Out of paradigm article at WaPo that is revealing anyway.
...the six-year bill cobbles together financing from expedients: one-time strategic petroleum sales; ostensibly improved tax compliance; and, most dubiously, a raid on the Federal Reserve’s capital.
The Fed returns the vast majority of earnings on its portfolio (swollen by recession-fighting expansive monetary policy) to the treasury. But it retains some each year, matched by payments from banks, as a buffer against losses. The practice strengthens the Federal Reserve’s balance sheet and thus increases public confidence in its ability to weather a crisis, albeit marginally. It is part of what makes the Fed a credible, independent central bank.
Yet the House bill would undermine this long-standing, conservative practice, a version of which other major central banks around the world also follow, by taking $29.3 billion that the Fed has socked away — and forbidding the bank from replenishing it. [Ed: UH OH!!!!!]
Note that the maneuver does not generate new financial resources, as taxes or offsetting spending would have done.[Ed: WaPo morons think munnie comes from taxes....] Rather, it takes money out of one government pocket — the Fed — and puts it into another — the highway program. [Ed LOL: Hellllloooo!?!?!?! Morons?!?!??! Helllllooooo?!!?!!?]
Maybe Dan has been secretly advising the GOP that the Fed can always rely on "negative equity" accounting if it ever thinks it has run out of munnie to pay the interest on reserves as the FOMC cohort there prepares to embark on policy rate increases for the first time in this new era when they pay interest on reserves meanwhile the yield curve looks ready to completely invert.
This puts us in a more dangerous situation as these morons would think they were bankrupted if they ever faced the prospect of negative equity in the accounting .... so we are now, to these deranged scrambled eggs for brains people, $29.3B closer to a Fed that would think it was out of munnie.
SCARY!!!!!
13 comments:
Matt-
How awesome is the ignorance demonstrated by this line:
"Central bank independence and fiscal transparency are attributes of a healthy democracy and have been throughout history. Many a banana republic, by contrast, has come to grief using its central bank to facilitate government deficit spending."
As anyone who knows anything about the way reserve operations function would know, CB's ALWAYS facilitate Govt deficit spending. There is no other way for the system to work. If the CB doesnt facilitate deficit spending by providing the reserves that primary dealers use to buy and clear TSY CD purchases, then we get the Volcker era and a bidding up of interest rates. Its almost like I heard this exact thing somewhere. In fact, I just might remember the actual creator, designer and first chairman of the modern Fed system explain this exact thing 70 FUCKING YEARS AGO FOR CRYING OUT LOUD......under oath no less:
"Nothing constructive would be accomplished by the proviso that
the Reserve System must purchase Government securities exclusively
in the open market. About all that such a ban means is that in making
such purchases a commission has to be paid to Government bond
dealers. The prohibition would not restrict the total amount of Government
financing, nor would it affect the general level of interest
rates, and that is the only way in which the "test of the market"
could be manifested. Interest rates on Government securities have
been and will continue to be determined by the Open Market Committee
in consultation with the Treasury. "
or this:
" pay, then, there is
naturally a deficit, and the Treasury is obligated to borrow. The
fact that they cannot go directly to the Federal Reserve bank to borrow
does not mean that they cannot go indirectly to the Federal
Reserve bank, for the very reason that there is no limit to the amount
that the Federal Reserve System can buy in the market. That is
the way the war was financed.
Therefore, if the Treasury has to finance a heavy deficit, the Reserve
System creates the condition in the money market to enable the borrowing
to be done, so that, in effect, the Reserve System indirectly
finances the Treasury through the money market, and that is how the
interest rates were stabilized as they were during the war, and as
they will have to continue to be in the future. "
Auburn you are qualified they are not.... I'm afraid it is that simple....
And this also wrt (what is supposed to be) a representative govt:
"Central bank independence .... (is an) attribute of a healthy democracy..."
Whaaaaaaaaatttttttt!?!?!!?!?
LOL MAtt-
I missed that the sweet irony of that line. Thanks for pointing it out. So a healthy democracy in mainstream world means, not too much democracy. I guess this goes back to Tom's point....that "liberal" economics and "liberal" democracy are antithetical.
Central bank independence is an attribute of corporate and bank dominance over the elected Congress and government.
The central bank should be merely an operational department independently executing the instructions from Congress and paying whoever Congress says should get paid regardless of how that makes the accounting look.
You'll find that most banana republics have a dictator. That is what the central bank is becoming.
Dan...negative equity...HAHAHAHAHAHAHAHA!!!!
This "pay-for" from the Fed dividend was taken out of the Highway Bill on Friday actually.
Central bank independence is an invention of the last decades. Monetarists scrambled eggs... central banking lovers.
I'm afraid Matt that this people has substituted God with "Central Bank Central Planners" in their belief system.
It's all political optics. The central bankers are terrified about what will happen when Congress and the public finally realize that even if the Fed runs a "loss", nothing bad necessarily happens. Unlike a private firm, where the ability of the firm to pay its debts and take on more debt is constrained by its capital and financial position, the Fed is only constrained by its own monetary policy objectives. The Fed could sustain these supposed income statement losses year after year after year, while conducting all of its operations without difficulty. The only issue is how deeply it can dip into the infinite money well while maintaining its price stability objectives.
Explaining that to the public - along with whatever models the Fed uses to estimate price level dynamics as a function of Fed policy - is hard work, so the Fed has adopted the communications strategy of pretending it is a regular business and presenting its operations in the form of balance sheets and income statements.
In Australia, they don't have the the same bogus "independent bank" institutional arrangements as the UK and U.S. The RBA is just a part of the Treasury, one assumes with some scope for independent analysis. They always consult with Treasury (politicians) before any action. I supposed that makes them a banana republic although functionally they operate the same way as the Fed.
Look at this Banana republic statement from their website.
The RBA is accountable directly to the Parliament and to the general public for the way it carries out its responsibilities.
Auburn et al,
concerning this:
Therefore, if the Treasury has to finance a heavy deficit, the Reserve
System creates the condition in the money market to enable the borrowing
to be done, so that, in effect, the Reserve System indirectly
finances the Treasury through the money market...
Can you elaborate further on the -operational- aspects of this (in ten lines or so, if possible)? It appears the steps are:
Congress authorizes spending
Treasury asks the Fed to credit it's accounts, and then spends
The Fed also makes a loan to the Primary Dealers, increasing their reserve balances
The Fed issues bonds offsetting Treasury's spending (a gold-standard holdover)
These bonds pay interest at a higher rate than the overnight rate
Primary Dealers purchase the bonds (because the Fed can't purchase new bonds)
Primary Dealers later sell the bonds, earning hold-time interest + commissions
Primary Dealers pay back the Feds loan
Is this correct, or is something misstated/left-out?
tofu looks pretty good imo...
Dan we know that but there is scant if any evidence that they know that...
There is no evidence that they are "taking the easy way" as you assert, there is only evidence in their statements to the opposite...
there is that policy paper that you cited one time where they floated the concept of negative equity... but there is no evidence that the top people there know about it or understand it... Auburn posted a recent comment by idiot Fisher bragging about "how much money the Fed makes! blah, blah..."
If they understood it, what better time would there ever be to implement that policy than here?
They could have just told the GOP people that they didnt have to stop at zero equity they could have been credited more for the highways in need of repair... and Fed could just go negative equity to create the positive TGA balances...
Instead they got them to drop the proposal as Justin reports above and they retained their 29B in positive equity... because they NEED IT as far as they are concerned...
Unless that policy paper said that they would ONLY use the negative equity to pay IOR perhaps that is how they are thinking but no evidence of that either...
In the movie, "The Matrix," a relatively few humans knew they were operating within a faux reality. This gave them some power in that faux reality BUT they still remain vulnerable to being killed within that faxu reality - imagined bullets or not - you still died both within the edifice and in reality.
Yes, an MMTer can easily see the flawed monetary, if not economic, thinking of the vast majority of those caught in the edifice of conventional monetary thinking, but it would be fatal to assume that the political thinking within that edifice are not reality and deadly.
The Post, within the edifice, is correct in its assertion of CB independence as vital to a functioning democracy. Imagine the t-baggin Congressional morons getting a firm hold on the FED. Within their flawed "Matrix," they would move us to balancing the Federal spreadsheet and paying down the accumulated debt - can we say "depression on steroids?" Or, possible worse, they actually discover the tenets of MMT that provides for them substantial increases in deficit spending just so long as inflation does not rise to harmful levels; is there any doubt that they would conclude the best way to increase deficit spending without inflation is to just cut the taxes of the top 1% "job creators" who alone have the propensity to save and invest, rather than spend - in effect, "trickle down on steroids" and income inequity becoming monstrous.
MMTers, brilliant on the monetary/economic; on the politics, not so much.
"Or, possible worse, they actually discover the tenets of MMT that provides for them substantial increases in deficit spending just so long as inflation does not rise to harmful levels; is there any doubt that they would conclude the best way to increase deficit spending without inflation is to just cut the taxes of the top 1% "job creators" who alone have the propensity to save and invest, rather than spend - in effect, "trickle down on steroids" and income inequity becoming monstrous. "
They did that in the 1980s I think. The original "trick down" is "we know MMT but we will call it something else like tax cuts "pay" for themselves."
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