What The Fed Is Going On?
As always reading the Interfulidity Blog enlightens me on macroeconomic issues. Today, Mr. Waldman posts an opinion piece on the Fed, its a must read for understanding whats going in our current crisis. He also references a James Hamilton piece on the Federal Reserve Balance Sheet (click here). I highly recommend you read both; James Hamilton provides understanding of the nuts and bolts of the Federal Reserve, while Steve Waldman article ties together the loose ends. Click Here To Skip The Introduction & Read More About What Fed Is Doing During The Crisis
Article Introduction (Via Interfluidity)
James Hamilton has an excellent post on the Federal Reserve and its changing balance sheet today. If you haven’t been following this stuff obsessively, it’s probably the single best primer to get up to speed.
To my mind, there are three signal facts about the brave new balance sheet:
1. The size of the Federal Reserve’s balance sheet has ballooned, more than doubling over a period of three months. If we take the FOMC at its word for it, it’s not going to shrink anytime soon. Given new programs already announced, we should expect the Fed’s balance sheet to continue to grow.
2. On the asset side, only a small fraction of the Fed’s holdings are now US Treasury securities. Excluding securities lent to dealers, just 12.5% of the Fed’s assets are Treasuries. The Fed has expanded the scope of its lending, from depository institutions, to primary dealers, to money-market funds and commercial paper issuers, to issuers of asset and mortgage backed securities, and very soon to private investment funds that invest in asset-backed securities. The Fed also periodically lends to support firms in, um, special circumstances, such as JPM/Bear and more recently AIG
3. On the liability side, the Federal Reserve has dramatically increased the degree to which it funds its activities with zero-maturity bank reserves, upon which it is now paying interest.
Article Excerpts (Via Interfluidity)
“Meanwhile, we are quietly allowing the Fed give away, as a direct, literal subsidy, more than the entire $700B that Paulson was allowed to play with. Note there is no question about this being an “investment”: The interest payments that the Fed is now making to banks on its suddenly expanded balance sheet are not loans. The banks owe taxpayers absolutely nothing in return for this windfall.”
” hope we all understand by now that the pronouncements of the banking industry are about as reliable as a monthly statement from Bernie Madoff. The reserves in the banking system are created by the Fed, and the quantity outstanding is now enough to cover banks’ regulatory and settlement needs many times over. This is not in any sense “their” money. It is money the Fed printed in order to pursue its own objectives. The banks have no right whatsoever to earn interest on this money, and absolutely do not merit an $800B subsidy.”
“Now we have the worst of all worlds: Not only has our corrupt, dysfunctional banking system won the small subsidy it has long lobbied for, but the size of that subsidy has grown by almost 8000%. The Fed is no longer lending only to financial institutions that would have to go under before taxpayers eat their losses. Under TALF, the Fed will lend to anyone who owns the kind of securities whose prices the Fed wants support. The borrowers will take the upside, while taxpayers eat the downside.”
Click Here To Read More About What Fed Is Doing During The Crisis
