Friday, November 25, 2011

Randy Wray takes on the Fed


I must admit that I’ve long been skeptical of [President Andrew] Jackson’s followers, who insist we’d be better off without a central bank. Surely we need someone to set the overnight interest rate, we need check clearing, and we need a lender of last resort. But maybe it’s time to think about an alternative to the Fed.
Read the whole post at Economonitor
Time to Abolish the Fed? Maybe Andrew Jackson Was Right, After All

For the record: Some MMT proponents have been recommending for some time that the central bank and treasury functions be formally consolidated under the Department of the Treasury.

45 comments:

Dan Kervick said...

I hope Randy Wray isn't going Austrian on us. Because it sounds like he is saying the Fed can go bankrupt.

Matt Franko said...

Dan,

Many on the political left have what I view as a 'blood lust" against what they view as an entrenched and corrupt interest in and around the banking system.

I hope Wray is not falling into this same trap.

The system is corrupt, no doubt, and many people should go to jail, but the problems our country faces are much deeper than this, more ellusive apparently.

There is nothing wrong with having a central bank per se, in fact I look at it as probably a good thing, but it has to have true "public purpose" in mind.

Jackson lived in a different era. One in which we had in comparison to today, archaic information technology.

If we can get the right people in these positions of authority, the system can function pretty much as presently configured with a few tweaks.

Resp,

Tom Hickey said...

I guess we will have to wait for further elaboration on this, but I didn't read it that way. MMT'ers have been calling for a revision of the Federal Reserve Act to bring it into line with actual practice and to eliminate obvious issues like conflict of interest, and unaccountability, etc.

Dan Lynch said...

Wray is on Bernie Sanders "dream team" to propose reforms to the Fed. As such, he probably has inside information that he is not ready to share. For example, he hinted that the bail-outs were actually $29 trillion, not the $16 trillion reported previously.

As Matt said, central banks play a useful role, the trick is making the central bank work for us and not for Wall Street.

Dan Kervick said...

@Tom

Here's the part of Wray's column I was looking at:

And, third, the Fed’s activities—especially those undertaken in the aftermath of the crisis—expose it to possible losses. I am not worried about the potential reduction of the portion of profits it pays to Treasury. While that could be a minor political issue (and is almost certain to happen in the next couple of years), the bigger problem would be massive losses on its portfolio of toxic waste assets and loans to bailed-out banks.

Over the course of the bail-out the Fed provided a cumulative total of $29 trillion of funds to troubled banks. (My Graduate Research Assistants Andy Felkerson and Nicola Matthews are finishing up their study of the Fed’s data, so the results to demonstrate this figure will be released soon.) To be sure, that is the total since the bail-out began; the amount outstanding at any point in time was much less—on the order of $2-4 trillion—since banks would borrow funds and then repay them. Still, the Fed was lending against just about any trash banks had, so the potential for losses was significant.

Further, the Fed also bought a lot of the trash. We do not know what, if any, losses the Fed has already absorbed, much less what it could incur over the life of the toxic waste. It is probable that the Fed is engaged in the same “extend and pretend” accounting that is rampant among the banks. And the Fed has apparently been pushing some of the trash onto the GSEs (Fannie and Freddie)—which still puts Uncle Sam on the hook. So there is still an unknown but reasonably high probability for big losses. Are we going to let the Fed go bankrupt? Will we ask its member banks to kick in more capital? Or will the Treasury be asked to cover the losses? I think we know the answer.

My understanding is that the Fed can never be resource-constrained in making good on any liabilities it possesses, and could operate perfectly well without capital. So I don't understand the frightful scenario Wray has in mind.

The balance sheet of a central bank is a quasi-fictional entity that seems designed in part to mislead the public about the real nature of monetary operations by making the central banks look like any other bank.

Tom Hickey said...

Dan, I believe that Randy has been using the larger figure for some time. Barofsky was estimating 23.7 T back in mid-2009 (Bloomberg)

Dan Kervick said...

@Matt

I also think a central bank, or at least a central government monetary authority, is a useful thing for promoting financial stability and prosperity - as long as it does its job. No "free banking" for me. That just seems to me like a recipe for even more instability, unpredictability and flim-flam. Plus it allows all sorts of private sector entities to make their own socially useless seignorage profits.

However, I'm inclined to think our current system should be both more transparent and more subject to direct democratic oversight and policy influence. I don't think we need the very high degree of separation and independence we have with the current system. It seems to me there ought to be a more efficient and less byzantine means of permitting countercylical expansions or contractions of the federal deficit, without requiring the workaround of issuing debt to the private sector.

I'm also interested in thinking about the possibility of a public option in banking. Right now, it seems to be that the financial sector is a grossly inefficient and bloated wealth vacuum. It's hard for me to believe we can't get the same or better service from the financial services sector without paying all those costly bonuses and salaries.

selise said...

"If we can get the right people in these positions of authority"

and how are we to do that when even members of congress say that wall street owns our government? (and who is "we" anyway?).

when the system itself selects for corruption and a public purpose that does not serve the public... then maybe it is time to consider changes to the system itself.

......

randy is one of the four in senator sander's committee who will be making recommendations to reform the fed.

i for one will be very glad if they do not pre-compromise and instead make the case for full -- not partial -- measures.

there is public support for major change. these are not left/right issues -- there are populists (left right and center) who do not think the financial industry in general or the fed in particular need only a few tweaks and changes in the public figure heads in order to affect real change.

Tom Hickey said...

Dan, I believe that the Fed does have a capital requirement imposed on it politically, the (false) idea being that the Fed assets "back" its liabilities. This would mean a bailout if things go south in the way Randy says.

NeilW said...

Why not simply eliminate the central bank and make it an executive arm of the Treasury?

It can then provide the liquidity to those with credit licences and resolve bust institutions.

Then it is as clear as day that the Federal government is the source of money and that it is elected individuals that control it.

Shaun Hingston said...

Seems simple to me.

Interest rate should be a popular average and members should be subject to popular vote.....

It's not rocket science.

googleheim said...

Fed was made indie b-cause similar to supreme court it needs some indepedence from elected wack-o's who know nothing

Are you trying to make it easier to go back to gold standard ?

We won the cold war with this set up afterall.

Shaun Hingston said...

Gold Standard??

Why can't people see that this notion of independence is being used as a justification between the people and the elite????

If after the last four years you still think that we need 'independent bodies' which means free from the influence of the masses, then we are doomed to commit the same mistakes.

The notion of independence should only be used insofar as determining the objectives of Governing bodies. If there are two conflicting objectives that are managed by a governing body, then these objectives need to be abstracted into two separate bodies, each subject to a separate popular vote.

This means there would be two elections, one for congress and one for the FED board, and maybe another determining the interest rate, although that would need to happen more regularly.

This idea of 'independence' has been used to justify control of the FED by banks.

The idea of removing the FED and having its operations taken over by Treasury is inadequate. There needs to be a separation of monetary powers, but each body must be subject to popular vote.

In today's age of modern communications there is no excuse!

This thing regarding removing the FED is just apart of the propaganda machine spreading misinformation to distract the masses from asking the real questions. And I must say that it even works well upon the MMT community.

Matt Franko said...

As far as "bankruptcy", here is the Fed's current Balance sheet:

http://www.federalreserve.gov/releases/h41/Current/

2,808 Total. It is mostly USTs (1,668), Agency's (107), Agency MBS (842) so right there is 2,617 that is 100% guranateed by the US Treasury.

All the "Maiden Lane" stuff only totals 38B which is well within 1 years so-called "profits" of the Fed so the Fed could liquidate these Maiden Lane things at zero and still probably return over 50B to the UST this year.

And Wray brings Chris Whalen of the IRA into this who remains way out of paradigm.

I would hate to see this Sanders thing turn into some type of out of paradigm "witch hunt".

@Seilse, Put Warren in as Fed Chairman and Mike in as the President of the FRBNY and most of all this goes away quickly with no changes to the laws imo.

Warren would politely tell Congress what they now had to do with fiscal, and Mike would set the term structure out to 30 years and keep it there.

Resp,

Tom Hickey said...

@ Neil

Folding the cb function into the Treasury has been floated by MMT economists in the past, and it might be the way Randy will propose to go in subsequent posts.

Tom Hickey said...

Fed was made indie b-cause similar to supreme court it needs some indepedence from elected wack-o's who know nothing

So the only choice is between wackos who know nothing and letting the foxes manage the hen house?

Tom Hickey said...

There needs to be a separation of monetary powers, but each body must be subject to popular vote.

In a capitalist economy, why not just let markets determine rates? The MMT proposal is setting the overnight rate permanently to zero. Then markets can determine spreads based on risk assessment.

Dan Kervick said...

I do understand that people trying to promote systematic monetary reform are going to have to reach out to potential allies. As Tom says, we'll have to see what the next two promised installments from Randy Wray like to see where he is going with this.

The Paulists and other Austrians will be hard to work with, because they continue to promote the absurd line that because our money comes from government it is "worthless" or "counterfeit". In proposing the cancellation of debt owed to the Fed (not a bad idea), Ron Paul argued that the reason the debt should be cancelled was that the money the Fed used to purchase that debt was counterfeit and the purchase was thus a "fraud". But there is nothing fraudulent about a sovereign government having ultimate authority over the creation and destruction of its money.

In my view these folks on the Paul/Tea Party right are partly responsible for our continuing economic doldrums. Many people who tilt this way believe, in some vague way at least, that the government is "broke" or "out of money". They believe, in an equally vague way, that since the government somehow sits at the apex of our economic system, that means America is broke or out of money. They are convinced that the Fed is the last linchpin in a colossal Ponzi scheme, and that when the Fed goes, all hell will break loose we all go into a massive depression. They also have very confused quasi-metaphysical ideas about the role of bank reserves in pace of spending, and the role of the sheer quantity of money - no matter where that money is an no matter what it's doing - in setting the price level.

People who believe these cranky Ron Paul theories become completely unwilling to engage in ordinary economic activity. They become obsessed with inflation hedging. They pour their money into gold or other fixed assets and hoard. They think everything is one the verge of collapse all the time. It's a terrible psychological atmosphere for business. Unfortunately, I suspect these crank theories are much more prevalent in the business world than people realize.

Now there is no doubt that much of the private financial sector was engaged in very speculative lending and Ponzi lending. But the government's money is not some kind of leveraged "credit" that can go bust if its financial assets don't perform. Nor is it some counterfeit voucher that "pretends" to be redeemable for some other kind of durable commodity even when it is not.

So economic ignorance matters. If we promote it, even for short term political gain, you can make matters far worse.

Matt Franko said...

Dan K.,

Seminal comments.

"So economic ignorance matters. If we promote it, even for short term political gain, you can make matters far worse."

I believe most political consultants recommend to always "stay ON message".

Resp,

Tom Hickey said...

@ Matt

Bringing in Chris Whalen just gives him cred. As you say, he is way, way out of paradigm, and he is supposedly "an expert" in finance. What a crock.

Shaun Hingston said...

In a capitalist economy, why not just let markets determine rates? The MMT proposal is setting the overnight rate permanently to zero. Then markets can determine spreads based on risk assessment.

Firstly I don't fully comprehend the outcomes of this solution, but I'll express some immediate issues.

Who decides which assets are eligible for funding?

Who decides how many people are the 'primary' dealers?

This still requires a political solution.

Tom Hickey said...

@ Dan

Agreed. Basic principle: Don't give crazy people cred. It will come back to bite you.

Tom Hickey said...

@ Shaun,

If Tsy issuance were ended since it is an unnecessary under the existing monetary system, the PD's would also be unnecessary.

Lenders and venture capitalists determine what assets are fundable at what rate or ownership percentage, based on risk/reward. That's how capitalism is supposed to work.

Shaun Hingston said...

What stops venture capitalists & lenders purchasing consumables?

Ryan Harris said...

In the modern anti-fed parlance, does 'bailout' include discount window type operations?

bosscauser said...

And while we are at it let's eliminate the Federal income tax. And then empty the halls of congress of politicians.

Why we're at why not make campaign contributions illegal for everyone we don't agree with?

And inaugurate Newt Gingrich so we can reform the marriage laws.

Hey, how about firing all the gang who lies to get into office including the black guy?

And while we are at it let's vote in Jesus for Fed chairman and make all these bad mans go away!

Now now I can be as utopian as anyone else on this site so what do you want to vote for?

Fed Chairman Bachman?

The best MMT can do at this time is to educate the guy on the street that cutting budgets takes money out of their pockets destroying their country's infrastructure and that people will tell them anything to get elected.

And that the Fed's primary function is to regulate the interest rate and control the money supply not buying up loans that unaccountable sleaze bags created.

However, many of us (yes, even on the right)believe that by doing so the Fed staved off the abyss of 1932!

Tom Hickey said...

What stops venture capitalists & lenders purchasing consumables?

They are the savers. They only consume from rent, never from capital.

Tom Hickey said...

In the modern anti-fed parlance, does 'bailout' include discount window type operations?

This is part of the central banks' operation as lender of last resort in providing liquidity. I don't have a problem with that in principle. But, as Bill Black has observed, this was often not ordinary liquidity provision to a solvent institution. The liquidity provision often masked insolvency. Those banks should by law have been put into resolution. They were not, and are not. That's a problem.

Shaun Hingston said...

They are the savers. They only consume from rent, never from capital.

I seem to be missing something. What guarantees that 'savers', venture capitalists & lenders, do not lend is such a way that drives up prices, causing demand-side inflation?

Tom Hickey said...

The culprits in creating demand side inflation are the financial institutions, not only banks, that lend imprudently for consumption and retail housing.

beowulf said...

The Fed could be put under control of the Secretary of the Treasury (separate from Tsy, just as the Marine Corps is separate from the Navy yet both answer to the Secretary of the Navy) by amending a single section of the Federal Reserve Act.
"Section 246 of Title 12, United States Code, is amended by striking the words ‘agent appears to conflict with the powers of the Secretary of the Treasury’ and replacing with the following: ‘banks is exercised’."
http://www.law.cornell.edu/uscode/uscode12/usc_sec_12_00000246----000-.html

And no the Fed can't go bankrupt since it passes its losses onto Uncle Sam (which can't go bankrupt either). In January, the Fed changed its accounting system so that any Fed losses are passed through as a "negative liability" to Tsy.
http://www.economicpolicyjournal.com/2011/01/hot-fed-hides-major-accounting-change.html

Since it doesn't count against the debt ceiling and the Fed can't and won't ever collect on it, its the legal equivalent of putting the losses on a rocket and shooting them into the Sun.

Tom Hickey said...

Here are the two versions

Present version:

Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control of the Secretary.

Proposed version:

Nothing in this chapter contained shall be construed as taking away any powers heretofore vested by law in the Secretary of the Treasury which relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested by this chapter in the Board of Governors of the Federal Reserve System or the Federal reserve banks is exercised, such powers shall be exercised subject to the supervision and control of the Secretary.

Tom Hickey said...

Since it doesn't count against the debt ceiling and the Fed can't and won't ever collect on it, its the legal equivalent of putting the losses on a rocket and shooting them into the Sun.

You have a singular way of putting things, Beowulf. :)

Mirabile dictu, a lawyer with a sense of humor.

beowulf said...
This comment has been removed by the author.
beowulf said...

"You have a singular way of putting things, Beowulf."

Thanks Tom, but to paraphrase Harry Truman, I just keep it real and they think its hell.
:o)

Ken said...

I'm wondering what the evidence is for the below statement, and which special Fed purchasing facility he's referring to? Anybody know of any refs?

-----

"Further, the Fed also bought a lot of the trash. We do not know what, if any, losses the Fed has already absorbed, much less what it could incur over the life of the toxic waste. It is probable that the Fed is engaged in the same “extend and pretend” accounting that is rampant among the banks. And the Fed has apparently been pushing some of the trash onto the GSEs (Fannie and Freddie)—which still puts Uncle Sam on the hook."

Tom Hickey said...

@ Ken

QE 1 was called "cash for trash."

Over at Winterspeak's JKH asserted that this was not fiscal because it was just risk assumption. I'm saying it was an intentional overpaying with knowledge that some of the assets would end up underperforming and others would end up worthless. That's basically an intentional transfer from public to private, and to call it something else is an accounting mirage.

Ken said...

Thanks Tom ... interesting thread. So the only program I can find that involved the Fed actually purchasing MBS was something called the "Agency Mortgage-Backed Securities Purchase Program", which purchased MBS from Fannie and Freddie. Stated purpose was to support the mortgage and housing markets. Total of 1.25T.

Is this what he's talking about? If so, do you know of any evidence that these securities were "trash", or is this just speculation?

Tom Hickey said...
This comment has been removed by the author.
Tom Hickey said...

Had to delete the previous attempt because I forgot to quote and missed it in the preview. Here it is again.

@ Ken



"Big news this week as the Republicans take control of the House of Representatives. On Wednesday, while we were all digesting the poll results, Dr. Ben Bernanke (and the Fed) voted to inject a $500 billion dose of “QE2” shock therapy into the debt-ridden corpse of our economy. In the doctor’s first round of treatment, known as “quantitative easing,” the Federal Reserve bought $1 trillion (yes, that’s trillion!) of defaulted, mortgaged-backed securities in order to save the chosen ones, large commercial banks like Citigroup and JP Morgan. (Goldman Sachs was saved by the AIG bailout.) Basically, the Fed bought mortgages at their full original value, and the banks got risk-free, interest-earning reserves."



There's a better way to stimulate the economy than backing up big banks



The Fed bought those MBS at above market value, knowing that many of them were dodgy, to get them off the books of the banks. That's a transfer in my book that doesn't go through the payments (fiscal) process. It's an end run around Congress as the fiscal authority according to Article 1, section 8.

Ken said...

Thanks ... although that author doesn't source the claim either, so I'm still skeptical.

If the MBS were agency backed, they couldn't really be trash from the perspective of the bank selling them, since agency backed securities had the implicit and later the explicit backing of US Govt, right? So purpose of this Fed program couldn't be to remove trash assets from the books?

Tom Hickey said...

The way I remember it is that uncertainty about the value of mortgage backing the MBS resulted an extremely low market bid. Holding the securities on the banks' books presented a liquidity problem and selling for what was bid would have presented a solvency problem. So the Fed overbid to acquire the securities. It was also pretty clear at the time that at least some of the securities would become worthless due to defaults of underlying mortgages. I am not clear that all the securities involved were government guaranteed.

I don't have documentation handy, but I am quite sure that Randy would have substantiation for his assertions. Why not head over to his blog and ask him directly?

Ken said...

The Fed itself says that all the securities in this program are agency backed. But you're right, I'm probably asking in the wrong place :-)

Tom Hickey said...

Ken, this just brings up the issue of whether the banks underwrote those dodgy mortgages knowing that they could pass them on and that other would stuck with the losses and defaults would ultimately be borne by Uncle Sam. Again, its a transfer to banks, in this case by the Treasury instead of the Fed, with a lot of unsuspecting investors getting screwed along the way.

Ken said...

That is probably so ... but this is supposed to be about the Fed. So I'm trying to be clear on what the Fed did or didn't do.

Of course, the question of whether the Fed should be able to buy things other than Treasury securities is still a legitimate one.