• Walker Todd

    Good detailed commentary by Jeff Hummel. I'll attest to both its legal/accounting and monetary accuracy.–Walker Todd, Chagrin Falls, Ohio

    • Jeffrey Rogers Hummel

      Thanks, Walker. Having learned from you on this subject, your praise is gratifying indeed.

    • You guys (Jeff and Walker) left out the 12 billion IOR that goes to the banks. It isn't chump change. That is interest that belongs to the people of the United States, not the banks! After a few years this adds up, Jeffrey.

      • Jeffrey Rogers Hummel

        Gary: I have written extensively criticizing the Fed’s paying interest on reserves, and in fact was one of the first to do so online. This post, in contrast, was about legislation that does not affect that aspect of Fed operations in any way whatsoever. Do you really expect a short blog post to include all possible criticisms of the Fed?

        • Well, after Bank of America has come out and said the Fed misprices risk causing bubbles and bust I was just in a bad mood. 🙂 By the way, that article about BAC didn't make the business section of Yahoo, and has been suppressed.

  • Since we aren't going to abolish the Fed, we may as well steal from it. It can finance everything that taxpayers and deficits can't. And as far as remittances, the Fed keeps some taxpayer interest on bonds it holds, billions in fact. It keeps more than we give to Israel as foreign aid! Article says:"Out of $116 billion in Fed interest earnings from all sources during 2014, $97 billion was remitted to the Treasury." Over years, that adds up! The food stamp budget is 74 billion dollars. The Fed keeping 19 billion dollars is a luxury this nation no longer can afford.

    • Jeffrey Rogers Hummel

      Thanks for your comment. But I think you missed my point. There is absolutely no $19 billion there. Fed interest earnings not regularly remitted to the Treasury are used to cover the Fed's operating expenses, and this bill does nothing to curtail those. So to provide the $19 billion, which for the most part is a one shot payment rather than a continuing flow, the Fed must either create new money or use, either directly or indirectly, money it gives to the Treasury already.

      • Ok, I guess I will have to take your word for it there. But consider this, Jeffrey, the banks do get perks from the Fed far beyond those you have listed. The Fed really has a secret dual mandate. 1. Save and protect the big banks and 2. create markets for treasury bonds. The first mandate included failure to prosecute securities violations when the TBTF banks were spreading bogus AAA rated bonds the world over. The first mandate includes lobbying judges to drop mortgage lawsuits (my opinion only) that should have put the banks under, and on and on. The second mandate includes creating markets for bonds to be used as collateral in the derivatives markets. That is useful for mandate number 1 as well. Those bonds are being hoarded and long bond yields will be pushed down forever by this plan, or conspiracy or whatever you want to call it. Long bonds no longer react to expected measurements. CATO and most economists are blind to this new reality. Supply and demand of bonds in those markets is a worthy topic for economic study yet none of you seem to want to do it. I am not an economist so you are going to have to do it. If you never do it it makes people like me question the veracity of your profession.

        It has been said that a trillion to 4 trillion dollars worth of bonds are needed in the clearing houses for collateral. And then consider that if bonds were to go up in yield, which they won't, there would be margin calls on the collateral, and even more bonds would have to be hoarded. The firms who are counterparties don't know interest rates won't go up, so they buy extra bonds. The Fed really did it this time. The Fed is in the business of keeping interest rates low, by backing the banks as they bet on low floating LIBOR and pass the fixed swaps rate to the counterparties. Put the two together and you wonder why we will never see strong growth in the economy for as long as we are alive!

  • joebhed

    All Fed (FRBS) money is less than real to me.
    When the Treasury sends its interest payments to the Fed banks holding Tsy's, is that as real as the money gets? Is that money? Or, what is that?
    And, since that 'money' becomes FRBS income in determining the Fed's net incomes (after posting that 'money' to its surplus and earnings accounts, why is the surplus account balance not 'money'?
    Or, what is it?
    Is it a CB reserve balance?
    Or, what?
    Was that either covered here, or irrelevant?

    But, in speaking of (dis)honor among thieves, what about the theft, by Fed fiat, of another $6 Billion FROM the taxpayers to the bankers by pay double interest to the holders of those Treasuries through IOR?
    That seems a greater injustice somehow.
    A greater dishonor if you will.
    Am I wrong?

    • I think it is 12 billion per year to the banks now. That is stealing from the taxpayer to pay the banks. But we have always known the Fed is beholden to the banks, not the citizens of the USA. The Fed has two real mandates, to protect the big banks and to create markets for US treasuries.

      • joebhed

        Totally agree on the amount stolen and on the role of the FOMC in marketing public debt.
        Given that every penny of salary and expenses of both the BoGs and the FOMC are paid by the bankers they(BoGs) are supposed to be regulating, one could see a problematic construct. But, given that the bankers have bought the Congress, who's looking?
        My question was also about the fact that the FRBNY is the Guv's (Treasury) paying agent, do the Tsy's balances represent an actual transfer of what would be M1 money, or do these TGA balances merely represent Treasury's share of CB reserves?
        I have a hard time figuring that out, and the depth of the discussion here seemed conducive to an understanding thereof.
        MMters say Treasury spends reserves.
        I never saw it that way.
        Trying to figure that one out.

        • Over my pay grade. That is the problem, finding people to trust. The author of this article failed to mention the 12 billion, which could shatter his whole article. But since it is mostly above my head I don't know if he is shattered or not. 🙂

  • John Robbart

    If the Fed had anything to do with the fraudsters not going to prison then this ability sould be specifically curtailed.

    Jeff, nice article as always, it makes you wonder what all the fuss was about as ultimately it didn't really amount to a hill of beans.

  • Max

    The analysis is fine but the headline is unwarranted. Rather than an "insane scheme", it's a combination of genuine reform and accounting gimmickry (and accounting gimmickry may be deplorable, but it's not insane, or unusual). So overall, it's progress.

    • George Selgin

      Max, Jeff's headline calls the scheme "inane," not "insane." So perhaps you and he don't view it very differently after all.

  • Bank of America just admitted that markets are manipulated by the mispricing of risk, by the Fed. So, that means the housing market bubble last decade was PREMEDITATED, as I have always argued.

  • Ellen Brown issued a nice article about this issue today. Truth is, it is likely a way to increase infrastructure spending without having to raise taxes or spend more, so Republicans can keep their jobs. But, it is not going to be a one time fix. It forces the Fed to take an interest in the real economy.