Former Dallas Fed President Bob McTeer on Magic Fed Un-Insolvency

Two things. OK three. First, I am wont to point out that the correct word is "Fedbashers" and I should know because I'm the pied piper of Fed-hating, Fedbashing assholes and practically invented the word, at least in the single, 10 letter form you see today. Just like I coined "Zimbabwe Ben" with the help of my fellow Fedbasher and mentor Skeptical CPA (with a honorable mention to WC Varones for encouraging us). So let's get that straight.

Second, I commend Bob for his site redesign, welcome to the 21st Century in web design, buddy.

Third, what the fuck is this shit?

Bob McTeer via his NCPA Economic Policy Blog:

As usual, serial Fed bashers are stretching to find ways to criticize the Fed. This time, the criticism is directed at the fiscal windfall which is a by-product of its monetary policy. One such basher, a former Fed official who should know better, said on Cable TV that the Fed was broke or near broke because a rise in interest rates could easily wipe out the Fed’s capital if its assets were marked to market, which should be done in his opinion.

First, there is no need for the Fed to mark to market since its assets are not held for trading and can easily be held to maturity or recovery if necessary. Second, the Fed’s liabilities are mainly the required reserves of the banking system not subjecting to withdrawal except as banking assets shrink. Fed liabilities are not hot money. Third, the Fed’s capital is required to be held by member banks and is subject to calls that would double its size if necessary. In other words, the Federal Reserve and other central banks are unique institutions and the usual rules and ratios don’t apply.

Regular banks, to some degree, still “borrow short and lend long.” They are vulnerable to losing deposits and faster than they can liquidate assets; so their capital is at risk. The deposit liabilities of Federal Reserve Banks, however, are the reserve deposits that banks are required to maintain at the Fed as a percentage of their own deposit liabilities. The excess reserve component has risen in the past two years, but mostly they are required reserves. The Fed’s ability now to pay interest on reserves, including excess reserves, gives it a tool, if needed, to incent even excess reserves to remain. In other words, those who hold the Fed’s liabilities are compelled to do so.

Did a former Dirty Fed asshat just admit the Fed can't possibly be insolvent because they just make it all up anyway? I think he did.

But what do I know, I'm just a Fedbasher stretching to find ways to criticize the Fed. I hate to break this to Bob and anyone else who might wonder why we don't seem to have anything better to do but it really isn't much of a stretch, the Fed writes most of the criticism themselves.

Here's what I don't get. Bob explains Fed "profit" (a.k.a. "income returned to Treasury") like this:

The Board of Governors recently announced a record $78.4 billion of Reserve bank earnings paid to the Treasury (and taxpayers) in 2010, up from a record $47.4 billion in 2009. These record earnings come from the growth in assets related to recent Fed policy. To the extent that outstanding Treasury debt is purchased by the Fed, the burden of interest payments on the public debt is reduced almost proportionally.

But if Fed "profit" also consists of interest payments paid by the Treasury on existing debt the Fed owns, why not just call it a wash instead of pretending like it is profit? Not to mention the fact that this "profit" is unaudited and when it is audited, it's done so using the very Fed financial accounting manual that - you guessed it! - the Fed itself comes up with. What about this isn't masturbatory?

My left hand is getting sore just reading about this sideways jerking off, Christ.

The Fed is insolvent! Deal.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


W.C. Varones said...

The other nice thing here is that McTeer is conceding that there is no exit strategy.

If the Fed can't mark-to-market without being insolvent, it also can't sell its holdings into a rising rate environment. If they tried to "exit," i.e. shrink the balance sheet, i.e. sell Treasuries or MBSs, they would face massive losses. Which of course they could paper over by printing off more billions, but then that kind of defeats the purpose of the "exit," does it not?

Fuck, I'm buying more gold tomorrow.

W.C. Varones said...

And did you notice that the Fed never even talks about a exit strategy anymore, and none of the asslick media ever call them on it?

A year ago, it was "exit strategy this," "exit strategy that."

Now it's like, "What exit strategy? We were always going to permanently triple the balance sheet."