MMT gets a mention.
Kind of astounds me that John Hussman thinks that a modern central bank can become insolvent operationally when it is the entity that controls the currency unless there is rule imposed politically that prevents negative equity. Operationally, there is no constraint on a central bank with negative equity since it cannot face a cash flow (liquidity) problem as currency issuer.
Animal Spirits Page
The Fed is (probably) insolvent; bank margins to suck more
Benign Brodwicz
15 comments:
If you look at the Fed's H.4.1 listing of factors, they have everything listed there at "face value" not "market value" so it appears they make an adjustment to the "factors" and associated RBs BEFORE they list the face value of the securities they acquire on their report...
iow if they buy a UST with a "face value" of 100 for 98, they put in in the H41 at 100 and adjust RBs for the 2 before they list them on the H41... same if they were to buy them at 102...
this is why under the QE they buy the most recently issued USTs because they go off at/near 100 and this process is less disruptive to RBs in the system...
iow to buy a 7 yr UST they dont buy a 30 year bond issued 23 years ago that might be selling for 125 or whatever... too disruptive to RBs...
Treasury (and Agencies) redeems at 'face value' so when the Fed stops buying under the QE and Treasury (and Agencies) starts to redeem at face value and the Fed portfolio starts to run off, the Fed will not "take a loss" even on paper...
This headline here is absurd...
rsp,
He must think that accountants can become insolvent too, and run out of numerals to account with.
Maybe one of his math classes ran out of numerals too, and couldn't do any more calculating!
Can somebody show him the DR Other Assets, CR Shareholders Funds trick.
"iow if they buy a UST with a "face value" of 100 for 98, they put in in the H41 at 100 and adjust RBs for the 2 before they list them on the H41... same if they were to buy them at 102... this is why under the QE they buy the most recently issued USTs because they go off at/near 100 and this process is less disruptive to RBs in the system..."
By necessity the Fed has also bought a lot of relatively high coupon debt at significant premiums to par. If they unwind QE buy selling off their balance sheet via reverse repo they create the mother of all bond market sell offs and incur substantial losses. On the other hand if the Fed just allows its Treasury holdings to mature and roll off, everything they bought at above par will incur a loss.
Operationally speaking the Fed may not be subject to actually taking a loss because they create the money. However, politically speaking the optics would be horrible and I suspect Congress would seize upon the opportunity to reign in and/or end the Fed as we know it.
Ed where is your evidence that they have bought "a lot" of high coupon debt above par?
And you miss my point completely as what you can see implied in their H41 is that even if they pay above par, they do an associated reserve balance adjustment BEFORE they record the entry in the H41 because everything there is LISTED AT FACE VALUE... not market value...
iow if the pay 105 that puts 105 RBs into the system, so they drain 5 in another transaction for instance they pay 95 for another transaction that they post at 100 to offset this premium paid...
I dont see any other way they could do this if the policy is to record the H41 factors at "face value", what if they dont pay "face value"?
they have to do some sort of related RB adjustment before the H41 recordation at "face"... otherwise they couldnt record it at "face"...
rsp,
Ed, what's wrong with you? I think you have been listening way too much to Peter Schiff these days.
Are these facts that you are stating or, just your opinion? Please clarify. Matt just explained the facts to you.
"end the Fed as we know it"
and replace it with...?
and replace it with...?
Free banking or PM?
Never going to happen because then the banks would be on the hook as they were when there was no central bank. The Federal Reserve Act of 1913 was a consequence of the Panic of 1907, when J. P. Morgan acted as the central bank in providing liquidity from private capital.
"Ed where is your evidence that they have bought "a lot" of high coupon debt above par?"
Matt - When I was working at Thomson Reuters I created an EXCEL spread sheet to record every single Fed purchase of Treasury debt done in QE2. I wanted to keep track of of the DV.01 of the QE2 portfolio to quantify the US$ risk for a basis point change in Treasury yields for the 5-6 year maturity bucket which was average duration of the holdings.
I may be imagining it or having an episode of selective memory, but my recollection is that the Fed bought a good many seasoned issues that were priced above par. If I am mistaken, then I will have egg on my face and will concede my error. I may still have the spread sheet and if I can find it I will gladly share it with anyone who is interested.
FYI.... I have located the 8 spread sheets I created to track the Fed Permanent Open Market Operations ( POMO) for QE2 and most of the individual Treasury notes and bonds were purchased at a premium to par, and some high yield coupons at a significant premium to par. The spread sheets have live data links for individual cusips via Reuters 3000Xtra platform, which has since been replaced by Reuters Eikon. However, anyone using Bloomberg could replace the links with Bloomberg links.
Ed that is interesting information I dont doubt your data....
But how do they make the adjustment in RBs if they for instance buy an issue for 110 but then post it on the H41 as "face value" which I assume would be 100?
When they credit the non-govt sector entity for the 110 then 110 of RBs are created in the system... then they record it at 100 so how do they do that?
Seems to me they would have to drain 10 in another associated transaction... how do they drain reserves? Sell bonds I guess..
iow they have an existing portfolio so if they pay 110 for an issue (buy the bonds) and similtaneously sell some previously held bonds for 10 then they end up with a net transaction of 100 for the whole transaction...
So at the end of the day when they close the books they end up with 100 face value more of bonds affecting reserve balances (paid 110 and sold another 10, put the new ones on the H41 at 100..)
Dont necessarily understand how they would do this if they paid LESS than face for the securities... as they would have to do an "add" to the 98 they might have paid... maybe they never pay less than 'face'? Do you see any data in your Excels where they paid less than 'face value'?
rsp,
"But how do they make the adjustment in RBs if they for instance buy an issue for 110 but then post it on the H41 as "face value" which I assume would be 100?:
Matt - In my experience, it is common to denote fixed income holdings at face value, because market value fluctuates day to day, and even minute to minute. I'll have to go back into the spread sheets to see if the pre-announced Fed purchases jives with the face value of the securities or the market value. In any event, the reserves created by the Fed to purchase the Treasuries would have to reflect the market value, i.e. price paid for the securities, not the face value of the bonds.
How is this booked. If the asset acquired is booked at face value, then the liability side has to match it for the account to balance.
"How is this booked. If the asset acquired is booked at face value, then the liability side has to match it for the account to balance."
Tom - There ought to be a simple test. QE2 was for a nominal amount of $600 billion. If the prices paid for all of the Treasury securities adds up to $600 billion, then I guess we have our answer.
"Do you see any data in your Excels where they paid less than 'face value'?"
Yes, but most of the asset purchases were at a premium to par. This should make sense when you think about it because the Fed was (and still is) purchasing every outstanding Treasury security that was not nailed down and interest rates had come way down relative to the levels that most of the securities had been issued. I think the securities that were purchased below par had mostly been issued shortly prior to the start of QE2 when interest rates were lower. Don't forget that the commencement of QE2 caused interest rates to skyrocket because traders perceived that the Fed was printing money and so they hit the sell button for Treasuries and the UD$ and at the same time bought equities, commodities and credit instruments, (RISK ON). Here's my take in a video I made as QE2 was winding down.
05/13/11 QE2 End Will Send Long-Bond Yields Down.... http://reut.rs/iSgCfl
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