The money absolutely impacts the economy and the individual. If the fed were not providing this printed money to the banks, the banks would need to do some combination of the following to increase liquidity:
1) Increase interest rates to attract new deposits
2) Sell assets — such as foreclosed homes now in the banks possession
With house prices at all time highs and interest rates at all time lows, both 1&2 sound great to me and absolutely have a direct impact on me.
You left out #3, tighten lending criteria and raise interest rates on loans to increase income per dollar lent and reduce volume of lending, which also improves liquidity.
But, yeah, if you are flush with cash and don't own a home but want to, #1 & #2 sound great if you consider only their first order effects on you.
#1, especially, is a huge brake on the economy (as is it's close relative #3). Which probably also has a negative impact on you, unless you are living entirely off of a pile of cash previously earned.
Given there's so much of this (https://en.wikipedia.org/wiki/Bullshit_Jobs) right now, I'm not convinced #1 would have a such a negative impact. If we broaden are thinking it could have an awesome impact long term.
The problems with these types of books to me is that the researcher surgically analyizes a tiny part of the whole picture and claims this is the grand solution or something like that.
This book does nothing other than highlight common knowledge but does nothing to show why or how it is that way and what can be done to begin to change it.
Its the equivilant of saying well the reason the timing belt on your car breaks is it is too weak. So I made a 150kg gear system to replace it. "Wont that be too heavy for the engine to turn it?" , "Oh yeah you will have to replace the whole engine and transmission as well." Except in this instance it is all of society and humanity that would have to be changed or replaced.
On example: the reason duct tapers exist is that they handle the exceptions from really, really ,really, really difficult problems to solve that are already partially solved and working good enough.
Well, it would. Now, you can certainly argue that with an ideal distributional system (or even a far-from-ideal one that is still better than the one the US has, which aren't exactly rare in the developed world), we could have significantly lower total output and still equal or better overall well-being (and far better practical conditions for the lower 60-75% of the income/wealth distribution). And, sure, you'd be right. But we don't have such a system.
> If we broaden are thinking it could have an awesome impact long term.
Returning to a system that encourages positive-feedback economic crashes isn't broadening our thinking, it's just blindly throwing away beneficial progress.
Are there other economic friend that might eliminate the need for the current mitigation for that problem and be far better overall? Probably. Find and implement them first, though.
It's stealing money out of everyone's pockets to keep the banks going. Devalues the existing currency already in circulation. I love the obsession with keeping the system going, if the system is cyclical and flawed for human beings, maybe we shouldn't base the system that feeds, clothes and houses humanity on a craps table. The more of this sort of news that comes up the closer I listen to Richard D. Wolff.
> Devalues the existing currency already in circulation.
Anyone with debt (e.g., mortgage, student loans) is advantaged from a future lower-value currency:
> If wages increase with inflation, and if the borrower already owed money before the inflation occurred, the inflation benefits the borrower. This is because the borrower still owes the same amount of money, but now he or she has more money in his or her paycheck to pay off the debt. This results in less interest for the lender if the borrower uses the extra money to pay his or her debt early.
> Inflation can help lenders in several ways, especially when it comes to extending new financing. First, higher prices mean that more people want credit to buy big-ticket items, especially if their wages have not increased – new customers for the lenders.
I'd argue you can't "win" in any form, if you're in debt. That's like trying to lose your way to the top of a ranked competition. You never move up the ladder of life by losing.
Broadly speaking, it's a position of weakness and servitude. It's a similar suggestion that if you're deep in debt, you "win" if you get hit in the head with a baseball bat. Sure, you enjoyed spending the money and now you're mentally deficient so you got away with not having to pay it off, but you've still been beaten over the head with a bat.
But ultimately, even if my view is an inaccurate description of reality, what you're saying is true, but I'd argue it's still a net loss. The end-goal over a lifetime of earning is to be in the black, not red. It's difficult to lose your way to the top. Wages don't track inflation (contrary to those 2% raises a year, because salaries are suppressed from downward pressure on wages). So the relatively short time someone is in debt doesn't outweigh the time spent out of debt thus the advantage you speak of isn't worth it.
All that said, debt is not inherently bad.. but that's another discussion and not in the context of this discussion.
The majority of people already own houses and have mortgages. That means they don't want interest rates to go up. So the Fed will not allow that.
That's it, that is the reason banks were bailed out in the first place. That's the reason they're being subsidised now (plus lots of cheap money pushes up the stock market and spurs investment and looks good at election time).
The vast majority of mortgages out there today are fixed rate, not adjustable rate. That means that the interest homeowners are paying is locked in regardless of the rates in the market today.
Most homeowners still have a substantial amount of leverage though, and you can refinance every X years. On top of that, rising rates reduce house values.
Most of my parents' net worth is in either residential or investment real estate, and low rates are very much good for them.
Which is exactly what you want. Expected monthly payments are fixed, so your principle would go down. This increases your ability to pay off the loan earlier, and lowers your property taxes.
(This may not sound causal until you consider the larger feedback loop that has gotten us to here in the first place.)
I think it makes sense for the banks to wait for the Fed to do something. Banks are acting in the interest of their shareholders; the Fed for the population as a whole.
This is no different than the manipulation that happened with LIBOR. Back then the media was quick to point out that the manipulated interest rate impacted pension funds, mortgages, and everything in between.
The fed is doing the same thing by stepping in and manipulating the overnight rate. Without the fed doing this, banks would have to plan ahead and make sure they have sufficient liquidity. This means maybe offering better interest rates to earn customer deposits.
With the major banks still calling 0.05% “high yield”, I don’t think it’s appropriate for the fed to continue to enable their incompetence. Furthermore, the banks hold a significant inventory of foreclosed homes on their books. They’ve been sitting on them for years. It’s time they sell that resource to people who need them.
I mean that given that the Fed will act if the banks do nothing, and that doing something will make the banks loose money, it is inevitable that the banks will "drag their feet". As you understand, I am not commenting on the moral aspect.
Part of the problem is the fed has tried to raise short term rates while the rest of the world has had a zero interest rate policy. Meanwhile, the US interest rate curve is inverted. So banks, who typically lend long and borrow short get squeezed. So even if the fed is targeting 2% rates, but the 10 yr is at 1.5%, a bank really shouldn’t be borrowing from you at 2% to lend it out to someone else at 1.5% on a ten year loan.
Maybe it's because the rest of the world can though. If you look at the debt to GDP ratio of Germany, Russia, China, it is much lower than the United States. Recently it was reported by AB Bernstein that the Debt-To-GDP ratio in the United States -- the real Debt-To-GDP Ratio -- is 1,832%!!
https://interactiveswingtrading.com/2019/09/09/ab-bernstein-...
Following that line of reasoning, isn't a bank incentivised to accrue as much debt as possible because the fed will just bail them out if they can't pay it back?
No matter how many times it is explained, at the end of the day people who are not me and who have no real valid claim to free money are being given free money and allowed to profit off of it.
I was talking about the two levers the Fed has to guide the economy at work - Printing Money and Lowering interest rates (as described by Ray Dalio https://youtu.be/PHe0bXAIuk0). My coworker starry eyed, looked at me and said, "What about Quantitative Easing?". I responded that is printing money. I think the issue is, these concepts are given difficult sounding names, so people do not question their ethics. I'm not saying they are not needed - in a credit based economy it seems they are absolutely necessary, but perhaps they could be implemented in a way that doesn't so favor the rich.
Except that "Quantitative Easing" is NOT "printing money"... it's just media who dubbed it "printing money" as it is a more clickbaity term that works better for driving traffic to the advertisement infested pages.
> Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to increase the money supply
When the central bank 'buys' securities, they do so with money they're creating in that purchase. In effect they're dumping new money into wherever they're buying securities from, but the 'dumping' isn't with dump trucks or dropping it from planes.
Now those bonds come due and the money is supposed to leave the system, but until then the velocity of money means there are knock on effects.
When you put money into the market, but take bonds (which are a guaranteed future cash flow) out you are injecting liquidity temporarily, effectively trading current cash for more future cash.
It's not the same thing as printing money and spending it and suggesting otherwise is either disingenuous or ignorant.
When you put money into the market, but take bonds (which are a guaranteed future cash flow) out you are injecting liquidity temporarily, effectively trading current cash for more future cash.
It's not the same thing as printing money and spending it and suggesting otherwise is either disingenuous or ignorant.
Start a company where you imagine wealth into existence then loan it to others. Then you setup partner systems where you charge folks who use that wealth. A charge for each transaction.
> If the fed were not providing this printed money to the banks
I'm pretty sure you don't actually mean "printed money", since the Federal Reserve doesn't do that. No currency was created for this market operation, just balances in books kept by the Federal Reserve Bank of New York.
The money which the fed gave to the banks did not previously exist. The fed increased the balance sheet of the banks to indicate they had cash they would not otherwise have had. Fits my definition of “printed.”
I think a more accurate phrase is "borrowed into existence", which is worse than printing because the balance created charges interest. Printing money directly rather than borrowing it is less inflationary, because more money is needed to service debt.
(This is all bad so I may be splitting hairs, but I would advocate for direct currency printing over this lending scheme if given the chance.)
Yes, it is not literally "printing money" in the way that the US Mint physically does. The term is appropriate though, as the result of translating from the paradigm banks operate in into the paradigm natural persons are bound by. We can only give away what we have received - I cannot give a friend $20 in exchange for an IOU, and then transmute that IOU into a crisp new $20 bill.
I thought the Financial Times had a more in-depth analysis of the structural reasons behind the spike in the REPO market than I've seen elsewhere. I've seen a few sources point out the tax payment due on the 15th, and the settlement of a large treasury sale, but as the article says:
"...Analysts say these two things alone should not cause the deep cracks in the repo market that we have seen this week. The underlying issue is more structural.
The Fed has been reducing the size of its balance sheet, letting the Treasuries and mortgage bonds it bought following the financial crisis roll off. In turn, that reduces the amount of cash reserves banks hold at the Fed...
'We have had tax payments in the past. What is different this time is that it has followed a period of quantitative tightening,' said Jon Hill, an interest rate strategist at BMO Capital Markets. 'Companies sucking cash from the market was just the tripwire that brought things falling down.'”
My understanding is that Treasury took in an additional 80+ in cash against their stated goal of having 350B cash on hand (by quarter end I think). Obviously this is a very large draw of liquidity out of the system and is likely the single biggest reason for the squeeze.
Not quite 2/3 of collateral at the Fed operations has been treasuries the rest mortgage paper with a tiny amount of agencies.
The financial system/world runs on repo and it is troubling this is happening at all. My gut is Mnuchkin knew this would happen and is trying to force the Fed into backdoor easing through another round of QE before gradually releasing the cash back into the system by slightly lower than expected issuance of new debt.
> The Fed has been reducing the size of its balance sheet, letting the Treasuries and mortgage bonds it bought following the financial crisis roll off. In turn, that reduces the amount of cash reserves banks hold at the Fed.
I'm somewhat skeptical that the reduction in Fed balance sheet is the impetus for the recent surge in repo rates, especially since the Fed ended its balance sheet unwind in August.
From August 2014 to January 2018, the Fed held $4.4 trillion in assets [0]. From 2014 to 2016, overnight repo rates remained stable and low [1]. In December 2015, the Fed began its hiking cycle. From this point onwards, repo rates began drifting up, consistent with an increasing fed funds rate [2]. It would appear that the changes in repo rates were not driven by Fed balance sheet during this period.
Starting in January 2014, banks held $2.4 trillion in excess reserves at the Fed, peaking at $2.7 trillion in August 2014 [3]. By January 2018, excess reserves held at the Fed had fallen to $2.1 trillion, independent of any change in the size of the Fed's balance sheet. In 2016, repo rates remained steady, despite a $400 billion decrease in excess reserves. In 2017, overnight repo rates drifted up, despite an increase in excess reserves of $200 billion. Here, repo rates do not exhibit any obvious impact from fluctuations in excess reserves.
As Fed balance sheet declined by $700 billion in 2018, excess reserves declined by roughly the same amount. However, even as Fed balance sheet continued shrinking in 2019, repo rates held fairly steady, corresponding to the stable level of the effective fed funds rate.
Given all this, it doesn't look like reductions in Fed balance sheet have been the sole driver of declining excess reserves, nor does it appear that the quantity of excess reserves correlates strongly with overnight repo rates. Furthermore, the Fed announced an August 2019 conclusion of the balance sheet unwind in July's FOMC statement. Finally, excess reserves held at the Fed are now 1000x greater than they were in 2007.
In short, the recent spike in repo rates happened despite a massive overhang of excess reserves and in the absence of a shrinking Fed balance sheet. I wonder if the decline of the interbank loan market, which serves as a source of short term funding for banks, is related. At the time the Fed discontinued reporting interbank loan volume (2018), volumes had declined ~75% from precrisis levels [4]. Such low volumes were last seen in 1979. This, in part, explains the large amount of excess reserves held by banks. If they do not have confidence they will be able to borrow when they need to, they must maintain such reserves.
How can reserves be too low when there are $1.4 T in excess reserves? How can repo rates spike to nearly 10% when the interest earned on those $1.4 T reserves only yields 1.80%?
edit: more questions. As I understand it, the "repo market" is broader than only banks. Why is it that the Fed performing repo operations will alleviate the liquidity issue in the repo market, unless it is some such bank borrowing in the repo market that is the cause of the problem? And given the point about the size of excess reserves, and the low yield they earn, is there any way for the repo rate to have spiked unless there were some bank that weren't able to muster adequate collateral?
I'd recommend for you to listen to the Bloomberg Odd Lots podcast from 15 April 2019 - it had Zoltan Poszar from Credit Suisse on to talk about the general trend in the money markets (and he was worried about something like this happening back then too), and quite a few of your questions should be answered by the time you're done.
edit: It's a little heavy on content, so if you don't know much about the money market (like me when I first listened to it), I'd recommend having a pen and paper on hand to take notes.
Someone needing liquidity? Yeah, the Treasury needs its debt funded, all the VC's need their IPO's bought, there is just a lot of supply right now. That they converged in the overnight market on one particular day might be a coincidence, but the structural issue is the very large funding needs in the economy at a time when foreign buyers are turned away due to protectionism.
Turn off enhanced tracking protection[0]. As outline inherently works by grabbing data off of third-party sites, the new enhanced protection may break it.
They can always pump more money to the market in different ways, but what is clear that is happening there is a shift on the dollar not being the world currency / international trade currency.
FED will have always more trouble to handle that. What will happen is hard to say, maybe some crazy inflation, or liquidity crisis... or something I don't care about. What I care about is that economy and money will be broken for a while which will make people move away from the Dollar.
Because if FED and US can't do a good job to keep their currency and country running properly, doing austerity when it is needed, not bailing out banks etc. Nobody will trust that currency anymore.
No country in the world can run a $1 trillion deficit or 5%(?) of their GDP every year and not have consequences. This might be "okay" now, but this will create an effect that when people finally start to move away from the dollar, things will run completely out of control in America.
On the question of "Are reserves too low" posed by the article:
Reserves are simply a low pass filter, making it very unlikely that high frequency events (routine events) will cause a crisis. But they still allow low frequency events to potentially cause problems.
Since the "cutoff frequency" of the "filter" is determined by the political process, then to answer the question about whether reserves are adequate we must consider how effectively the political process addresses these sorts of issues in general.
Consider the PBGC, the government coordinated insurance system for pension funds. It is dramatically under-funded, and if more than one or two large firms with big pension obligations went under, so would the PBGC. What this means is that it would be up to the political system to bail it out.
Underwriting capital (reserve capital, or capital that is generally kept idle) is useful for financial contracts because it is far more reliable than the uncertain outcome of the political system. It is also much faster to access pre-arranged underwriting capital than it is to wait for the political system to resolve an issue.
We learned in 2008 that underwriting requirements were too low, and the policy response was actually to reduce them further, allowing firms to use riskier assets for underwriting and the government buying some of those assets (QE).
From the perspective of a politician, the response to the 2008 crisis was superb. The Fed and Treasury teamed up to prevent more widespread insolvency of financial firms and even automakers. This led to both industries being increasingly beholden to politicians and the political process in general.
But imagine if the underwriting levels prior to 2008 had actually been adequate to prevent the cascade of insolvency. There would simply have been no crisis.
From the perspective of an insurance company or banker, reserve capital is sitting idle and going to waste. If the US requires more reserve capital, this gives a competitive advantage to foreign firms whose governments require less caution. So reducing underwriting requirements is a view supported by economic nationalists.
So considering that most policy discussion these days is dominated by the political class and by economic nationalists, of course the conclusion is that everything is being done in a very smart, sensible way.
In the past, before bailouts were so commonplace, we could expect the firms' selfish interests to moderate their appetite for risks to the firm's solvency, but this check is not really a factor anymore.
Is there no limit at which point the Fed will stop printing money? In theory, once all that money printing hits the actual economy and inflation starts going up, they'll have increase interest rates. I'm not sure I believe that 100%. I wonder how complacent they will be once inflation does start to raise, and eventually spiral out of control.
Inflation rates under the current administration have been very high relative to previous years after the 2008 crash. The Obama era Fed struggled to hit their 2% controlled inflation mark during the economic recovery but it has sat closer to 3% in recent years. See the chart in the link below:
Could it be that the system is just too complex, with too many variables - that nobody can really make sense of the entire world economy? Sure, you can look at segments and smaller systems and maybe make sense, but are we not wanting to focus long term (which means the world, not just US)?
I like the question based structure of this article. it does lack the one question I have though:
"How does it affect everyone else that is not a bank?"
I wish it were that simple. It’s truly a global economy and between the spike in oil prices, the looming brexit/not-brexit, the US-China trade war, and everything else, I think it’s all one big cluster%]+} and it doesn’t make a difference which of the two currencies you store your money in, long term.
1) Increase interest rates to attract new deposits
2) Sell assets — such as foreclosed homes now in the banks possession
With house prices at all time highs and interest rates at all time lows, both 1&2 sound great to me and absolutely have a direct impact on me.