not some reedy solo voice eternally practising the monotonous scales of its ‘feelings’, ‘memories’ and ‘impressions’
April 2, 2014 § Leave a comment
Just a few short days ago, it looked like Citigroup was on the ropes. The company’s proposal for redistributing capital back to shareholders was rejected by the Board of Governors of the Federal Reserve System. Given the global bank’s repeated fiascos – including most recently the theft of around $400 million from its Mexican unit – it is hardly surprising that the Fed has said “no” (and for the second time in three years).
The idea that Citigroup might now or soon have a viable “living will” now seems preposterous. If top management cannot run sensible financial projections (that’s the Fed’s view; see p.7 of the full report), what is the chance that they can lay out a plausible plan to explain how the company, operating in more than 100 countries worldwide, could be wound down through bankruptcy – without any financial assistance from the government? According to the Dodd-Frank financial reform law, failure to submit a viable living will should result in remedial action by the authorities.
Such action has now been taken: CEO Michael Corbat has been named to a top White House job, with responsibility for helping to develop “financial capability for young Americans.” read more
PHOTOGRAPH: Nicholas McLean
A brothel running from a single-bed flat above a Rose Hill shop was shut down by police yesterday. Officers entered the flat to find two Brazilian women aged 33 and 40 at 4.30pm. One said she was married, the other was wearing a towel
December 20, 2013 § Leave a comment
… when you think about money it is at least a good idea to take into account that the definition you use might need to include government bonds. They are a central part of the transaction infrastructure of the U.S. economy.
And if you include government bonds as money, then you’ll see there is very little money creation going in QE. Trading bond-money for reserve-money shifts the components of the money supply but does not necessarily increase it. (If the Fed is paying a premium for the bonds, or the Fed’s buying drives the market for the bonds up, there probably is some marginal increase in the money supply.) Of course, this might have important effects but the effect cannot be explained as simply as the standard monetarist narrative would have it.
So why not consider government bonds money? Here’s how Sumner recently responded in the comment section on his blog:
And I do not consider money and bonds to be close substitutes. When I go shopping I do not agonize about whether to bring cash or T-bills to the grocery store. And bonds pay interest, cash does not. Even reserves paid no interest until 2008, when the Fed shot itself in the foot with IOR.
Frankly, I don’t know what the grocery store insertion accomplishes here. My local grocery store won’t accept bills in denominations larger than $50. Are $100 bills not money? Is the balance of my bank account not money because I have to write a check or go to an ATM to settle a transaction at my grocery store? Is all available consumer credit card indebtedness money because it could be used in grocery stores? The grocery store test is both under-inclusive and over-inclusive.
More importantly, Sumner begs the question: are bonds money? It’s not whether money and bonds are close substitutes but whether, when it comes to figuring out whether QE is inflationary, bonds and reserves are close substitutes and should both count as money. And with both bonds and reserves paying a bit of interest these days, and both being transactional currencies considered both safe and liquid, it seems that they are.
The upside of counting bonds in the relevant money supply is that it explains why the QE-driven enormous expansion of the Fed’s balance sheet—that is, the growth of base money—hasn’t been very inflationary. You don’t have to make up phantom, Occam’s Razor violating concepts such as “demand for reserves,” to explain this. You just notice that QE doesn’t grow the money supply by very much. read more
PHOTOGRAPH: Andrew Shapter
The cessation was glibly attributed to the Great Fire: but in every other city in England the Plague ceased at about the same time
November 21, 2013 § Leave a comment
While virtually all mainstream economists believe in a long-term Say’s Law (supply creates demand, so the ultimate constraint on long term growth comes from the supply side), the real constraint on long-term growth in a developed capitalist economy is always on the demand side. (Note that there’s nothing new in the Summers/Krugman recognition of secular stagnation; David Levy called it a “contained depression” in 1991; Wallace Peterson announced a “silent depression” in 1994; and I demonstrated in 1999 that the problem is chronically constrained demand. At a recent Levy Institute conference in Rio, Paul McCulley laid out what he called a fundamental economic principle: Microeconomics and Macroeconomics are inherently different disciplines. Macro is demand-side; micro is supply-side. For any practical time horizon, demand always drives supply.)
I know what I’m saying is heretical, even though it is fully backed by all the data. And this stagnation is not due to a liquidity trap, or to a negative “natural” rate of interest. It is in the nature of the productivity of capitalist investment in plant and equipment. To put it in simple terms, the problem is that investment is just too damned productive. read more
PHOTOGRAPH: Antonio Olmos
September 18, 2013 § Leave a comment
I don’t even think Holder takes Holder seriously anymore; this is about the fifth time he’s said something like this. They’ve been busy propagating the myth that this is the first virgin crisis, conceived without sin…
We’ve got a million people that work in the criminal-justice system and 2300 of them do elite white-collar crime… they only come when there’s a criminal referral and banks don’t make criminal referrals against their own CEOs, which is why, in the Savings and Loan débacle we, the Office of Thrift Supervision, made over 30,000 criminals referrals… Flash forward to this crisis over 70 times larger in terms of losses and fraud and the same agency, the Office of Thrift Supervision, made zero criminal referrals; the Office of the Comptroller of the Currency made zero criminal referrals; the Fed appears to have made zero criminal referrals; the FDIC was smart enough to refuse to answer to the question…
Risk has virtually nothing to do with vast aspects of this crisis, at least risk as we conventionally talk about it in finance. If you follow the accounting control fraud recipe you are mathematically guaranteed in the near term to report record profits… watch
ART: Tilman Hornig
June 18, 2013 § Leave a comment
It is sometimes argued that the US government must be dependent on commercial bank money to fund its various activities and public enterprises, because the US Treasury holds some deposit balances at commercial banks. But I believe this is a seriously misleading claim. The government is certainly dependent on private sector economic activity and finance in a more general sense: if there were less private sector economic activity, there would be correspondingly fewer goods and services produced by our society, and thus fewer real assets that the government could make obtain and make use of to carry out its own activities. But the government is not financially dependent in any fundamental way on commercial bank deposit liabilities to carry out government spending.
To see this, let’s first look at a simplified picture of Treasury taxing and spending, before moving to the more detailed and accurate picture. The US Treasury has an account at the Fed called the “general account,” and that is the account from which it spends. Suppose I have an account at Maple Valley Bank from which I pay a $2000 tax obligation to the US government. Here’s the simplified picture: I send a check to the government, and as a result of the check being cleared $2000 is transferred from Maple Valley Bank’s Fed account to the Treasury general account. At the same time, my deposit account balance at Maple Valley Bank is reduced by $2000 and so Maple Valley Bank’s debt to me is reduced by $2000. Thus, Maple Valley Bank has lost both a $2000 asset and a $2000 liability, and experiences no net loss or gain. But the US Treasury now has $2000 more and I have $2000 less. The Treasury then spends that $2000 by buying $2000 worth of sticky note pads from Acme Office Supplies, a company which banks at Old Union Bank. After the various payment operations are completed, Acme’s account at Old Union has $2000 more in it, and $2000 has been transferred from the Treasury general account to Old Union’s reserve account at the Fed.
Now here’s the more accurate picture: In practice it has been found that conducting government operations in the way just described results in undesirable volatility in bank reserve balances, which interferes with the central bank’s ability to implement its target rate for interbank lending: So the government has introduced Treasury Tax and Loan (TT&L) accounts. TT&L accounts are US Treasury accounts at commercial banks designated as TT&L depositories. Suppose Ridge Bank is such a depository. Then when I send my $2000 check to the government, it may deposit it in its TT&L account at Ridge Bank. As a result, $2000 is transferred from Maple Valley Bank’s Fed account to Ridge Bank’s Fed account. At that point, no reserves have left the banking system. But as the Treasury spends over time, it continually transfers money from its TT&L accounts to the general account, and then spends from the general account. As that happens, central bank liabilities first leave commercial bank reserve accounts and then go back into those accounts after the Treasury spends.
Clearly there is no fundamental difference between the simplified system and the more complex system that uses the TT&L accounts as monetary way stations. The TT&L accounts exist solely to smooth out the flow of central bank liabilities to and from the Treasury general account and commercial bank reserve accounts. There is no sense in which the Treasury needs the commercial banks to “create” money in those accounts to carry out its taxing and spending operations.
In a broader sense it should be clear that, far from needing to acquire commercial bank liabilities in order to spend, the government doesn’t even need to obtain Federal Reserve liabilities from commercial bank reserve accounts in order to spend, and could alter the existing system if it so chose. The central bank is itself an arm of the US government and thus liabilities of the Fed held as assets by the Treasury are just amounts owed by one government account to another government account. read more
PHOTOGRAPH: Josef Sudek
‘She reads at such a pace,’ she complained, ‘and when I asked her where she had learnt to read so quickly, she replied “On the screens at Cinemas.”’
May 15, 2013 § Leave a comment
This morning I saw a very nice quiz concocted by a financial markets guy. I don’t want to get him in trouble so will borrow heavily from him but without attribution. If you can get this right, then you know why Quantitative Easing One, Two, and Three is a big bunch of baloney.
Consider the following thought experiment. These are the scenarios; what is the expected result of each?
A. The Treasury decides that it will fund itself 30% more in Overnight Bills and reduce bond issuance across the curve.
B. The Fed announces it will increase QE by 30% (it will remit the net income of this activity back to the Treasury).
C. Congress announces a new tax on all passive income from USTreasuries, to holders both at home and abroad (ie Central Banks), for all new-issue USTreasuries. The tax will be equal to 30% of the return in excess of the fed funds rate.
D. Treas Secty Lew pre-announces that we will ‘selectively default’ and apply a haircut of 30% on all future Treasury coupon payments of new issues in excess of fed funds rate.
What will be the likely effects of each policy? Don’t peek!
OK here is what the markets guy (rightly) says:
Here’s what’s funny. Most intelligent market participants will say things like:
A. Stocks down a few percent on fear of US debt downgrade. Economy slightly weaker or unchanged.
B. Stocks up 5-10% and economy grows another 1% for 1-2 yrs; monetary stimulus.
C. Stocks down 5-10% on tax hike (like last year) that maybe corrects. Economy slows 1-2% for a year or so because it’s a tax hike (ie fiscal consolidation).
D. Stocks down 80% and we go into a great depression on steroids. All investment dollars flee the US. I can’t tell you what happens next because my Bloomberg account gets shut down. They might even declare an Internet Holiday.
Here’s what’s craziest: THESE ARE ALL THE SAME THING. The name and the processes are different, the OPTICS are different, but the net is the same. There’s the government and there’s everyone else. The government either pays more out – in interest payments or transfer payments or vendor payments, or it takes back more in taxes or default or interest ‘savings.’ Everything the government net gets in ‘revenue’ the rest of the world loses in income. Everything the government dissaves (deficits) the rest of the world saves. Equal and opposite. read more
COPY: Matt Bloom