Tuesday, October 29, 2013

Now We've Heard Everything - Some Think That The Fed Needs A Bailout

   (Commentary posted by Roger Erickson.)



OMG! Yes, Maude, it's true. This raises the most dire spectre of all!!! The USA itself could run out of fiat! If that were to happen, who would be left to bail us out? Who and what would they have to defraud next, to make it look real? The US Constitution? Please, let's not take the idiocy that far.

As stimulus tab rises for Fed, worries grow it may require a bailout

Just when you thought the level of discussion could not sink further.

LA Times: "The Fed's bond-buying binge could put the central bank's finances at risk if interest rates were to rise sharply, critics warn."

Seriously? In a prominent US newspaper? With a straight face?

You couldn't make this stuff up! What's next? Bail needs an out? In case systemic fraud were to rise sharply? Coupled with an increase in ignorance about fiat currency operations? It could happen, you know.

So who are the geniuses espousing this view?

James D. Hamilton, an economics professor at UC San Diego."It's really pretty cut-and-dried as far as the arithmetic goes: If you buy bonds and interest rates go up, you're going to take a capital loss on those bonds. The more they buy, the bigger their balance sheet, the bigger the loss they're going to face."

Sounds like the organ responsible for generating his logic DID dry up! No intellectual capital left.

Rep. Mick Mulvaney, R-SC. "The Fed stands to lose a lot of money, and by a lot of money, I mean hundreds of billions of dollars. It is not hyperbole to suggest the next big bailout could be of the Federal Reserve."

Ooh! He means it. There's a lot of fiat involved in denominating Public Initiative. Somebody get his train of thought a track to run on. It's chugging, but obviously derailed.

Et tu, Ben Bernanke? "The bottom line is that for any reasonable interest rate path, this is going to end up being a profitable policy for the taxpayer" says spineless, pandering Ben, as he sinks further into the political quicksand.

Sounds like Ben Bernanke is the one bailing out! Seems he pines for his cushy job at Princeton, where he can just go back to writing his little papers, not responsible for even pretending to counter the Erble Logic that is leading his nation astray. Ben prefers to sit in a comfortable deck chair and play his violin, as the ship goes down? With a stiff drink? Anyone noticed if he's been drinking more lately? Maybe he's planning to move to Switzerland too, or the Cayman Islands.

Marvin Goodfriend, an economics professor at Carnegie Mellon University's Tepper School of Business. [Finally! Surely we can expect a bit more from people grounded in business, not just nominal economics?]

"In the short term, it's a money-maker. The borrowing cost is cheap right now. Those borrowing costs are going to rise."

Ok, guess not. Another hope dashed. Move along folks, no situational awareness to see here.

The last word goes to the venerable LA Times. "When interest rates begin rising, the Fed will have to pay a higher rate on bank excess reserves. That will eat into the Fed's bottom line."

Let me get this straight. The Federal Reserve, accountant to the Treasury of the USA, denominator of a growing nation's purely nominal records of Public Initiative ... has a bottom line of nominal? Perhaps in nom only? Where'd this come from? How do we turn out citizens like this with no remaining connection to reality? Is our education system now completely nominal as well? Real situational awareness is considered purely nominal?

The article goes on to quote the least authority of recent times, Peter Schiff. I won't bother dipping into his meandering path, as his skiff sails further beyond the bounds of reason. Maybe he'll drop off his imagined horizon someday.

Too bad the US electorate doesn't set a bottom line in situational awareness. We could use a threshold defining a minimal, survivable level for an informed electorate right about now. Our economists are advising us to tighten the nominal noose we've placed around our own economy's real neck. Even if this is just some eco-erotic game for economists, please stop now, before it's too late for everyone?

Since assisted suicide is illegal, surely citizens could plausibly arrest all orthodox economists, for promoting and abetting economist_assisted_national_suicide?


36 comments:

Unknown said...

Yes, the very thought of bailing out the counterfeiter-in-chief (despite the fact it can operate forever with negative Equity) makes me angry beyond indignation.

And how would it work in practice? Would the Fed buy US Treasuries (through the primary dealers) so the Treasury could turn around and give the cash back to the Fed as a gift? Or is the government to run a Depression causing surplus to get the cash?

Matt Franko said...

The Fed carries all of the US govt securities it purchases at "face value" on its H.4.1 Report so sorry morons, they do not take "losses" on the securities they buy... try again!

The Just Gatekeeper said...

Matt,

That's an interesting point. Could you elaborate a bit?

Matt Franko said...

Justin,

If you look at the Note (2) in this H.4.1 report:

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

At the bottom of Table I it states:

"2. Face value of the securities. "

So imo they must ALREADY do a small adjustment to RBs BEFORE they account for the securities at "face value" on the H.4.1 report... otherwise, if they pay a bit more or less than the actual "face value" of the securities and do not do another adjustment before accounting for the securities in the H41 like this, then the system will not balance...

This imo is also why they typically by mostly the most recent issued securities from the Dealers as those would trade closest to 'face value' avoiding the deep discounts/premiums of longer dated on-the-run securities so as to reduce this required adjustment as much as possible...

My 2 cents... I have never seen the Fed comment on this I am "reading between the lines" on this.

The Fed has already made RBs adjustments (up or down) to the 'face value' of the securities they are factoring and reporting on in the H41 imo...

Of course the morons will just say "that's cheating" or some other such nonsense... nothing we can do about that...

rsp,

Anonymous said...

The Fed doesn't get "bailed out". But the losses do translate into a "deferred asset" on the Fed's books, which is a claim on future remittances to the Treasury. Actual remittances to the Treasury would thus cease until the balance sheet is in the black again.

Anonymous said...

http://www.federalreserve.gov/pubs/feds/2013/201301/revision/201301pap.pdf

Anonymous said...

Matt, I think you need to look at the Fed's combined income statement, not the balance sheet. The income statement is what shows net gains or losses from the security portfolio, which is part of what determines whether the Fed will have net positive income in a given operating period, and therefor whether income will be remitted to the Treasury.

Matt Franko said...

Justin,

From Dan's link: "It is important to note that Federal Reserve accounting records the securities holdings at
face value and records any unamortized premium as a separate asset or unamortized discount
as a separate negative asset. Consequently, we must project both the face value of the
portfolio and the associated premiums. To project premiums on future securities purchases we
need to calculate the market value of securities in the future, which we assume is the present
discounted cash flow of these securities."

page 8

Looks like they treat the premium/discount to "face" as either a + or - asset so everything still balances in the reserve system...

rsp,

Matt Franko said...

I think we are on the same page on this now Dan.... I used to think they might have had a problem here as far as reducing the QE...

I think they still have to be a bit careful how they do it but for "political purposes" only...

Scott F wrote a paper on 'helicopter drops' a while back where he wrote:

"As an aside, it’s also highly doubtful that the Fed can carry out helicopter drops as in Figures 1 or Figure 2 absent legal blessing from Congress and the President given the effects on its own capital account. That is, the increase in currency (in Figure 1) or deposits (in Figure 2) would be accompanied by a reduction in the Fed’s capital, as there is no rise in the Fed’s assets. Given the already almost negligible quantity of capital held by the Fed—since it has always been legally required to turn its profits over to the Treasury instead of retaining its earnings—the Fed’s capital would turn negative very quickly were it to engage in helicopter-drop like actions, and the political fallout could be disastrous for the Fed. "

http://neweconomicperspectives.org/2010/01/helicopter-drops-are-fiscal-operations.html

Different issue ('helicopter drops') but Scott knows that the whole 'negative equity' issue is a political problem for them via the Ron Paul types probably...

I think they can still run down the portfolio while not entering into 'negative equity' if they use run-offs/redemptions and take it real slow otherwise...

rsp,

Unknown said...

Actual remittances to the Treasury would thus cease until the balance sheet is in the black again. Dan K

So another bailout at the public's expense.

Doesn't it take the fun out of being rich to know one doesn't deserve it? That one trampled the poor on the way up? That there might be a God after all and that the mostly likely Candidate for God takes a very dim view of oppressing the poor?

Matt Franko said...

F.,

Define 'poor'...

rsp,

Unknown said...

Franko,

Many people are effectively slaves to their bosses because jobs are scarce and because they've been driven into debt. A few missed paychecks and they could be homeless. I call that poor and oppressed. You think God doesn't?

But in any case ALL theft is forbidden by the Bible.

I'm getting tired of dealing with you defenders of thieves and oppressors. Repent! Or like Paul, I may try my hand at handing you over to Satan for the destruction of your flesh. Why not? How many millions have the banks killed?

Anonymous said...

So another bailout at the public's expense.

Sort of. But think of it this way: Just to use round numbers, suppose the Treasury has a deficit of $1 trillion and the Fed had net income - after paying its own expenses and its mandatory payouts to member banks - of $100 billion.

Then the net consolidated government deficit is actually $900 billion. The Fed actually transfers the money to the Treasury so the Treasury's operating deficit is effectively reduced to $900 billion.

Now suppose that the Treasury had a deficit of $800 billion but the Fed had a net loss (negative income) of $100 billion. Then the net consolidated government deficit is still $900 billion. But in this case, the Fed transfers nothing to the Treasury, and books a $100 billion deferred asset. If the Fed has a positive net income of $100 the next year, that deferred asset is realized and is cleared from the books, and the Fed still remits nothing to the Treasury. Remittances would begin again the next year if the Fed had positive income in that year.

However, from an aggregate point of view its not as though the public necessarily lost out in the deal. The reason the Fed would have negative income in the first place in some year is that it emits more in liabilities that year than it earns from its assets - i.e. it pumps more money out into the private sector than it drains.

Matt Franko said...

F,

I'm hardly defending the current outcomes...

Our system as it is presently configured via our existing laws can be operated justly as long as we get the right people in there to operate it...

fyi I have asked you for the second time now to "define poor" and you haven't been able to do it...

rsp,

Unknown said...

However, from an aggregate point of view its not as though the public necessarily lost out in the deal. Dan K

The non-rich and non-banker public lost out since the Fed does not serve them while the Treasury somewhat ameliorates the damage the banks do.

And since "trickle-down" is discredited (since the rich neither create jobs nor make up in charity for the jobs they destroy), I'd say those who defend the Fed are skating on very thin ice.

Unknown said...

I don't have to define poor since ALL theft is forbidden by the Bible.

And if we are to enter a desperate race to the bottom with the poorest countries in the world you can be sure that some will begrudge the very soup handed out in soup kitchens.

As for our money system it is INHERENTLY unjust. Angels could not make it work honestly!

Keep pushing Franko. I was not kidding about handing you over to Satan. Who knows? It might save your soul too.

Matt Franko said...

"Angels could not make it work honestly!"

Right. They are too stupid...

rsp,

Unknown said...

The correct Biblical response Franko is:

May the Lord rebuke you!

Yet in the same way these men, also by dreaming, defile the flesh, and reject authority, and revile angelic majesties. But Michael the archangel, when he disputed with the devil and argued about the body of Moses, did not dare pronounce against him a railing judgment, but said, “The Lord rebuke you!” Jude 1:8-9 New American Standard Bible (NASB)

Kristjan said...

to Matt:
"At the bottom of Table I it states:

"2. Face value of the securities. "

So imo they must ALREADY do a small adjustment to RBs BEFORE they account for the securities at "face value" on the H.4.1 report... otherwise, if they pay a bit more or less than the actual "face value" of the securities and do not do another adjustment before accounting for the securities in the H41 like this, then the system will not balance..."


Face value is face value, It always balances because of unamortized discounts and premiums lines there.

It can sure take losses(gold, MBS, monetary operations, from selling securities for less in the future etc) but not the way described in LA Times, they are not "marked to market"

mike norman said...

Beard,

No one is defending the Fed. We're debunking the bullshit of the mainstream media and others.

Matt Franko said...

"did not dare pronounce against him a railing judgment, but said, “The Lord rebuke you!” "

As I said, no authority for such a judgement, they are too stupid...

Matt Franko said...

Kristijan,

The point I'm (trying) to make is that if they pay a non-govt entity say perhaps 101 for a bond that has a face value of 100, they put it on the H41 at "face" or 100 BUT, they paid 101 so reserve balances are increased by 101.

So they cant put it on the factors for 100 when they paid 101 or there will be 1 RBs that are unaccounted for .... so they have to account for this extra RBs it looks like via the paper Dan found they book another asset called "unamortized premium" at 1 and the bond at 100 EVEN THOUGH THEY PAID 101 FOR THE BOND...

So they do not "mark to market" they account for the bonds at "face" and make another SMALL associated adjustment to RBs for difference between "face" and "prices paid"...

rsp,

The Rombach Report said...
This comment has been removed by the author.
The Rombach Report said...

"The Fed carries all of the US govt securities it purchases at "face value" on its H.4.1 Report"

Matt - I think you may be wrong on this point for reasons we have discussed in a previous post. I have granular records of every note and bond the fed bought in QE2 and the prices paid. I will go into the spreadsheets to compare the face value of the securities purchased vs. the market prices they were purchased at to see which sum adds up to $600 billion.

Matt Franko said...

Ed it is not my point it is the Fed's

That said, I really want to see what you come up with!

Rsp

The Rombach Report said...

So imo they must ALREADY do a small adjustment to RBs BEFORE they account for the securities at "face value" on the H.4.1 report... otherwise, if they pay a bit more or less than the actual "face value" of the securities and do not do another adjustment before accounting for the securities in the H41 like this, then the system will not balance..."

Sounds like guess work on your part.

"This imo is also why they typically by mostly the most recent issued securities from the Dealers as those would trade closest to 'face value' avoiding the deep discounts/premiums of longer dated on-the-run securities so as to reduce this required adjustment as much as possible..."

Fact of the matter is that in QE2 the fed bought many seasoned issues with coupons much higher than market levels, which means that many securities were purchased at big premiums to par. I am happy to share the spreads sheets with anyone who wants to have a look.

The Rombach Report said...
This comment has been removed by the author.
John Hemington said...

Carnegie Mellon’s Tepper School of Business, you’ve got to be kidding, it’s headed by Alan Meltzer, the Tea Party’s main economic guru. I’ve heard ‘ol Alan speak in a private conclave and it isn’t pretty.

Matt Franko said...

Ed,

How can we share this info in your excels?

Can you email?

Perhaps we can put a post up together here at Mike's?

Ive tried to export excel directly to html and it isn't pretty imo...

Perhaps I can print them out and scan them or export to pdf and embed them...

If you care to forward them to me:

franko dot mattthew at gmail dot com

will of course give credit to the Rombach Report ....

rsp,

The Rombach Report said...

"The Fed doesn't get "bailed out". But the losses do translate into a "deferred asset" on the Fed's books, which is a claim on future remittances to the Treasury. Actual remittances to the Treasury would thus cease until the balance sheet is in the black again."

Yes. Functionally speaking the fed will not be bankrupt, but optically it will appear as if it is. The practical consequence will be that Congressional opponents will seize upon this issue to attack the fed. Rand Paul already says he will hold up Yellen's appointment unless Senate Majority Leader Harry Reid allows Paul's “Audit the Fed” bill to go to a Senate floor vote.

The Rombach Report said...

"How can we share this info in your excels?"

franko dot mattthew at gmail dot com


10-4. Look for it sometime tomorrow. I think there are 8 spreadsheets, so I can send one or two as samples or the whole 9 yards in batches. Too much data for 1 spread sheet. Note that some cells are live data links for Reuters300Xtra which has been supplanted by Eikon, so unless you have one of those 2 platforms those cells will not feed through. However, if you have Bloomberg you can substitute the corresponding codes. My purpose was to be able to mark to market the QE2 portfolio in real time, quantify how much the portfolio would gain or lose for a 0.01% change in yield for the average duration and quantify accrued interest along the way.

Unknown said...

http://www.federalreserve.gov/monetarypolicy/files/BSTfinaccountingmanual.pdf

If you look at the pdf linked above on Page 1-25 ..... + you will find the accounting policy for Government securities etc.

There is nothing magical about it and without specifically referencing GAAP, it generally follows what would / could be considered standard, when the information is consolidated. However, depending upon the industry etc. (and if you paid your audit fees :-) the original premium/discount would likely be netted, meaning the bond would be recorded at the transaction price.

E.G. They purchase a bond for $101 US - assuming no accrued interest.

Cash is credited ($101)

Security Asset - debited $100

Premium/Discount - debited for $1

The Premium / Discount associated with the specific security is amortized over a straight line defined by the terms of the bond and brought into income/expense in the period earned. The Premium / Discount will

No unrealized losses or gains are recorded.


Hope this helps a bit ?

Matt Franko said...

Seve,

Yes that I believe is probably the way any bank can also do it if it is a security the bank intends to "hold to maturity"....

So it is probably very similar to GAAP for a bank... perhaps a few wrinkles as they are a CB after all...

HOWEVER, not for a hedge fund... its like all of these morons have a "hedge fund mentality" on this with their zealousness for "mark to market" accounting.... NOBODY uses that in legitimate business.

rsp,

The Rombach Report said...

"HOWEVER, not for a hedge fund... its like all of these morons have a "hedge fund mentality" on this with their zealousness for "mark to market" accounting.... NOBODY uses that in legitimate business."

Most financial institutions operate in a mark to market accounting structure except for those securities classified as "Held to Maturity".

Roger Erickson said...

Dan Kervick said: "Actual remittances to the Treasury would thus cease until the balance sheet is in the black again."

Right. Regardless of the nominal accounts used, the Fed & Treasury pass records of public fiat back & forth between themselves.

It's all nominal compared to the simple, real question of whether a population can ever run out of collective fiat.

Yes, real people can tie themselves in entirely nominal knots, but that's a purely voluntary issue. In the end, there's no accounting for it. :)

[that matters, anyway]

Roger Erickson said...

ps: If the Treasury doesn't need taxes to generate fiat, then it sure as hell doesn't need remittances back from it's accountant-FED either.

http://constitution.org/tax/us-ic/cmt/ruml_obsolete.pdf