolished.
We could also get rid of the Air Force, Space Force, etc.
The only constitutional federal military is the Army and Navy! (Article 1, Section 8)
Or just recognize that it was created because of a long history of severe painful crises, and considered the 'least bad' option compared to JP Morgan having to bail out the US Economy (and hence wielding incredible power). [https://www.crf-usa.org/images/pdf/jpmorgan.pdf]
The devil you know, or the devil you don't.
The only constitutional federal military is the Army and Navy! (Article 1, Section 8)
Or just recognize that it was created because of a long history of severe painful crises, and considered the 'least bad' option compared to JP Morgan having to bail out the US Economy (and hence wielding incredible power). [https://www.crf-usa.org/images/pdf/jpmorgan.pdf]
The devil you know, or the devil you don't.
Distrust of king's standing armies led Constitution to allow army for two years.
https://constitution.congress.gov/browse/essay/artI-S8-C12-1...
"To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years"
Maybe we could amend the Constitution if we want the standing army.
https://constitution.congress.gov/browse/essay/artI-S8-C12-1...
"To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years"
Maybe we could amend the Constitution if we want the standing army.
Good luck with that!
Nothing like a "long history of severe painful crises" to excuse throwing out the rules...
For sure. The treasury is the most morally correct decision maker for economic policy in every facet. It really comes down to a question of sovereignty, which should be in the hands of the people through elected officials.
But what are the consequences? Do those consequences make us vulnerable?
But what are the consequences? Do those consequences make us vulnerable?
Cite?
[https://www.federalreserve.gov/faqs/about_14986.htm] disagrees.
They’re a weird semi-governmental entity.
[https://www.federalreserve.gov/faqs/about_14986.htm] disagrees.
They’re a weird semi-governmental entity.
Thats the national fed.
The regional feds are privately owned by 'member banks'
https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...
It's actually a really ambiguous topic to research, as ownership stakes are basically never published. Someone supposedly did a FOIA and got the list of ownership shares for the NY fed, but its sourcing was dubious though it seemed legit enough. The names made sense and it lined up with a lot of verifiable historical facts. Banks of ownership for the NY Fed were systemically important banks like Citi, JP Morgan and BNY Mellon, few others iirc.
Read and evaluate for yourself: https://wallstreetonparade.com/2019/11/these-are-the-banks-t...
The regional feds are privately owned by 'member banks'
https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...
It's actually a really ambiguous topic to research, as ownership stakes are basically never published. Someone supposedly did a FOIA and got the list of ownership shares for the NY fed, but its sourcing was dubious though it seemed legit enough. The names made sense and it lined up with a lot of verifiable historical facts. Banks of ownership for the NY Fed were systemically important banks like Citi, JP Morgan and BNY Mellon, few others iirc.
Read and evaluate for yourself: https://wallstreetonparade.com/2019/11/these-are-the-banks-t...
* The first link points out,
1) Those shares are not controlling in any way, but they do pay dividends. And those shares are for all member banks.
So it is a way for the Federal reserve to push any 'profit' from lending to the banks who paid the interest in.
2) They do vote for some directors (6 of 9) for the sub-banks, but those directors do not control things like interest rates or other policy decisions. That is done by the Board of Governors, which is controlled by the US Gov't.
* For your second link, that website looks like infowars had it's head explode all over the room. I'll pass.
1) Those shares are not controlling in any way, but they do pay dividends. And those shares are for all member banks.
So it is a way for the Federal reserve to push any 'profit' from lending to the banks who paid the interest in.
2) They do vote for some directors (6 of 9) for the sub-banks, but those directors do not control things like interest rates or other policy decisions. That is done by the Board of Governors, which is controlled by the US Gov't.
* For your second link, that website looks like infowars had it's head explode all over the room. I'll pass.
It's unlikely that they have shares for the hell of it. Advisory capacity or not, there is some influence however you want to phrase it. Why not publish them if its totally innocuous? If you read the history of banks those are the ones that were there at its founding.
I agree that website looks like shit, but what it says is sourced and lines up with the public history of the fed.
I agree that website looks like shit, but what it says is sourced and lines up with the public history of the fed.
While Trump advocated for spending, the spending bills come from House of Representatives. Trump helped reduce expenditures by starting the withdraw process from two-decade Afghanistan quagmire. The Fed helps the government with deficit spending.
I was pointing out that Trump kept threatening to fire the Fed Chairman if he didn't drop interest rates.
[https://www.reuters.com/article/us-usa-fed-trump-tweets/trum...]
This wasn't that many years ago!
[https://www.reuters.com/article/us-usa-fed-trump-tweets/trum...]
This wasn't that many years ago!
The Fed was raising rates first couple years of Trump. And the economy was doing okay with higher rates.
Oh, I never said Trump was doing what he was because of any concern about the economy.
The fed wasn’t in his crosshairs at first, but when they started to raise rates…
Trump and his family has extensive real estate ties, and those were having trouble due to the rising rates.
So then he started threatening them, and miraculously, they took a break. Which seems to have helped his son in law avoid bankruptcy at the minimum.
Weird, huh?
The fed wasn’t in his crosshairs at first, but when they started to raise rates…
Trump and his family has extensive real estate ties, and those were having trouble due to the rising rates.
So then he started threatening them, and miraculously, they took a break. Which seems to have helped his son in law avoid bankruptcy at the minimum.
Weird, huh?
What McCulley said in 2017:
https://www.youtube.com/watch?v=xnYZwxzxd9Y
https://www.youtube.com/watch?v=xnYZwxzxd9Y
[deleted]
Lyn Alden sounds like an expert but never worked in the financial industry. Either that makes the reports clever outside view or misleading detail of someone who doesn't really understand it. My money is on the latter.
Was there a particular part you were suspicious of?
Not the OP but there’s quite a few parts of the article are misleading. For example:
>> That serves as the source of financing for banks
I think they meant to say funding but regardless it’s wrong either way. A bank doesn’t use deposits to fund/finance loans it makes. A bank is licenced to create money from nothing in order to originate loans. This loan making activity is not constrained by deposits (money stored at the bank by other customers) nor by reserves (special money that cant be spent in the economy and is stored in the commerical bank’s account at the central bank). There are legal controls that mean loan making activity is constrained by a bank’s capital (this is what Basel I, II, III etc are all about). The definition of capital is very particular and complicated but a fair summary could be it’s the money invested in the bank by shareholders. Higher capital requirements increase shareholder risk and decrease public risk.
the author goes on to write the following without seeming to notice the incongruence:
>> Bank of America (BAC) as an example, they have $3.051 trillion in assets and $2.778 trillion in liabilities
(simplifying) BAC has issued $3tn loans but only has $2.7tn in deposits - so what did the author think they meant by “financing”?
To be clear the story here with BAC is more complicated than just loans and deposits but in the interests of not writing a wall of text…
>> Liabilities of the Federal Reserve consist mainly of bank deposits
this is unfortunate wording, it makes it sound like deposits by you or me. The money stored at the fed by commercial banks is different than dollars or pounds; its “reserves”. You can’t spend reserves in the economy like you can with normal money.
>> If a central bank loses its independence, and for example a president can tell the central bank to do whatever he wants, then a country has basically lost its guardrails against hyperinflation
I think this is a reference to Turkey and mis-understanding the bigger picture. Specifically the fact that hyperinflation is partly a function of money supply (and partly a function of money velocity) and that money supply is increased in two ways: commercial banks issuing loans (as above this is constrained by capital requirements) and secondly by expansionary fiscal policy - that is the government spending into the economy to consume on its own behalf. Neither of these is guard trailed by monetary policy.
NB: fiscal policy = government, monetary policy = central bank.
I think this comment is getting long enough, i’ll wrap it up there.
>> That serves as the source of financing for banks
I think they meant to say funding but regardless it’s wrong either way. A bank doesn’t use deposits to fund/finance loans it makes. A bank is licenced to create money from nothing in order to originate loans. This loan making activity is not constrained by deposits (money stored at the bank by other customers) nor by reserves (special money that cant be spent in the economy and is stored in the commerical bank’s account at the central bank). There are legal controls that mean loan making activity is constrained by a bank’s capital (this is what Basel I, II, III etc are all about). The definition of capital is very particular and complicated but a fair summary could be it’s the money invested in the bank by shareholders. Higher capital requirements increase shareholder risk and decrease public risk.
the author goes on to write the following without seeming to notice the incongruence:
>> Bank of America (BAC) as an example, they have $3.051 trillion in assets and $2.778 trillion in liabilities
(simplifying) BAC has issued $3tn loans but only has $2.7tn in deposits - so what did the author think they meant by “financing”?
To be clear the story here with BAC is more complicated than just loans and deposits but in the interests of not writing a wall of text…
>> Liabilities of the Federal Reserve consist mainly of bank deposits
this is unfortunate wording, it makes it sound like deposits by you or me. The money stored at the fed by commercial banks is different than dollars or pounds; its “reserves”. You can’t spend reserves in the economy like you can with normal money.
>> If a central bank loses its independence, and for example a president can tell the central bank to do whatever he wants, then a country has basically lost its guardrails against hyperinflation
I think this is a reference to Turkey and mis-understanding the bigger picture. Specifically the fact that hyperinflation is partly a function of money supply (and partly a function of money velocity) and that money supply is increased in two ways: commercial banks issuing loans (as above this is constrained by capital requirements) and secondly by expansionary fiscal policy - that is the government spending into the economy to consume on its own behalf. Neither of these is guard trailed by monetary policy.
NB: fiscal policy = government, monetary policy = central bank.
I think this comment is getting long enough, i’ll wrap it up there.
I stopped reading the article the second i read: "That serves as the source of financing for banks" which is two paragraphs in.
Your comments are spot on. What I don't understand is how its possible for people to still get these things wrong.
Lyn is a bit of a crank. It's unfortunate to see her work posted here.
The Fed didn't "go broke" none of this really matters because the Fed's job isn't to make profit, it's to manage the money supply. The 'losses' here just indicates an outflow from one part of their operation but it's meaningless out of context.
[edit] To be clear this article is actually pretty good, and comes to roughly the same conclusion. My statement that she's a crank has to do with her voodoo economics/mental gymnastics in support of Bitcoin.
The Fed didn't "go broke" none of this really matters because the Fed's job isn't to make profit, it's to manage the money supply. The 'losses' here just indicates an outflow from one part of their operation but it's meaningless out of context.
[edit] To be clear this article is actually pretty good, and comes to roughly the same conclusion. My statement that she's a crank has to do with her voodoo economics/mental gymnastics in support of Bitcoin.
What do you base this on? Sources?
This article is actually pretty well written, so credit where due, it's all her Bitcoin quackery. I don’t really trust any flat earthers to write physics blogs.
She rarely mentions Bitcoin in her research, and when she does she always sticks to the facts.
You're engaging in a blatant ad hominem attack on someone who's constantly producing high quality research on a variety of topics - seems pretty uncalled for.
You're engaging in a blatant ad hominem attack on someone who's constantly producing high quality research on a variety of topics - seems pretty uncalled for.
Rarely mentions? Every other article on her page is about crypto.
Any article about the Federal Reserve that isn't talking about their discount rate is more or less presumptively quackery until proven otherwise. As other commenters have pointed out, this criticism here has nothing to do with what the Fed is for or about.
If you're asking for sources, try an intro level macroeconomics textbook.
If you're asking for sources, try an intro level macroeconomics textbook.
> A commercial bank has a considerable amount of both assets and liabilities. In order to remain solvent, the asset side must exceed the liability side, and they have various regulations placed on them to try to keep them as solvent as possible.
The 'attempt to remain solvent' assumes that an insolvent bank isn't instantly marked as 'a fraudulent store of assets', in the same way that a parking garage that 'takes joyrides in its customers cars' can't really be called a 'properly functioning parking garage', even if most of the customers don't generally get inconvenienced by the joyriding.
Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money, and in 'old times' was regarded as uninteresting, simple fraud, and the responsible parties were stripped of their banking certifications and publically shamed for the crime of stealing their customers assets.
The fed is not to be taken seriously, though it can hurt you if you run afoul of it, and everyone who is affected by the dollar is kinda running afoul of it right now. :(
The 'attempt to remain solvent' assumes that an insolvent bank isn't instantly marked as 'a fraudulent store of assets', in the same way that a parking garage that 'takes joyrides in its customers cars' can't really be called a 'properly functioning parking garage', even if most of the customers don't generally get inconvenienced by the joyriding.
Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money, and in 'old times' was regarded as uninteresting, simple fraud, and the responsible parties were stripped of their banking certifications and publically shamed for the crime of stealing their customers assets.
The fed is not to be taken seriously, though it can hurt you if you run afoul of it, and everyone who is affected by the dollar is kinda running afoul of it right now. :(
> Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money
Isn’t this just fractional-reserve banking?
Isn’t this just fractional-reserve banking?
>> Banks that lend out _deposits_, for loans to others, who then deposit those loans as deposits, are _lying_ to their customers about the availability of the money
> Isn’t this just fractional-reserve banking?
Yes, and it is no longer a thing, and it has not been for a while. Tobin call this the "Old View" in 1963:
* https://elischolar.library.yale.edu/cowles-discussion-paper-...
For how things actually work in recent decades see:
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
> Isn’t this just fractional-reserve banking?
Yes, and it is no longer a thing, and it has not been for a while. Tobin call this the "Old View" in 1963:
* https://elischolar.library.yale.edu/cowles-discussion-paper-...
For how things actually work in recent decades see:
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
> Banks that lend out _deposits_, for loans to others
Banks don’t lend deposits. They create deposits through loans. Understanding that is far more fundamental than anything about the Fed.
Banks don’t lend deposits. They create deposits through loans. Understanding that is far more fundamental than anything about the Fed.
I think the way that people naively think banks work and the way that you think banks work are actually completely equivalent. The differences are only in what you call 'money' and how you do the accounting.
No, they are no equivalent. Banks do not need deposits to create loans:
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
* https://rationalreminder.ca/podcast/132
In may countries even reserves (requirements) are not needed:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
* https://rationalreminder.ca/podcast/132
In may countries even reserves (requirements) are not needed:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
They can create an account for the borrower with a balance in it. But as soon as the borrower actually pays that money to someone else (with an account at a different bank) then it has to come from somewhere, i.e. deposits.
Of course it could come from numerous other sources (e.g. interbank lending) but the naive view also agrees that banks deal with a variety of financial instruments.
Of course it could come from numerous other sources (e.g. interbank lending) but the naive view also agrees that banks deal with a variety of financial instruments.
>> then it has to come from somewhere, i.e. deposits.
It’s more complicated than that. If i use a loan to pay you and we’re both using the same bank, it’s no different to marking down the number in column A and marking up column B.
It’s only when we’re at different banks it changes, now my bank needs enough reserves to transfer to your bank. It can never not have enough reserves though because the central bank will always and without limit, lend it however much reserves it needs via the discount window.
Long way to say the money doesn’t have to come from anywhere.
>> interbank lending
not in a post GFC world, that’s one of the reasons we have the reserves situation today.
This all has happened before which people often forget. Eg it’s common for people to think Quantative easing is a new concept and yet its only the term is new, the idea is as old as banking systems.
It’s more complicated than that. If i use a loan to pay you and we’re both using the same bank, it’s no different to marking down the number in column A and marking up column B.
It’s only when we’re at different banks it changes, now my bank needs enough reserves to transfer to your bank. It can never not have enough reserves though because the central bank will always and without limit, lend it however much reserves it needs via the discount window.
Long way to say the money doesn’t have to come from anywhere.
>> interbank lending
not in a post GFC world, that’s one of the reasons we have the reserves situation today.
This all has happened before which people often forget. Eg it’s common for people to think Quantative easing is a new concept and yet its only the term is new, the idea is as old as banking systems.
Likewise in the naive view, if the central bank loans a commercial bank a bunch of cash, then the commercial bank can use that cash to make loans.
That doesn’t hold - the central bank could loan all the cash (really we mean reserves) it wants and the bank still be unable to make a loan. Because the bank cannot break its capital requirements and the central bank can do nothing to help that situation.
Similarly the central bank could loan nothing and the commerical bank could loan millions.
Similarly the central bank could loan nothing and the commerical bank could loan millions.
> Likewise in the naive view, if the central bank loans a commercial bank a bunch of cash, then the commercial bank can use that cash to make loans.
Define "cash".
What the central bank gives to banks is not the money you and I use: what is given is not something that can be turned around and used in a business loan or a residential mortgage.
What the central bank 'gives' banks is simply a credit in their reserve account for inter-bank settlements. And having more reserves makes little difference in the creation loans, as (as mentioned before) some places don't even have reserve requirements:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
Define "cash".
What the central bank gives to banks is not the money you and I use: what is given is not something that can be turned around and used in a business loan or a residential mortgage.
What the central bank 'gives' banks is simply a credit in their reserve account for inter-bank settlements. And having more reserves makes little difference in the creation loans, as (as mentioned before) some places don't even have reserve requirements:
* https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...
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> But as soon as the borrower actually pays that money to someone else (with an account at a different bank) then it has to come from somewhere, i.e. deposits.
Nope, not deposits. Inter-bank settlements occur via reserves, which banks (generally) get from the central bank, but also borrowing from other banks.
Nope, not deposits. Inter-bank settlements occur via reserves, which banks (generally) get from the central bank, but also borrowing from other banks.
> differences are only in what you call 'money' and how you do the accounting
They are for first approximations. Someone leading a life with the deposits-lent-out-as-loans model will generally navigate the financial system fine, just like someone ignorant of general relativity or, frankly, time zones, can live happily. But the simple model breaks down when you consider how banks interact with each other, and what happens in crises. It totally disintegrates when you get to the central bank.
They are for first approximations. Someone leading a life with the deposits-lent-out-as-loans model will generally navigate the financial system fine, just like someone ignorant of general relativity or, frankly, time zones, can live happily. But the simple model breaks down when you consider how banks interact with each other, and what happens in crises. It totally disintegrates when you get to the central bank.
Of all things, the thing that helped me understand this best was Terry Pratchett's novel Making Money. Without giving away the ending too hard: in the post-gold era, the value of a nation-state's currency has very little to do with numbers or tangibles and everything to do with the perceived power of the nation-state (although, of course, numbers and tangibles feed into that perception).
The US is a huge outlier and it's hard to predict how things like "The central bank running a deficit" end up impacting the psyche of the financial decision-makers of the world.
The US is a huge outlier and it's hard to predict how things like "The central bank running a deficit" end up impacting the psyche of the financial decision-makers of the world.
I think a critical point might be how the federal reserve is not a commercial bank
The Fed's actual goals are: (1) to maximize employment as much as possible, while (2) keeping prices reasonably stable (i.e., not rising too much each year), and (3) promoting the stability of the financial system as much as possible.
If they conclude that they have to raise rates much higher and continue to withdraw liquidity from financial markets to bring inflation under control, they will do it -- even if it means inflicting a painful recession.