Thursday, May 24, 2018

Fed modifying IOR policy


Fixing their potential (to them) bankruptcy problem due to having to potentially pay an IOR amount that would be higher than their portfolio income amount.  Looks like they are going to actually codify a new Fed policy whereby they must run the IOR at ALWAYS a rate somewhat below their FFR; insuring they will always have enough net portfolio income to both pay the IOR and operate their Federal Reserve System:


Separately, Fed policy makers backed potentially making a “small technical adjustment” of setting the interest on excess reserves, or IOER, rate “modestly below” the top of the federal funds target range to help keep the effective fed funds rate “well within” range.

Yeah "well within range" of them always having "money!" ...  LOL!

This potential (to them) bankruptcy was a big potential problem that has been eliminated from the realm of possibility (for us)... will green light any future rapid rate increases without jeopardizing (to them) their solvency due to a lack of net income during any period.







34 comments:

Ralph Musgrave said...

As Warren Mosler argued, a permanent zero interest rate would be best. Put another way, the GDP maximising rate of interest is the free market rate, with the central bank confining itself to issuing enough dollars to keep the economy working at capacity, while offering zero interest to those holding that money. Least I think that was what Warren meant….:-)

Andrew Anderson said...

As Warren Mosler argued, a permanent zero interest rate would be best. Ralph Musgrave

Actually, the MOST the inherently risk-free debt of a monetary sovereign should yield is 0%* and that's for the LONGEST maturity sovereign debt (e.e. 30 yr US Treasury Bond).

Since account balances at the Central Bank (a.k.a. "reserves" in the case of the accounts of banks) have the shortest possible maturity wait (0 wait) the interest on them should be NEGATIVE with, of course, an individual citizen negative-interest-free exemption up to, say, $250,000.

*To avoid welfare proportional to account balance.

Andrew Anderson said...

Shorter, we should have a permanent Negative Interest Rate Policy (NIRP) except for individual citizen accounts up to, say, $250,000.

Matt Franko said...

Well they are obviously not doing that Ralph so competent people should be monitoring what they actually are doing ...

Tom Hickey said...

As Warren Mosler argued, a permanent zero interest rate would be best. Put another way, the GDP maximising rate of interest is the free market rate, with the central bank confining itself to issuing enough dollars to keep the economy working at capacity, while offering zero interest to those holding that money. Least I think that was what Warren meant….:-)

I believe so, too.

Added to this is using fiscal policy instead of monetary policy, with fiscal policy set by SFC macro modeling, functional finance and MMT JG setting price anchor tied to the price of labor and mopping up residual UE after automatic stabilization.

Andrew Anderson said...

I believe so, too. Tom Hickey

Then what should yields on longer maturity sovereign debt be? Positive? Or else who will buy them if they can get 0% for 0 wait account balances at the Central Bank?

If you say positive then you're in favor of welfare proportional to account balance, i.e. welfare for the rich or "corporate welfare" according to Professor Bill Mitchell.

Tom Hickey said...

Warren Mosler's policy proposal includes no issuance of government securities beyond short-term bill. that would effectively serve as large denomination cash substitutes.

So "safe assets" would still be available, but without subsidizing a parking place.

Andrew Anderson said...

Warren Mosler's policy proposal includes no issuance of government securities beyond short-term bill. Tom Hickey

And why should a bank buy a longer maturity wait for 0% when they can get 0 maturity wait for 0%?

So Mosler still seems to be in favor of welfare proportional to account balance.

Andrew Anderson said...

that would effectively serve as large denomination cash substitutes.
Tom Hickey

So the rich can escape the $250,000 insured deposit limit FOR FREE? Or even worse, get paid for it?

Tom Hickey said...

With ZIRP, a 30 bill would be issued at very close to 0%, making it a cash equivalent.

Tom Hickey said...

The 250K deposit limit is virtually meaningless since one can have fully insured accounts at multiple institutions.

And the 250K is a policy variable.

Andrew Anderson said...

The 250K deposit limit is virtually meaningless since one can have fully insured accounts at multiple institutions. Tom Hickey

Which is one reason why government-provided deposit insurance should be abolished in favor of inherently risk-free individual citizen accounts at the Central Bank itself - said accounts to be negative-interest-free up to, say, $250,000.

Andrew Anderson said...

making it a cash equivalent. Tom Hickey

No, since cash can be stolen, not so with an inherently risk-free "savings account" at the Central Bank.

If the rich want to hoard risk-free they should have to pay for it - especially for the shorter maturity debt of a monetary sovereign.

Andrew Anderson said...

With ZIRP, a 30 bill would be issued at very close to 0%, Tom Hickey

But still positive, eh Tom? Still welfare for the rich?

Matt Franko said...

AA, the rich own shares of firms...

Andrew Anderson said...

No, since cash can be stolen, aa

Not that physical fiat itself should be allowed as a means to escape negative interest for large holders of fiat.

Tom Hickey said...

in banking finance, "cash" means more than currency in circulation. It includes deposit accounts and often short term treasuries.

When it is said that Apple has a billion dollars in cash it doesn't mean bills in a vault or safe deposit box.

Tom Hickey said...

But still positive, eh Tom? Still welfare for the rich?


That's Warren's proposal. Complain to him about it.

Andrew Anderson said...

It includes deposit accounts and often short term treasuries. Tom Hickey

Being inherently risk-free, account balances at the central bank and other debt of a monetary sovereign should yield AT MOST 0% to avoid welfare proportional to account balance, i.e. welfare for the rich.

Complain to Warren Mosler? You're the one who said "I believe so, too."

Mosler is a banker or at least an ex-banker, so who should expect him to know ethics from a hole in the ground?

Tom Hickey said...

Complain to Warren Mosler? You're the one who said "I believe so, too."

I said to Ralph that I believed that his summary of WM's proposal was correct.

I did not say I agreed with it. But I do.

Irrelevant though. It is not going to happen anytime soon.

Andrew Anderson said...

It is not going to happen anytime soon. Tom Hickey

Nor should it, being ethically indifferent at best.

OTOH, a responsible, ethically based solution should be irresistible since who will dare oppose it? At least publicly?

So the MMT crowd should start thinking along ethical lines instead of how to perpetuate the current unethical system.

We're going to have a just system eventually anyway or do you think Jesus Christ will nod and wink at bankers when He returns? Or have you concluded that matters of justice may be safely ignored?

Tom Hickey said...

If we are taking along ethical lines, the firs thing that has to go is the class structure.

Everyone in the West is agree that the caste system is a huge problem for India, but they can't stand back and see the same for the bourgeoise liberal West.

Matt Franko said...

“the firs thing that has to go is the class structure. “

I vote for elimination of the moron class...

Ralph Musgrave said...

Andrew,

You say “So the rich can escape the $250,000 insured deposit limit FOR FREE?” My answer is “yes – and there’s nothing wrong with that”.

Reason is that money placed with a central bank (assuming we’re talking about responsible countries) is inherently totally safe (or as near totally safe as is possible in this world).

That’s in contrast to insured deposits with commercial banks, where the whole process of deposit insurance is very questionable. E.g. James Tobin had doubts about it.
“If the rich want to hoard risk-free they should have to pay for it.” Normal procedure surely is to charge for something only where there is a cost, and to relate charges fairly closely to costs. E.g. the rich and poor pay the same price (at a given shop) for bread, beer, etc etc.

Also, anyone who hoards money at a zero rate of interest actually pays a tax equal to the rate of inflation. So there are arguments both ways on your “tax the rich” idea.

Andrew Anderson said...

If we are taking along ethical lines, the first thing that has to go is the class structure. Tom Hickey

How do you think labor and capital became distinct classes in the first place?

Surely government privileges for private credit creation played a major role.

And surely, the proper abolition* of those privileges could result in a great decrease in relative wealth disparity.

*E.g. The proper abolition of government-provided deposit insurance should require a huge and equal fiat distribution to all citizens to provide the necessary reserves needed for the transfer of at least some currently insured deposits with the banks to inherently risk-free accounts at the Central Bank itself.

Andrew Anderson said...

My answer is “yes – and there’s nothing wrong with that”. Ralph Musgrave

Beyond initial capital formation and legitimate liquidity needs, money beyond one's consumption needs should be invested (including charity), not hoarded. See Matthew 25:14-30 (The Parable of the Talents) for confirmation of what the Lord thinks of money hoarding.

Tom Hickey said...

@ AA

The upper class are the government, and those not upper class that manage to get into government as cronies or minions, are a subset of the upper class. They operate on class interest, not ethics or morality. Today, what is legal is moral and the upper class makes the laws and administers them.

There is no such thing as government or society other than as sets of sets and as systems constituted of subsystems, elements, and their relations. The arrangement of relationships distinguishes them from sets.

Always and everywhere, governments have been constituted of members of the ruling class along with their cronies and minions.

This is the structure that needs to be broken before an actual democracy can become operational.

Moreover, there is no inherent reason that an actual democracy would be ethical either.

In the final analysis it comes down to the level of collective consciousness and that cannot be legislated.

Tom Hickey said...

I should specify that class is an analytic concept in social science. There are different approaches to it.

Wikipedia/Class analysis

I prefer to look at the phenomenon systemically and view class in terms of networks and networking. Think secret handshakes, for examples, as well as shibboleths. There are signals of inclusion and signals of exclusion.

In the end, one of the big determinants of inclusion is wealth (ownership), since being in the upper class requires displaying a degree of lifestyle that those of inferior classes cannot access for lack of affordability. But there are others, such as birth (old money), education ("Oxbridge"), etc. that establish the basis for some networks. This keeps nouveau riche off the social register, and so they don't get invites to upper class functions where networking happens just being being seen there.

Andrew Anderson said...

In the final analysis it comes down to the level of collective consciousness and that cannot be legislated. Tom Hickey

So it's unhelpful that the MMT crowd is almost* clueless themselves wrt to the ethics of fiat and credit creation.

*Bill Mitchell among the least clueless, to his credit, while Bill Black calls the banks "our banks" and Yves Smith calls equal protection under the law wrt accounts for all citizens at the Central Bank "balmy."

Andrew Anderson said...

Also, anyone who hoards money at a zero rate of interest actually pays a tax equal to the rate of inflation. Ralph Musgrave

Price inflation is not the proper means to penalize fiat hoarding since it penalizes the poor too.

Instead the proper method is to apply negative interest to individual citizens account balances above, say, $250,000 and to all non-individual citizen account balances starting at $0*.

*Since, as Tom hints at, multiple accounts could be used to circumvent negative interest. Hence, negative-interest-free accounts should be limited to one per citizen.

Andrew Anderson said...

And the idea is not to "tax the rich" but that they should have to pay to use the inherently risk-free debt of the monetary sovereign, including for account balances at the Central Bank, aka "reserves" in the case of banks.

jrbarch said...

”How do you think labor and capital became distinct classes in the first place?”

I think there are two different types of ‘intelligences’ at work there. The more evolved manipulating the less evolved, selfishly. Materially focused and ‘competent’.

I think however the word intelligence should apply to a mind that is focused towards the self; is aware of the heart. The first signs of that are ‘conscience, kindness, premonition, intuition, reminiscence, unity’ – new wine in old bottles. This begins to leaven and reorient mind, and raise the individual and by aggregate, collective consciousness; and grows into an awareness of the secret every human being holds. Intelligence needs the light of love to become itself. Peace is the only thing we haven’t tried yet. There is the societal human being; then there is the real one. The self sweeps out the old to grow closer to the real. It sweeps civilisations before it; in cycles, aspect and attribute.

Andrew Anderson said...

The more evolved manipulating the less evolved, selfishly. Materially focused and ‘competent’. jsbarch

If they are so evolved, they shouldn't need to steal via government privileges and should be ashamed to do so.

And bankers aren't more evolved; e.g. Keynes said "A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him."

jrbarch said...

eg. A fresh perspective: Entrevista Prem Rawat - RADAR El Corte Ingl├ęs