Steve has written a post on quantitative easing, with an admirable bent towards the importance of accounting in that context:
Steve Keen: Is QE Quantitatively Irrelevant?
He says, “I’m open to correction that I’ve wrongly characterised what banks do or how QE works here.”
I think there is definitely a range of mischaracterizations in Keen’s post about how the banking system responds to QE in both operations and accounting. So I’m going to offer some comments, as invited. While his construction departs from the actual case, I do have respect for the general direction of his pursuit.Monetary Realism
The Accounting Quest of Steve Keen
JKH
3 comments:
JKH: "By way of contrast, the Fed does spend from equity (at the margin, via the income statement) when it pays for its own types of accounting expenses – salaries, purchase of regular goods and services in running its daily operations, and even payment of interest on reserves. These items are recorded as expenses on the income statement of the Fed."
As I suspected they "live off of" their portfolio income... so the QE portfolio is a way for the Fed to survive, otherwise they would quickly become "bankrupt" in their own view if their portfolio income was insufficient to "pay the bills" so to speak, and have some 'profits' left over to contribute to the UST for 'deficit reduction'...
These flows all come from Treasury via 'automatic appropriations' of interest on UST securities, and Treasury guarantees on the MBS... rather than a direct appropriation... the Fed imo will never put itself in the position of having to ask for an appropriation from Congress... or 'negative equity' as in their own minds at that point they will be 'bankrupt'....
rsp
Matt from what I've read, they don't really think that being in negative equity is equal to bankruptcy. But they believe it would 'look bad' and make the central bank loss credibility. Have read this several times over the last years coming from various CB's and/or the BIS.
This is the problem, a bunch of fools managing public institutions like if they were households or corporations. So we don't have only the private sector increasing their net worth and equity position, but we even have central banks competing for this. At least CB's can set price floors on financial assets so it's hard for them to get into negative equity w/o trying hard, although this is dangerous too because sending the wrong signals ("pull out any shitty product you want, create a bubble, and we will backstop it as buyers of last resort").
Ignacio,
I was wondering if this was leading them to keep current rates at zero... iow, if they "taper", but keep rates at near zero, I like Mike S at MR think there would probably ensue a big bond rally and they could face large prepayments in the MBS and their portfolio income could crash...
Not sure if it would crash to levels where they no longer could "pay the bills" but it might get tricky for them..... have to think this thru some more...
rsp,
Post a Comment