Tuesday, December 13, 2011

More from Wray on the Fed

 In case you missed any of this:

Read Randy's initial response at Economonitor, Great Leap Forward
Bernanke’s Obfuscation On The 29 Trillion Dollar Bailout: Response To Critics
by L. Randall Wray

In it Randy points to publication of Felkerson's working paper at Levy

$29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient
by James Felkerson

Randy also directs us to Barry Ritholtz's blog where BR gets Randy's point.

by Barry Ritholtz at The Big Picture
BR: One comment about some of the folks pushing back against this massive total: Yes, there is a big difference between a $100 lent for 3 days, and a $100 lent overnight rolled over 2 more times. And there is an enormous difference when temporary overnight lending lasts for three years.
Overnight lending, by its definition, is temporary, short term, lower risk, modest impact. It exists to allow slightly over-extended banks to meet their reserve requirements. But rolling overnight lending repeatedly for 3 years is none of those things. And it makes a mockery of these same reserve requirements, and the protective purposes they are supposed to serve.
The amount of overnight lending reflects how broken our financial system really is. A well capitalized, moderately leverage system does not require this massive liquidity from a central bank — interbank lending should be sufficient. What the data reveals is that the financial sector remains dangerously under-capitalized and overleveraged.To pretend these were merely minor overnight loans, rolled over once or twice, is foolish, dangerous nonsense
Randy elaborates further at New Economic Perpectives
Bernanke’s 29 Trillion Dollar Fog of Deceit
by L. Rabble Wray (sic)

Randy concludes at Economonitor
The $29 Trillion Bail-Out: A resolution and conclusion
by L Randall Wray

Lively comments on all these posts, too. This has really stirred up a hornet's nest of controversy, and Randy is clearly enjoying it.

8 comments:

Ken said...

Still go through all this, but love this comment from the BR blog ... sums up my view exactly:

"One problem with the “$29.6 trillion” is that is has the wrong unit. If this is the outstanding balance integrated over time, the correct unit is 29.6 trillion dollar*[time unit]. I guess the time unit is days in this case. So, the statement should be “the bailout has been 29.6 trillion dollars days.” Otherwise the result is arbitrary depending on what incremental time period is taken for the summation. Why use days? Why not seconds? Why not claim the bailout has been 2,558,822.4 trillion dollars (29.616 trillion x 24 x 60 x 60)?"

mike norman said...

So the Fed "printed" $29 trillion and the dollar has gone...up??

That's right.

The side story here is that there has been no debasing of the currency. There is no correlation between what the Fed did and the value of the dollar. In fact, by looking at what actually occurred, one could even argue that the Fed's actions were bullish for the dollar.

LR Wray said...

Good job, Mike. Take a look here for some interesting graphs. And at how confused Rogoff remains!:

TheBrowser (@TheBrowser)
12/14/11 5:15 AM
Top Economists Reveal Their Graphs Of 2011: Fascinating. Annotated graphs illustrate financial turmoil of 2011 b.rw/sX5acM @bbc

paul meli said...

Here's a (related) post over at Barry Ritholz's blog:

http://www.ritholtz.com/blog/2011/12/flight-to-quality-funding-of-the-u-s-budget-deficit/

and a smack-down delivered here:

http://modeledbehavior.com/2011/12/14/qe-and-the-budget-deficit/

is Karl Smith one of the guys that gets it?

Ryan Harris said...

"The amount of overnight lending reflects how broken our financial system really is. A well capitalized, moderately leverage system does not require this massive liquidity from a central bank"

Clever, Wray is. He gets right to the crux of the issue and doesn't get bogged down in the swamp of moral failures that lead to the crisis. So if his analysis is correct, will he next propose policy options and regulatory reform to de-leverage the system?

Tom Hickey said...

TB, I don't get where you are coming from on this.

Randy is focused on the Fed here, and only a particular aspect at that, namely, how a central bank can keep insolvent banks alive through regulatory forbearance and ongoing provision of liquidity. As Barry Ritholtz points out this amounts to banks using "public capital" so to speak, which is anti-capitalistic, especially when banks claim to be private entities, therefore not subject to strict regulation. There's a gap in the logic of that argument.

Randy's bona fides on reform is impeccable. He has been out front on accountability and institutional reform , often in conjunction with Bill Black.

Hyman Minsky was Randy's PhD advisor. Randy is well aware that "stability is destabilizing," so that constant vigilance is required along with institutional reform, since regulations can be avoided and institutions can be captured and perverted.

Ryan Harris said...
This comment has been removed by the author.
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