Saturday, December 10, 2011

Wray on the Fed — continued


Reminder if you missed it.

BERNANKE’S OBFUSCATION CONTINUES: The Fed’s $29 Trillion Bail-out of Wall Street
by L. Randall Wray at Economonitor, Great Leap Forward

Note: The 29T figure is cumulative, including rollovers. Randy takes some flak over this in the comments.

UPDATE: Prof. James Hamilton rebuts Wray

More on those secret Federal Reserve loans to banks
at Econobrowser
(h/t Calculated Risk)

Randy rejoins in the comments.

18 comments:

Matt Franko said...

Tom,

I dont know where this is going.

You dont have to go down into the sewer to get the rats, MMT doesn't even need this to make it's points; and it is WEAK in any case.

$29T is sensationalism not accounting.

btw I do not believe Warren agrees with it either, and Mike took on Bloomberg here wrt their sensationalism around this issue already back in 2009 I believe.

http://mikenormaneconomics.blogspot.com/2009/04/another-misleading-and-misinformed.html

Been there done that.

This is disheartening. Zero Hedge type stuff. Perhaps the Roubini influence...

Resp,

Tom Hickey said...

@ Matt

Agree.

Wh10 said...

Yeah this embarrassing for all of us....

beowulf said...

I would have likened it to debit card swipe fees. If banks had to pay the same 0.44% swipe fees that merchants had to pay prior to Dodd-Frank (which cut them in half), the banks would owe the Fed $127.6 billion in swipe fees, which it could pass through to Tsy as part of its net earnings rebate.

Anonymous said...

I wish Wray would say something about the solvency constraint on the Fed. I don't understand it. I was always under the impression that on MMT principles the Fed can't go bankrupt and has no solvency constraint.

And I agree with all of those who have criticized Wray's use of the drunken sailor analogy, and its confusion of continuously repaid overnight loans with a succession of separate acts of spending. It's really bad.

To me, this should be the bottom line: whether it was 29 trillion or the Bloomberg figure of 7.7 trillion, then question to ask is where did this money come from. The MMT answer? Nowhere. It was created from scratch by the Fed's power to credit accounts at their own discretion - to "use the printing press".

Did all that financial sector account crediting produce massive, runaway hyperinflation? Nope. Hardly any demand-pull inflation to speak of. Did all of the alleged fears of hyperinflation lead to a surge in government borrowing costs? Nope. The world is basically on the "dollar standard" - everyone wants dollar assets and the Fed controls the interest rates for those assets.

Now for just $1 trillion you could pay every unemployed person in America a healthy one-year salary. So were is the bailout for the unemployed? Why does the printing press exist for the banks and not for the rest of us?

Now at this point, you can't really blame Ben Bernanke. Despite the loose talk about "helicopter drops", the Fed is not authorized under the US system to spend money on the hiring of Americans to produce goods and services. That's Congress's job - Congress has the power of the purse and the Fed is constrained to lend money to banks and purchase assets. But Congress could at any time establish a special Employment Crisis Account for the Treasury Department at the Fed, and could authorize - that is, order - the Fed to credit that account to the tune of One Trillion Dollars.

Ralph Musgrave said...

Wray makes a mistake when he agrees “with the Chairman that a tally should not include facilities that were created but not utilized”.

A bank backed by “not utilized” facilities is more credit worthy than one which is not, which enables the bank to borrow at an artificially low rate of interest. Indeed this is the whole basis of the implicit tbtf subsidy. According to the UK’s Independent Commission on Banking, the tbtf subsidy is worth well over £10bn a year to UK banks: that’s about £150 a year for every UK citizen.

wilwon32 said...

Perhaps someone could explain why several of the above comments suggest that LR Wray has written/claimed something (re the nature of the FR's past actions) wrtw your understanding of MMT is at odds. My understanding was that he defined those actions which defined unauthorized FR activities.

Are your concerns related to the possibility that the guy who 'wrote the/a book' really doesn't understand keystrokes? Is it possible that his remarks were based upon his coworkers employment of what he considers a legitimate correction of the claims by the Bloomberg critics claims wrt %7+ trillion of unauthorized actions?

By the way, does anyone think that the concepts promoted by the 'MMT advocates' ever entered into the decision making concerns of those who actually decide/act at the FR or within the Executive Branch of the government of the US? Why is that?

Tom Hickey said...

For me the problem lies in implying that the banks were "bailed out" to the tune of 29T. That is too non-specific and needs to be qualified, e.g., The cumulative lending and guarantees, including rollovers, extend over the period (dates) totaled (sum).

To say that the bailout amounted to 29T without qualification suggests that the Fed was on the hook for that amount at a particular point in the period, which is not true. Hence the objection.

However, I agree that the cumulative figure with rollovers and guarantees to Wall Street is highly significant anyway in the present discussion, in that Main Street got bupkis. One group in society could go to the well for liquidity to tide them over a crunch (even though some were technically insolvent) while another group did not, hence, because actually insolvent and incurred massive losses.

This is a lot of what the protests are about.

Tom Hickey said...

The larger issue is "forbearance," actually favors, for the few (privileged) and very little to nothing for the rest ("the little guy"). It was not only the Fed, but also the president, Congress, the SEC, the FDIC, the FASB, etc., all of whom rushed to the aid of the few and left the rest hanging out to dry.

Now the Fed is getting the brunt of it, but there was plenty of blame to go around, in the process of creating a double standard in a two-tier system.

Just why are some to big to fail, and not only domestic firms, while a total of millions of citizens are not? This is the issue, and the Fed is at the center of it now, rightly or wrongly.

wilwon32 said...

It would appear that TI Palley's analysis, as far as it goes, illustrates at least one of the critical characteristics dear to the heart of MMT advocates:

Euro lacks a government banker, not lender of last resort
December 9, 2011 12:30 pm by Financial Times
By Thomas I. Palley

http://blogs.ft.com/economistsforum/2011/12/the-euro-lacks-a-government-banker-not-a-lender-of-last-resort/#axzz1g31Gizzm

However, I suspect that a deliberate picture of the big story wrt MMT will await the recognition by its main advocates that the concepts can only be comprehended as an appropriately qualified package. In the case of Europe, it may be that even such concepts as that suggested by Palley may have to await a reeducation/demise of the EM/CU elite's technocrats.

Tom Hickey said...

I think that the MMT analysis is much more explicit than Palley about the need for a fiscal authority (Treasury and political mechanism for appropriations) in addition to a CB. The EZ has a CB, but it has been hobbled, and there is no fiscal authority corresponding to the monetary authority. Without fiscal union, the euro is eventually toast, or else Europe will be an economic basket case, which is the opposite of why it was formed as a counterbalance to the US, China, and India in the 21st century.

Tom Hickey said...

Prof. James Hamilton answers Randy at Econobrowser and Randy comes back in the comments. I posted in the link as an update to the original post if you want to take a look.

confused said...

Can someone clarify this for me please?

Consider the following scenarios:

1) Bank A takes out an overnight loan for $10 from the Fed on day 1. On day 2, Bank A can't pay it back. The Fed then 'rolls over' the loan, which effectively gives Bank A more time to pay. Bank A pays $10 back the next day (day 3).

2) Bank B takes out an overnight loan for $10 from the Fed on day 1. Bank B pays it off on day 2. Bank B then takes out another $10 overnight loan on day 2. Bank B pays $10 back on day 3.

These two scenarios seem different to me. Scenario 1) seems less plausible a scenario to count the overnight loan as another loan. Scenario 2) however, the Fed actually made 2 loans of $10.

What's happening in the actual data being anaylzed? 1)? 2)? Both? Should both only be counted as $10 total lending?

What if Bank C borrowed $10 in January. In March, it borrowed $30. How much total lending did the Fed do for it?

confused said...

Then there is the other scenario where the Fed lends a bank $10 for 3 days. I see this as definitely the same as scenario 1). But it's less clear that it's the same as scenario 2).

Matt Franko said...

Confused,

Consider that it doesnt matter.

Look the whole bubble thing was financed by the commercial paper market what Gross called the "shadow banking system" ooooooh! scary!

That industry financed at say 30 day repos or whatever and the borrowers DEPENDED on getting rolled over at the end of the 30 days. When the deficit got too small in 07 and the Financial Obligations ratio went to all time highs AD crashed and the commercial paper market stopped/froze up and nobody who depended on it could get funded hence GFC.

So the Fed had to throw an alphabet soup of emergency facilities together and emergency convert a bunch of Broker-Dealers who depended on this type of funding to actual banks to be able to lend to them (exception GE and perhaps AIG) as lender of last resort.

Fine, WHO CARES! The incompetence is that the Fed let this happen in the first place and should have seen it coming if they were competent regulators. All this who lent what to who when and how many times is utter non-edifying bullshit that is not helping. They dont know how a FFNC system runs and we've been using one for at least 30 years.

We have incompetent, perhaps some also corrupt MORONS running things!

This is the scandal.

Resp,

Matt Franko said...

Tom,
The Bloomberg article that Hamilton references at Econbrowser was I believe the original article by the late Mark Pittman that Mike backed them down on like 2 years ago now. See the link in one of my comments above to one of Mike's old posts.

This is like ancient history for Mike Norman Economics.

I'd like to see MMT get back on to the mission of educating the world about the truth of running a FFNC system ASAP. Let's move on with haste. People are killing themselves over these issues that MMT knows how to set right. This is valuable information for humanity we need to get back on message fast.

In a hole: Stop digging. Warren picked a bad week to take a boat ride.

Resp,

Dan said...

I got to agree with Matt (as well as Tom to an extent). The Fed should be more transparent, deal with conflicts of interests, and there should be more explicit rules contained within legislation that doesn't simply leave bureaucrats so much discretion that they can be bought and sold. But the myths that the Fed is causing hyperinflation through open market operations/QE and that the lender of last resort function/discount window are debasing the currency is a big step backwards and a distraction.

The bigger issue now is the imaginary constraints we've imposed on ourselves which preclude us from doing the right thing and having a fiscal policy that addresses the issues of unemployment and price stability.

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