tag:blogger.com,1999:blog-88190763152977043982024-03-13T18:02:59.258-04:00All Wonks of LifeUnknownnoreply@blogger.comBlogger57125tag:blogger.com,1999:blog-8819076315297704398.post-54127010677037395202016-01-22T16:30:00.000-05:002017-03-12T17:00:24.137-04:00Proposals for Reforming the Banking System<div class="MsoNormal">
Currently, the US financial sector pulls in upwards of 30% of <u>all </u>corporate income, which is both unacceptable and unsustainable. A financial services sector that is larger than the productive sector of the economy that it is intended to serve is entirely to large, and must be significantly reformed. While I support all of the proposals in Senator Elizabeth Warren's "21st Century Glass-Steagall" bill, I do not think the legislation is quite comprehensive enough. In my view, the proposals outlined below are necessary to truly reign in the financial sector and restore it to the safe, boring, utility system that it should be, to ensure a fairer, more efficient, and more productive US economy.<br />
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Much of this post comes from <a href="http://moslereconomics.com/2009/09/16/proposals-for-the-banking-system-treasury-fed-and-fdic-draft/" target="_blank">this article by the great Warren Mosler</a>, and is intended to present proposals for the FDIC, CFPB, OCC, SEC, Treasury, Federal Reserve, and the banking system. I worked off of Mr. Mosler's many powerful and well-developed ideas and added a few of my own. The basic premise of these proposals is that the US government exists for a <u>public </u>purpose, and as an extension of the US government, the banking system does as well.<br />
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US banks are public/private partnerships, that exist for the public purpose of establishing a safe an reliable payment system, and providing credit to American borrowers based on nonpolitical credit analysis. In the housing market, for example, the federal government provides much of the background support and regulates processes, with final credit determination made by private bankers. Supporting this type of credit creation on an ongoing, stable basis also demands a source of funding that is not market dependent. Hence most of the world’s banking systems include some form of government deposit insurance, as well as a central bank standing by to loan reserves to its member banks.<br />
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The US banking system is an extension of the US government, much like the US military. While Congress ultimately controls the military, it does not micromanage its daily affairs. The military has the discretion to move tanks and point guns without constant approval from Congress. Similarly, US banks are allowed to price risk and allocate credit without constant approval from Congress. However, the structure in which they do so would not exist without constant federal support, regulation, and supervision. Despite what you might hear from the right-wing think tanks, federal regulation and supervision does not place a net burden on honest lenders; on the contrary, it makes it possible for them succeed by relieving them of the impossible burden of competing with unscrupulous firms.<br />
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Further, national banks in the US are designated as “federal instrumentalities” in their federal charters. They have unique status among enterprises as “fiscal agents of the United States” who can accept and distribute deposits from federal spending. The ability to accept deposits, make payments on behalf of customers via the Federal Reserve System, and extend credit are unique prerogatives of banks. Since national banks are compulsory members of the Federal Reserve System, they also have a unique role in the implementation of fiscal and monetary policy in coordination with the US Treasury. Due to these prerogatives, national banks are designated as federal instrumentalities, a designation that is not applied to any other type of enterprise. This designation emanates both from statute and decades of judicial interpretation.<br />
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It is important to understand that our monetary economy is essentially constructed as a series of records of accounts to track how we make claims on goods and services. This system of records is a creation of the human mind, from nothing. The entire monetary system is created from “thin air”, so loan and deposits are just one form of asset and liability that is created within the monetary system. The supply of what we call 'money' is no more fixed than any person’s ability to type numbers into a computer. In essence, all of the financial assets and liabilities created from thin air are simply accounting relationships that enable us to record how we interact within our economy. Bank deposits and loans are just one type of way we account for these interactions, though they’re a particularly important type of interaction because they represent the primary medium of exchange in the current US economic system.<br />
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<b>Banking Under A Gold Standard</b><br />
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Under a gold standard or other fixed exchange rate regime, continuous and stable bank funding cannot be credibly guaranteed. In fact, fixed exchange rate regimes by design operate with an ongoing constraint on the supply side of the convertible currency. Banks are required to hold reserves of convertible currency, to be able to meet depositor’s demands for withdrawals. Confidence is critical for banks working under a gold standard. No bank can operate with 100% reserves. They depend on depositors not panicking and trying to cash in all their deposits for convertible currency. The U.S. experienced a series of severe depressions in the late 1800’s, with the ‘panic’ of 1907 disturbing enough to result in the creation of the Federal Reserve in 1913.<br />
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The Federal Reserve was to be the lender of last resort to insure the nation would never again go through another 1907. Unfortunately, that strategy failed. The depression of 1930 was even worse than the panic of 1907. The gold standard regime kept the Federal Reserve from freely lending its banks the convertible currency they needed to meet withdrawal demands and stay open. After thousands of catastrophic bank failures, a bank holiday was declared and the remaining banks were closed by the government while the banking system was reorganized.<br />
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When the banking system reopened in 1934, convertibility of the currency into gold was permanently suspended (domestically), and bank deposits were newly covered by federal deposit insurance. It has now been 80 years since the Great Depression. Thankfully, the United States and the vast majority of the wold has abandoned commodity currencies, and has for nearly a century used fiat currency systems. It would now take exceptionally poor policy responses for a financial crisis to cause another depression, although misguided and overly tight fiscal policies have unfortunately prolonged the restoration of output and employment since 2008.<br />
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The hard lesson of banking history is that the liability side of banking (deposits) is not the place for market discipline. That is, we cant rely on everyday depositors who "fund" banks, to adequately evaluate the balance sheets of these complex institutions, especially since our professional regulators continually struggle with this. Therefore, with banks funded without limit by FDIC insured deposits and loans from the central bank (reserves), all discipline is occurs on the asset side. This includes being limited to assets deemed ‘legal’ by prudential and consumer regulators, and minimum capital requirements also set by the regulators.<br />
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Therefore, to bolster the public purpose of banking (provide for a payments system and to fund loans based on credit analysis), additional proposals and restrictions are in order, which apply to insured depository institutions which includes commercial banks and credit unions. Private nondepository financial entities, such as investment banks and hedge funds, are not considered in this proposal.<br />
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<b>Proposals for the broad banking system</b><br />
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1. Insured depository institutions should only be allowed to lend directly to borrowers and then service and keep those loans on their own balance sheets. There is no further public purpose served by selling loans or other financial assets to third parties, but there are substantial real costs to government regarding the regulation and supervision of those activities. The public purpose of banking is to facilitate loans based on credit analysis, rather than market valuation. The accompanying provision of government insured funding allows those loans to be held on the balance sheet to maturity without liquidity issues, in support of that same public purpose.<br />
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The justification for securitzation is that it helps to spread risk around the entire financial system that would otherwise be concentrated in originating banks. This point is perhaps bolstered by the fact that capital standards and supervisory actions by prudential regulators, in the past, have incentivized insured depository institution to move riskier, variable rate assets of their books, in the misguided attempt to improve the soundness of individual institutions. All sorts of loans can perform perfectly well while remaining on the balance sheet of the originator, if they are properly underwritten. And a broad based negative-feedback financial collapse like in 2008 can be prevented with the proper fiscal policy, which if targeted accurately can prevent large scale borrower defaults.<br />
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During the years from 1940-1980, when housing growth was strong, and the credit needs of Americans was adequately met, mortgage originators, which were mostly life insurance companies, savings and loans, and small commercial banks, held their mortgages on portfolio and did not feed the secondary market, with the obvious exception of Fannie and Freddie. No private secondary market was necessary during this period of prosperity. The growth of securitzation in the last 30 years did not enhance the ability of the banking system to extend housing credit- on the contrary, it helped create a global financial crisis that destroyed tens of trillions of dollars in wealth and threw millions of homeowners into foreclosure. There is no real reason why 100% portfolio lending cannot meet the housing needs of the country. And finally from a consumer protection standpoint, securitization also often leads to poor record keeping and abuse by servicers. The extreme length and complexity of sorting out the post-2008 mortgage crisis is clear evidence of this.<br />
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So for all of these reasons, insured depository institutions should be prohibited from engaging in any secondary market activity. The argument that these areas might be profitable for the banks is not a reason to extend governmental banking enterprises into those areas.<br />
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2. US banks should not be allowed to contract and lend in LIBOR. LIBOR is an interest rate set in a foreign country (the UK) with a large, subjective component that is out of the hands of the US government. Recent events have demonstrated that in addition to being subjective, LIBOR is subject to manipulation and fraud.<br />
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Part of the recent crisis stemmed from the Federal Reserve’s inability to bring down rates on US LIBOR settings to its target interest rate, as it tried to assist millions of US homeowners and other borrowers who had contacted with US banks to pay interest based on LIBOR settings.<br />
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Desperate to bring US interest rates down for domestic borrowers, the Federal Reserve resorted to a very high risk policy of advancing unlimited, functionally unsecured, lines of credit called ‘swap lines’ to several foreign central banks. These loans were advanced at the Federal Reserve’s low target rate, with the hope that the foreign central banks would lend these funds to their member banks at the low rates, and thereby bring down the LIBOR settings and the cost of borrowing for US households and businesses.<br />
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There is no way for the Federal Reserve to collect a loan from a foreign central bank that elects not to pay it back. If, instead of contracting based on LIBOR settings, US banks had been linking their loan rates and lines of credit to the US Federal Funds rate, this problem would have been avoided. The rates paid by US borrowers, including homeowners and businesses, would have come down as the Federal Reserve intended when it cut the target rate.<br />
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3. Insured depository institutions should not be allowed to have subsidiaries of any kind. No public purpose is served by allowing banks to hold any assets such as CDOs ‘off balance sheet.’ These off balance sheet entities are also much more difficult for bank examiners to properly analyze and risk-weigh, since their values can be derived from any number of financial outcomes that occur both in and out of the banking system.<br />
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4. Insured depository institutions should not be allowed to make margin loans or accept financial assets as collateral for loans. Lending against financial assets is not an appropriate role for the insured banking system because it exposes it to systemic and market risk, which can then jeopardize the public purpose of a stable national lending platform. Lending against financial assets is a role for capital market entities such as private investment banks and hedge funds, which do not benefit from the subsidies of deposit insurance and unlimited Federal Funds. No public purpose is served by creating financial leverage within the banking system. This would also refocus the banking system on its original public purpose of lending against real productive assets.<br />
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5. Insured depository institutions should not be allowed to lend offshore. No public purpose is served by allowing them to lend for foreign purposes. Foreign lending only exposes the US banking system to risks that often fall outside the purview of prudential regulators.<br />
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6. Insured depository institutions should not be allowed to buy or sell credit default insurance. The public purpose of banking as a public/private partnership is to allow the nongovernment to price risk, rather than have the public sector pricing risk through public banks. If an insured depository institution relies on credit default insurance, it is transferring that pricing of risk to a third party outside the banking system, which defeats the whole purpose of having an insured banking system. <br />
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7. Insured depository institutions should not be allowed to engage in proprietary trading or any profit making ventures beyond basic credit creation. Net interest margins should be the main source of income for insured depository institutions. If the public sector wants to venture out of banking for some presumed public purpose it can be done through other outlets. All other financial activities should be done outside of the insured, Federal Reserve banking system.<br />
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8. Insured depository institutions should utilize FDIC approved credit models for evaluation of bank assets. Marking banks assets to market is not appropriate, since the process of lending itself is not market dependent. In fact, if there is a valid argument to marking a particular bank asset to market prices, that likely means that asset should not be a permissible asset of an insured depository institution in the first place. Therefore, marking to market rather than evaluation by credit analysis exposes banks to market crises, serves no further public purpose, and subverts the existing public purpose of providing a stable national platform for credit creation.<br />
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9. Every American citizen should have a legal right to access the payment system at no charge (as defined by Regulation DD/Truth in Savings.) It is no more acceptable that 40 million Americans do not have full, direct access to the payment system than if they did not have access to the water, sewer, or phone systems. Like those systems, the payment system is a utility function necessary for modern life. Therefore, any citizen who applies for a checking and savings account would be provided one at no cost, either at an insured depository institution or at a US Post Office. This would cut down on check cashing fees, loss or theft of cash, and the volatility and fraud associated with nonbank payment and storage systems.<br />
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Currently, the Community Reinvestment Act (CRA) gives regulators a few mild tools, both sticks and carrots, to incentivize banks to serve the communities in which they are located. However, the CRA covers only lending activity, which is only half of the public purpose of the banking system. The CRA, and its implementing regulations and guidance documents that bank examiners use, should be updated to include incentives and penalties for achieving universal access to checking and savings accounts.<br />
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10. Credit unions should not face regulatory asset limits on member business lending. Since credit unions, like community banks, tend to be smaller institutions with localized footprint and community ties, they are well suited for local business lending. Since the large national banks are increasingly retreating from small business lending, this would allow credit unions to fill in some of the gap.<br />
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11. In order to help smaller depository institutions, the Fed should loan unsecured Federal Funds in unlimited quantities to all insured depository institutions, regardless of size. This step would clearly establish banks as the credit allocation utilities that they already are, and eliminate public confusion that banks are merely intermediaries between savers and borrowers.<br />
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The regulators should then drop all requirements that a certain percentage of bank funding be ‘retail’ deposits. Small banks and credit unions are currently at a competitive disadvantage because the marginal cost of funds is too high. The true marginal cost of funds for small institutions is probably at least 2% over the Federal Funds rate. This is keeping their minimum lending rates at least that much higher, which also works to exclude borrowers who need that much more income to service their borrowings, all else equal.<br />
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The primary reason for the high cost of funds is the regulatory requirement for ‘retail deposits’, which causes these institutions to compete for a finite amount of available deposits in this ‘category.’ While, operationally, loans create deposits, and there are always exactly enough deposits to fund all loans, there are some leakages. These include cash in circulation, the fact that some banks, particularly large, money center banks, have excess retail deposits, and a few other ‘operating factors.’ This causes small institutions to bid up the price of retail deposits in the broker CD markets and raise the cost of funds for all of them, with any institution considered even remotely ‘weak’ paying even higher rates, even though its deposits are fully FDIC insured. Additionally, small institution are driven to open expensive physical branches that can add over 1% to a bank’s true marginal cost of funds. So by driving small institutions to compete for a limited and difficult to access source of funding the regulators have effectively raised the cost of funds for them.<br />
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<b>Proposals for the Federal Reserve System</b><br />
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1. As above, the Federal Reserve should lend reserves unsecured to member banks, and in unlimited quantities at its target Federal Funds rate. There is no reason to do otherwise. Currently the Federal Reserve will only loan to its banks through the discount window on a fully collateralized basis, which is both redundant and disruptive. Reserve banks demanding collateral when they lend is redundant because all bank assets are already fully regulated by Federal prudential regulators. It is the job of the regulators to make sure that all FDIC insured deposits are ‘safe’ and the Deposit Insurance Fund is not at risk from losses that exceed the available private capital. Therefore, the FDIC has already determined that funds loaned by the Federal Reserve to a bank can only be invested in ‘legal’ assets and that the bank is adequately capitalized as required by law.<br />
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There is no room for funding from the Federal Reserve to be ‘misused’ as banks already can obtain virtually unlimited funding by FDIC insured deposits (except for institutional size discrepancy, as described in #11 above.) The only difference between banks funding with FDIC insured deposits and funding directly from the Federal Reserve might be the interest rate the bank may have to pay; however it’s the further purpose of the Federal Reserve’s monetary policy to target the Federal Reserve funds rate. The Federal Reserve also tends to set quantity limits when it lends to its member banks, when there is every reason to instead lend in unlimited quantities.<br />
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Bank credit creation is not reserve constrained, so attempting to constrain it via reserve supply does not work. What constraining reserves does is alter the Federal Funds rate, which is the rate banks pay for reserves. So the only way the Federal Reserve can fully stabilize the Federal Funds rate at its target rate is to simply offer to provide unlimited funds at that rate as well as offer to accept Federal Funds deposits at that same target rate (currently called Interest on Reserves, accomplished by the establishment of Excess Balances Accounts). With no monetary risk or adverse economic consequences for lending unlimited quantities at its target rate there is no reason not to do this.<br />
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Another benefit of this policy would be to entirely eliminate the interbank Federal Reserve funds market. There is no public purpose served by banks trading Federal Reserve funds with each other when they can do it directly with the Federal Reserve. To eliminate the interbank markets entirely the Federal Reserve has the further option to provide funding with an entire term structure of rates to its member institutions, to both target those rates and also eliminate the need for any interbank trading. This could be accomplished through expansion of the Term Deposit Facility and Repo trading.<br />
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2. The federal funds rate should be dropped permanently to zero. There is no reason to set an arbitrary cost for banks to obtain what is an unfixed, free-floating, fiat currency. This zero rate minimizes cost pressures on output, including investment, and thereby helps to stabilize prices. It also minimizes rentier incomes, thereby encouraging higher labor force participation and increased real output. Additionally, because the non-government sectors are net savers of financial assets, this policy hurts savers more than it aids borrowers, so a fiscal adjustment such as a tax cut or spending increase would be appropriate to offset this loss of interest income.<br />
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Implementing a zero rate policy would also ease regulatory burdens on the banking system. Although many of the burdens placed by regulators on the banking system are useful, the need to mitigate interest rate risk is not. In recent years, fears of the Federal Reserve raising its overnight interest rate target have led prudential examiners to increasingly focus on interest rate risk, among the many other new requirements under Dodd-Frank. In the current variable rate environment, banks have to constantly monitor the maturities on the balance sheets for exposure to interest rate risk, and often mitigate these risks by entering into interest rate derivative contracts. A permanent zero rate policy would therefore reduce the need for many of the derivative tools currently used in the banking system, which remain inadequately regulated and supervised by the CFTC and SEC.<br />
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Additionally, several consumer protection regulations are based around rate spread, that is the difference between the 30-year Treasury and 30-year mortgages. For example, HMDA requires lenders to report mortgages that are originated above a certain spread, so when the long end of the yield curve changes as a result of Fed policy, the amount of mortgages that must be reported under HMDA changes. Consumer protections under HOEPA also kick in based on the basis point spread between certain mortgage products and and the prime rate, which itself is based off of the Federal Funds Rate. When the Fed changes the Funds Rate, all these spreads also change, which makes compliance with these regulations unnecessarily difficult for banks and credit unions.<br />
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3. All Federal Reserve bank examiners and supervisory staff should be employees of the Federal Reserve Board of Governors. Currently, examiners are employees of the Reserve banks, which have supervised entities as shareholders and board members. Without necessarily changing the work stations of exam/supervisory staff, shifting their employment to the Board would remove the potential for regulatory capture or conflict of interest (whether real or imagined).<br />
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4. Require Presidential nomination and Senate confirmation of the President of the Federal Reserve Bank of New York. The FRBNY is the closest to the Board of Governors in power and responsibility, and it should be overseen as such. Since the FRBNY executes the directives of the FOMC and supervises many of the largest bank holding companies in the world, its responsibilities are far higher than any other Reserve bank.<br />
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<b>Proposals for the FDIC (Federal Deposit Insurance Corporation)</b><br />
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1. Remove the $250,000 cap on deposit insurance. The public purpose behind the cap is to help small banks attract deposits, under the theory that if there were no cap, large depositors would gravitate towards the larger money center banks. However, this cap drives deposits into the uninsured and unsupervised money markets, which played a large part in funding the mortgage bubble of the 2000’s. However, once the Federal Reserve is directed to trade in the Federal Funds markets with all member banks, in unlimited amounts, the issue of available funding becomes moot. This would also help eliminate the cost discrepancy problem for small banks described in #3 below.<br />
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2. Insured depository institutions should not be funding the FDIC’s operations through taxes or fees. As with the proposal for the OCC and SEC, the FDIC’s operations should be entirely funded through the Federal Reserve System. Taxes on solvent banks should not be on the basis of the funding needs of the FDIC. Taxes on banks have ramifications that can either serve or conflict with the larger public purposes presumably served by government participation in the banking system. These include sustaining the payments system and credit creation based on credit analysis. Any tax on banks should be judged entirely by how that tax serves or doesn’t serve public purpose.<br />
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3. The FDIC, whether through regulation, guidance, or supervisory discretion, should not be requiring well-capitalized institutions to fund themselves through any particular mix of core retail or brokered deposits. Requiring institutions to fund themselves through a certain percentage of retail deposits raises the marginal cost of funds for community banks, which have limited branch networks and areas of operation. This forces them to bid up the price of retail deposits within their operating region, which puts them at a competitive disadvantage to banks with national reach. Any liquidity risks posed by larger reliance on wholesale funding would be eliminated by the above proposal to allow the Federal Reserve to trade unlimited Federal Funds directly with all depository institutions.<br />
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3. The FDIC should operate without direct assistance from Treasury (apart from guaranteeing the full faith and credit of the Deposit Insurance Fund). The FDIC is charged with taking over any bank it deems insolvent, and then either selling that bank, selling the bank’s assets, reorganizing the bank, or any other similar action that serves the public purpose government participation in the banking system. The TARP program was at least partially established to allow the US Treasury to buy equity in specific banks to keep them from being declared insolvent by the FDIC, and to allow them to have sufficient capital to continue to lend.<br />
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Normally, once a bank incurs losses in excess of its private capital, further losses are covered by the FDIC. However, if the Treasury ‘injects capital’ into a bank, all that happens is that once losses exceed the same amount of private capital, the US Treasury, also an arm of the US government, is next in line for any losses to the extent of its capital contribution, with the FDIC covering any losses beyond that.<br />
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So what is changed by Treasury purchases of bank equity? After the private capital is lost, the losses are taken by the US Treasury instead of the FDIC. It makes no true difference for the US government and the ‘taxpayers’ whether the Treasury covers the loss indirectly when backing up the DI Fund, or directly after ‘injecting capital’ into a bank. All that was needed to accomplish the same end as the TARP program (to allow banks to continue to function and acquire FDIC insured deposits) was for the FDIC to either make Prompt Corrective Actions against undercapitalized banks, or directly reduce capital requirements. Instead, both the Obama and Bush administrations burned through substantial quantities of political capital to get the legislative authority to allow the Treasury to buy equity positions in dozens of banks. And, to make matters worse, it was all accounted for as additional federal deficit spending.<br />
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While this would not have mattered if Congress and the administrations understood the monetary system, the fact is they didn’t, and so TARP therefore restricted their inclination to make further fiscal adjustments to restore employment and output. Ironically, this persistently tight fiscal policy continues to contribute to the rising delinquency and default rate for bank loans, which continues to impede the desired growth of bank capital. This backwards view of finance permeates every level of the policymaking community and has significantly reduced national output and standards of living.<br />
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<b>Proposal for the CFTC, SEC and OCC</b><br />
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The CFTC, SEC and OCC should not be funded by any fees, assessments, taxes, or appropriations. In order to preserve agency independence and remove any potential conflicts of interest, these agencies should be funded entirely as part of the Federal Reserve System, as the Consumer Financial Protection Bureau is currently. This would allow the agencies to grow their staff to appropriate levels, and offer competitive compensation to attract and retain public servants of the highest integrity.<br />
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Along with the FDIC, at most, this would reduce Fed remittances to Treasury by $8 billion, a fraction of the current amount.<br />
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SEC FY2015 Budget Request: ~$3 billion<br />
OCC FY2015 Budget authority: ~$1.06 billion<br />
CFPB FY2015 Budget authority: ~$582 million<br />
FDIC FY2015 operating budget: $2.3 billion<br />
CFTC FY2015 Budget request: $280 million<br />
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Further, since a great deal of financial activity now occurs in the capital/derivatives markets outside the banking system, the resources and responsibilities of the SEC and CFTC, the two federal nonbank regulators, need to be significantly increased. While both agencies do currently have supervisory roles, they should have the resources to develop examination and supervision corps that are on par with those of the prudential regulators.<br />
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<b>Proposals for CFPB</b><br />
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The Consumer Financial Protection Bureau should use its exemption authority to exempt all credit unions from coverage under the Mortgage Servicing, Loan Originator Compensation, and Escrow Rules. Credit Unions are democratically operated, nonprofit financial cooperatives that exist only to serve their members not make a profit. All credit union customers are also members, so the profit centered, client relationship of the for-profit banking world does not apply.<br />
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The problems that the Servicing, Originator Compensation, and Escrow rules are intended to prevent, all stem from the profit motive which does not exist in credit unions. The potential for consumer harm is minimal when consumers are also voting members of the institution. However the Ability-to-Pay/QM Rule should continue to apply to all credit unions, in its current form. There is good macroeconomic reasoning to cover all US creditors with the same underwriting requirements, in order to prevent credit growth from shifting into entities with weaker underwriting practices.<br />
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The Bureau should also be given clear legal authority to regulate and supervise all auto lending activities, whether by insured depository institutions, auto dealers, or otherwise. This is a notoriously opaque and often abusive business which has shamefully operated in the shadows for too long.<br />
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<b>Proposals for the Treasury</b><br />
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1. Cease all issuance of long term Treasury securities, and allow Treasury to only issue paper with maturities of three year or less. This would provide adequate safe assets to build bank capital and meet pension fund investment obligations, without artificially raising the term structure of interest rates. The Treasury Borrowing Advisory Committee (TBAC) could continue to provide guidance on maturity issuances of three years or less.<br />
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No public purpose is served by the issuance of long-term Treasury securities with a non-convertible fiat currency and floating exchange rates. Issuing such securities only serves to support the term structure of interest rates at higher levels than would otherwise be the case. Since these long term rates serve as the benchmark for trillions of dollars of investment, higher long term rates only serve to adversely raise the price structure of all goods and services. Any long-term asset price support that may be deemed necessary could be achieved by Federal Reserve Banks auctioning term deposits, which are functionally the same as US Treasuries, but don't count as "national debt."<br />
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This change, which seems dramatic, would in reality have no effect on fiscal policy or public finance. At the most basic operation level, federal spending simply adds deposits to reserve accounts at the Federal Reserve. Whether these deposits are swapped to securities accounts is irrelevant to anything except interest rates and asset prices, as securities accounts are available to the public and reserve accounts are not.<br />
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Further, since there is no operational difference between direct reserve creation and security issuance, there is no inflation risk involved (which would not be the case for nations on a fixed-exchange rate). For nations like the US, it makes no difference whether “financing” is executed by the treasury or central bank, since both constitute government, that is, the state using its monopoly power to create currency (ask yourself: what is the difference between overnight federal reserves, and say, a two-day treasury note). The only financial difference is payments of interest, which are simply fiscal additions like any other that increase non-government net financial assets. Since all this spending is simply the issuance of tax credits and the state is the monopoly issuer of tax credits, which it accepts alone in payment of the financial obligations it imposes, there is no financial limit on the amount that the state can create.<br />
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2. Treasury should not be allowed to purchase financial assets, including bank equity. This would also limit the activities of Treasury’s Exchange Stabilization Fund to only dealing in foreign exchange. Government purchasing of financial assets should be done only by the Federal Reserve, as has traditionally been the case. When the Treasury buys financial assets (ie TARP) instead of the Federal Reserve, all that changes is the reaction of the President, Congress, economists, and the media, as they misread the Treasury purchases of financial assets as federal spending (increasing the dreaded “deficit”), which ends up limiting future fiscal options.<br />
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<b>Conclusion</b><br />
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These proposals will serve to clearly bifurcate the banking system into its two important roles: providing full access to the payment system and safe savings, and granting credit based on credit analysis. These two functions should be operated distinctly, since history has demonstrated that trying to control credit through the price, quantity, or availability of liquidity has never worked. While operationally, it is already the case that credit creation is not constrained by quantities of liquidity, these proposals would make this absolutely clear to both bankers and regulators. This would free up regulatory resources to focus on the public necessity of sound underwriting, which should be the main focus of banking policy.<br />
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These proposals will quickly restore the US economy to positive growth, full employment, and establish a banking system that will promote public purpose and require less regulation while substantially reducing the systemic risk inherent in our current institutional arrangements. This is not nationalization. This is not socialism. This is not an attempt to politicize the credit creation process. It is completely possible, completely constitutional, and firmly rooted in the successful American banking system we built decades ago. This leaner, simplified system does not threaten private enterprise. It actually strengthens private enterprise by reducing the massive rent-seeking operations that our bloated financial sector has devised, which suck efficiency and demand out of our real, nonfinancial economy. Capital formation is not a magical process. It is not something that requires a great deal of complexity or intelligence.<br />
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So these reforms go far beyond Dodd-Frank and even Glass-Steagall. They will restore our banking system to the simple, boring utility system that existed in the four decades when our nation was most prosperous and our middle class most robust. If bankers want to continue to think of themselves as businessmen, they are free to do so. But the basic functions of banking will no longer be conducted under the false premise of private, competitive, market activity.</div>
Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-8819076315297704398.post-20831956988291703482016-01-07T13:20:00.003-05:002017-04-17T22:08:08.319-04:00Making (some) Sense of the Middle East<br />
The tension between the two main factions of Islam has dramatically escalated over the past few days, as Saudi Arabia, and a few other countries, have severed their diplomatic ties with Iran. (This has had the added benefit of driving down oil prices, since both Sunni KSA and Shia Iran are major oil producers, each of which are refusing to lose market share by cutting production.) There remains widespread confusion in the west as to the nature of this conflict. So when it comes to evaluating the perpetual disaster that is the Middle East, I find the easiest strategy is to divide the actors into two sides. These sides are Sunni and Shia, the two major factions of Islam. These two groups have been at war for centuries, and the current conflicts in the Middle East are just the modern expression of this conflict (for a better display of the Sunni-Shia geography, check out <a href="https://prod01-cdn07.cdn.firstlook.org/wp-uploads/sites/1/2016/01/Shia-and-Oil-lg.jpg" target="_blank">this great map</a>.)<br />
<br />
<a href="https://prod01-cdn07.cdn.firstlook.org/wp-uploads/sites/1/2016/01/shia-oil-cropped-2-1000x865.png" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img alt="shia-oil-cropped-2" border="0" height="345" src="https://prod01-cdn07.cdn.firstlook.org/wp-uploads/sites/1/2016/01/shia-oil-cropped-2-1000x865.png" width="400" /></a>So on one side you have the Sunni nations and their allies:<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Kingdom of Saudi Arabia (KSA)<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Qatar<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>United Arab Emirates (UAE)<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Egypt<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Jordan<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Turkey<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>United States/NATO<br />
<br />
And on the other side you have the Shia and their allies:<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Iran (Shia theocracy)<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Iraq (population split, but Shia government)<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Assad government in Syria<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Hezbollah in Lebanon<br />
•<span class="Apple-tab-span" style="white-space: pre;"> </span>Russia<br />
<br />
<br />
As you probably know, the growing threat to the west is the rising militancy of factions of Sunni Muslims that have formed the terrorist groups of Al-Qaeda, Al-Nusra, and the Islamic State (ISIS). The Sunni nations listed above have been not-so-secretly funding these terrorist groups, partially in an attempt to take down the Shia Bashar Al-Assad who is the president of Syria. As a Shia Muslim, Assad is the only thing standing in the way of total Sunni domination of the Arab world, since the Shia in Iraq are barely clinging on power and the Iranians are isolated in the north. Assad has also been one of the few Arab leaders consistently protecting Arab Christian minorities from violence. The radical Islamists, who are mostly Sunni, have made it clear that establishing a Sunni caliphate, or Islamic State, is their goal. This is a much more radical ideology that even Al-Qaeda, which was mostly concerned with simply ridding the Muslim world of western influence.<br />
<br />
Russia has been a long term ally with the Shia governments in Iran and Syria, partially because both nations were hostile with the United States and Turkey, and partially because of Russia’s conflict with the Chechens, who are mostly Sunni Muslims. The Russians and Turks have been enemies for centuries, constantly waging war over seaports and agricultural land. The Crimean War between Russia, and Turkey+Europe was one such fight. Russia has therefore chosen to ally itself with Shia Muslims, both because Russia’s main oil competitors are Sunni states, and because the Shia are a small minority within Islam whom the Russians deem to be worthy of defending.<br />
<br />
Russia had been covertly supporting Assad’s fight against the rebellion in Syria since it began in 2011, but dramatically escalated its presence in Syria a few months ago, when they began flying their own sorties to bomb ISIS and the Syrian rebels in response to the downing of their airliner. This bombing campaign also had (for Putin) the added benefit of annoying NATO, of which Turkey (a supporter of the Syria rebels) is a member.<br />
<br />
This conflict has been significantly worsened by the Obama Administration’s Cold War mindset. Habitually seeing Russia as the enemy has prevented the administration from clearly rebuking the increasing radicalization of Sunni Islam, which has awkwardly been funded by our Saudi and Turkish allies. Although we have traditionally seen Iran and Russia as adversaries, they are our clear allies in the fight against Sunni militants. The United States has always been good at dealing with state/ governmental enemies (the enemy we know). But history has shown that we have been terrible at dealing with non-state enemies, whether they be the Viet-Cong, Al-Qaeda, or now ISIS (the enemy we don’t). Although the governments of Iran, Russia, and Syria are horrible, brutal dictatorships, they are now, clearly, the least-worst alternatives to the radical Sunni guerrillas that are infecting the Middle East with ever-growing brutality.<br />
<br />
Back in 2013, the United States was just a few days away from declaring war against Assad and toppling his regime. The Obama administration had drawn up plans for a full scale assault, and had bombers and ships in position ready to strike, only to call off the attack at the last second, claiming that Congressional approval was suddenly necessary. In retrospect, carrying through on this plan would have been a disaster on par with the removal of Saddam Hussein in Iraq. We now know that the Syrian rebels that were fighting Assad were mostly Sunni jihadists of various stripes, many of whom became ISIS. But even after the administration pulled the bombing at the last minute, it continued to insist on Assad’s removal and against any Russian involvement.<br />
<br />
The events of the past few months, including the destruction of a Russian airliner and the massacre in Paris, revealed the administration’s Syria policy to be completely untenable. Just as the CIA-supported anti-Soviet mujahedeen morphed into Al-Qaeda during the 1980s, the CIA-supported anti-Assad rebels morphed into the uncontrollable Islamic State. This neocon Cold War strategy of training and arming rebels groups to fight against state enemies of NATO has repeatedly proven catastrophic, as these Islamist groups inevitably turn their anger against their western supporters.<br />
<br />
For all its mistakes however, the Obama administration should be applauded for finalizing a nuclear deal with Iran. Secretary Kerry in particular deserves praise for his tireless efforts to finalize this deal, which was no easy task. Although Iran is still far from friendly towards the United States, at least the nuclear issue has been put on the back burner, at a time when we desperately need to stake out clear lines in this conflict. Had the deal not been struck, it’s likely that the US would formed deeper relationships with the Sunnis, making the fight against ISIS even more difficult.<br />
<br />
Secretary Kerry’s recent remark that the US is “not seeking regime change” in Syria demonstrated that the administration’s position is slowly changing. Finally admitting that their previous approach to Syria was utterly wrong will be very difficult for any person in the White House to admit, especially since it fit the mold of previous US interventions. However last year, VP Biden accidentally admitted during a speech at Harvard that the US’ Sunni allies were the problem, saying "Our biggest problem was our allies… the Turks… the Saudis, the Emirates, etc, what were they doing? They were so determined to take down Assad and essentially have a proxy Sunni-Shia war, what did they do? They poured hundreds of millions of dollars and tens, thousands of tons of weapons into anyone who would fight against Assad."<br />
<br />
There is certainly an argument to be made that Assad overreacted to the originally peaceful antigovernment protests in Syria that began during the 2011 Arab spring. But the reality here in 2016 is that Assad remains in power with the support of the Syrian people, at least in the eastern, more urban parts of the country. Despite western politicians and media portraying Assad as the Syrian version of Saddam Hussein, recent developments have made it clear that for the time being, the only hope for a peaceful resolution to the Syrian conflict is for Assad to stay in power.<br />
<br />
So I’d posit that the US create a sliding scale of Middle Eastern governments. The worst possible combination is religious dictatorships, followed by secular dictatorships, followed by secular democracies. We can debate whether the Assad government falls under secular dictatorship or secular democracy, but there is no debating that Assad is one of the few remaining Middle Eastern leaders who is committed to secular government of some type. The Saudis on the other hand, fall on the worst end of the scale- they are neither secular nor democratic, as last week’s mass execution clearly demonstrated. For the Middle East to have any hope of a peaceful future, the west must embrace and support secular governments, even if that means taking sides against governments with which we have been previously allied (KSA and Turkey).<br />
<br />
Western interventions in Iraq, and now Syria, have destroyed two ancient societies and thrown the entire region into chaos. Heres to hoping our leaders will see the writing on the wall and turn away from the Medieval Saudi oligarchs, and toward more modern and moderate Middle Eastern leaders.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-28389085139846388702015-12-04T15:12:00.001-05:002017-04-17T22:08:08.332-04:00Dissecting the Don6 months ago, I was worried that the 2016 presidential election was shaping up to be one of the most boring in modern history. The conventional wisdom at the time was that Hillary and Jeb would go against each other in the 2016 Battle of Bores with Billions. Now, with Donald Trump polling in the high 30's with only three month until Iow and New Hampshire, that prediction was, thankfully, far off base.<br />
<br />
Trump's success has come to the surprise of most of the US political establishment, media, and punditry. Nobody took his campaign seriously during the few weeks before the first Republican debate, and following the debate, most pundits thought he was finished. Of course, now we know that the exact opposite was true (and that most of the political punditry is worthless).<br />
<br />
The same pundits that got everything wrong so far have taken to writing hundreds of complicated articles dissecting the Trump phenomenon, and predicting when or if it would end. But as I see it, the reason for his success is actually quite simple: Donald Trump understands, perhaps better than anyone, that political language no longer has any meaning. American political discourse has been rendered meaningless by decades of Orwellian tactics by the right wing political and media machine. The media, which is supposed to be the caretaker of objectivity in national political discussions, has for decades been complicit in the conservative takeover of the US political economy and therefore has little to no legitimacy in the eyes of the American public, which has been economically crippled and politically marginalized by neoliberalism. The media can yell and scream all day long about the vile, racist, and borderline-fascist comments made by Trump and his supporters, but it will have little to no impact. To steal a line from"Who's Line", 21st century American politics is a place where <i>"everything is made up, and the facts don't matter." </i><br />
<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQcqgp3PKrq0kqNyPduoyzuZ-EFL4Se4Fz7VBm2CzbJahPIMHaqW_RnCQcHEfx4N_61yo5eOHP4T53nlPrYw9IBqp6dVp1aiERA4moplj2VYz80qnZRcqZ7k4_FqQSTnau8M3cl3X6eBgW/s1600/483201940-republican-presidential-candidates-donald-trump-and.jpg.CROP.promo-xlarge2.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="285" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQcqgp3PKrq0kqNyPduoyzuZ-EFL4Se4Fz7VBm2CzbJahPIMHaqW_RnCQcHEfx4N_61yo5eOHP4T53nlPrYw9IBqp6dVp1aiERA4moplj2VYz80qnZRcqZ7k4_FqQSTnau8M3cl3X6eBgW/s400/483201940-republican-presidential-candidates-donald-trump-and.jpg.CROP.promo-xlarge2.jpg" width="400" /></a>Trump understands that the political process has no integrity or legitimacy, so he treats it with all the respect it deserves-- which is to say, none. Unlike the more serious establishment GOP contenders, Trump doesnt bother to act as if any part of the process is worthy of anything in and of itself. He sees it as purely a means to an end, and doesn't care how he gets there. And he probably knows that the reliably short-term memories of the American electorate will allow him to soften and regulate his tone during the general election, and res-cast himself as a practical businessman who just want to "Make American Great Again!!!" Watch for his tone to drastically soften once he has sewn up the primary.<br />
<br />
I suspect Trump also knows that policy proposals, especially during hotly contested primaries, are a joke. That's why his plan to cut taxes by $10 trillion, regulate health insurance at the federal level, and deport all illegal immigrants are so absurd. Since these proposals are meaningless anyway, why not go full-on right wing to suck in as much of the base as possible? So far, this has worked better than any political analyst could have imagined. This also happens to be a perfect strategy for wooing in a Republican base that has been conditioned to angrily reject nuance and analytic thought.<br />
<br />
It is also hard to overestimate how much Trump's ascendancy scares the shit out of the Republican establishment. Trump has swiftly hijacked a political and media machine that many in the GOP establishment have spent their entire lives crafting. From the Powell memo to Citizens United, the GOP has built a system of electoral repression and unbridled corporate financing that they thought would cement their political power for a generation. Then along comes Donald Trump, a billionaire with no political experience, who simply manhandles their entire operation and forces it to his own personal advantage. He easily dispensed the 'inevitable' $125 million Jeb Bush campaign with a few zippy deliveries of the novel "low-energy" line. All the right-wing SuperPACs, attack ads, pundits, analysts, and even Fox News, were no match for Trump's "high energy", wealth, and force of personality. Trump has brow-beaten them all into submission and now has a clear path to the nomination.<br />
<br />
Keep in mind, Trump is really not a right wing conservative at heart. He is more likely an Eisenhower Republican, who believes that government has some sort of proactive role in the economy, to do great, 100% yuge things, Big League. And in all honesty, Trump is a good representative for the United States at the moment- White, slightly overweight, aging, loud, rich, and rabidly unapologetic.<br />
<br />
That's why nothing Trump says, controversial or mundane, matters at this point. He's little more than a political opportunist who saw a right-wing base that was ripe for the picking. He took one look at the field of so called "inevitable" Republican candidates, and thought out loud "Hey, I can do better than these bozos!"-- and so far, he has.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-49004018834970061372015-11-19T11:27:00.002-05:002017-04-17T22:08:08.366-04:00Obama's Arbitrary Approach to ArbitrationMuch noise has been made in recent months about the pending Trans-Pacific Partnership (TPP) agreement currently working its way through Congress. While recent reports have indicated that the deal may have stalled in Congress, I think its still worth noting one element of the deal that reveals a startling hypocrisy from the Obama administration.<br />
<br />
While the Consumer Financial Protection Bureau (CFPB) <a href="http://www.consumerfinance.gov/newsroom/cfpb-considers-proposal-to-ban-arbitration-clauses-that-allow-companies-to-avoid-accountability-to-their-customers/" target="_blank">begins its foray into regulating</a> the world of private arbitration clauses, a different agency of the Obama administration is taking on the opposite approach. While the CFPB's efforts are to be applauded,any improvements that may result domestically will be offset by the international devastation that would arise from a particularly nasty provision of the TPP.<br />
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<u><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgG15Z40j0UBaL48M9yd_-sSvgpKego4DwJIk8RPn7UW5DHCE6c2gwWYtXVsSbAQuOqLw0a9K59amKCw40-8Zii9BL0wEP6K8sFujaGbByhyp7uOFWP-r1cL1Dbj2Xsw1Xy8fgUG-f2ZCyQ/s1600/cfpb+vs+ustr.PNG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="104" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgG15Z40j0UBaL48M9yd_-sSvgpKego4DwJIk8RPn7UW5DHCE6c2gwWYtXVsSbAQuOqLw0a9K59amKCw40-8Zii9BL0wEP6K8sFujaGbByhyp7uOFWP-r1cL1Dbj2Xsw1Xy8fgUG-f2ZCyQ/s640/cfpb+vs+ustr.PNG" width="640" /></a></u></div>
<u><u><br /></u></u>
<u>A little background on arbitration:</u><br />
<br />
The CFPB's rulemaking, if finalized, would be the first attempt by the federal government to crack down on the ballooning use of what are called "forced" arbitration clauses, which appear in all sorts of commercial contracts: from real estate leases, to cellphones, and cars. Forced arbitration clauses routinely are inserted into the fine print of contracts that people must sign to buy a product or service or get a job. Millions of Americans are inadvertently signing away their rights to sue the entity they are doing business with when they sign these agreements. Arbitration is a process in which a private firm is hired to settle a dispute without going to court. It was designed as a voluntary alternative to actual litigation.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxucJfOT75pr-Amjk-aBhelCeISKO-On8OkqlMIeenZKPgiIK9kcqwi599UUfbklPTwbevKQrUMAtlzGQLugGe76Ueq22g4secEyhzDWDHGkxBb8FV-1rLhABFOO4FHm9DK8NTyDrKuaEq/s1600/fair_arb_action+%25281%2529.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxucJfOT75pr-Amjk-aBhelCeISKO-On8OkqlMIeenZKPgiIK9kcqwi599UUfbklPTwbevKQrUMAtlzGQLugGe76Ueq22g4secEyhzDWDHGkxBb8FV-1rLhABFOO4FHm9DK8NTyDrKuaEq/s400/fair_arb_action+%25281%2529.jpg" width="325" /></a>While the language varies, the point of arbitration is to shield business from their customers suing them, especially through class-actions suits. Whether they know it or not (usually not), the consumer agrees to have their issues settled by a private arbitrator, who is not an appointed judge of any town, county, or state. These arbitrators are often selected by the business itself, which presents a obvious conflict-of-interest problem and stacks the deck against the consumer and their attempt at redress.<br />
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Arbitration is now a tool used by corporations large and small, to force consumers and employees to surrender their right to hold corporations accountable for wrongdoing before a real, governmental court. The main selling point of the pro-arbitration crowd is that it is "discount justice"-- consumers can get some form a redress quicker and cheaper than through the actual justice system. No need to hire one of those slimy lawyers, file a lawsuit, or appear before some crotchety old judge.<br />
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While at first glance it may seem like a more efficient system, arbitration is a way for powerful corporations to evade responsibility and rule of law. Under forced arbitration, individual consumers or employees must fight it out before a private arbitrator essentially chosen by the company that cheated or discriminated against them. Arbitrators do not need to be lawyers or follow precedent, yet their word is nearly always final and unappealable.<br />
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Nearly all forced arbitration clauses also ban class-action suits, which allow individuals to band together to bring their common claims against big corporations. Without the ability to band together, individual claims are usually too small for any one person to bother with the costs of litigation, allowing shady companies to do small amounts of harm to a large number of people without consequence. The whole false right-wing narrative about "frivolous lawsuits" has empowered the stunning growth of these clauses over the past decade.<br />
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In my view, these hidden arbitration clauses also violate the very spirit of our Constitution, which supposedly provides equal protection by, and access to, government for the redress of grievances.<br />
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<br />
So while CFPB (an agency which Obama himself signed into law) takes on the issue domestically, the White House is burning through what is left of its meager political capital to push through the widely-despised Trans-Pacific Partnership "trade" deal on the international level. At the core of the TPP is the so called "investor-state dispute settlement" (ISDS) system, which is basically a globalized arbitration panel.<br />
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These international panels grant extraordinary new rights and privileges to foreign corporations and investors that formally prioritize corporate rights over the right sovereign nations to govern their own affairs. These terms empower individual foreign corporations to skirt domestic courts and directly challenge any policy or action of a sovereign government before World Bank and UN tribunals.<br />
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Comprised of private attorneys, the extrajudicial tribunals are authorized to order unlimited amounts of compensation for health, environmental, financial and other public interest policies that don't fit corporate interests. The amount awarded to corporations is based on the "expected future profits" that the corporation would have earned in the absence of the public policy it is attacking.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWVc1rrAwgMEzcLwcPumYeZqTQJAKxuAfxOvubY_nSxdaad1n-msIpCac6Ak0AMHX8N-DED_rvdqT8cs08Fb72EKM4cOuW33oWmI0RXS6rOXSZ8kzoSKhCvJllg6oipF6t0d5qj5lat_Uq/s1600/download+%25281%2529.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="317" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWVc1rrAwgMEzcLwcPumYeZqTQJAKxuAfxOvubY_nSxdaad1n-msIpCac6Ak0AMHX8N-DED_rvdqT8cs08Fb72EKM4cOuW33oWmI0RXS6rOXSZ8kzoSKhCvJllg6oipF6t0d5qj5lat_Uq/s320/download+%25281%2529.jpg" width="320" /></a></div>
This panel would provide a super-national platform for multi-national corporations to sue sovereign governments. If a government proposes, for example, a new series of environmental regulations that impose costs on a corporation, that corporation can bring suit against the government with the ISDS, in an attempt to stop the regulation or receive compensation for compliance costs and any potential profit losses emanating from the regulation. This arrangement already exists in a more limited form at the World Trade Organization, where suits can be brought against countries who impose trade barriers.<br />
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<div>
ISDS is essentially arbitration on steroids. Just as consumers are disempowered by forced arbitration domestically, sovereign nations are disempowered by arbitration internationally. This expansion of private, unaccountable corporate power is antithetical to every democratic ideal, and is a horrifying reversal in the gradual expansion of global democracy that occurred in the 20th century.</div>
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The passage of TPP would symbolize yet another weakening of national democratic sovereignty. Democratic government would be powerless to appeal decisions of this international arbitration panel, which is controlled by neoliberal, corporate interests and ultimately not accountable to anyone. By creating a platform for corporations to overpower national governments, the TPP would codify the dominance of global corporate power, which has grown exponentially in the past 30 years.<br />
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That a former Constitutional law professor would have anything to do with such a flagrant offense to a core principle of the US Constitution is notable enough. But the fact that his White House is pushing to expand corporate-friendly arbitration on a global scale is particularly disgusting. If implemented, this panel would represent another step in the corporate globalization.<br />
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So while this scheme may seem rather odd, I don't mean to suggest that this policy incongruity is surprising. In fact, it fits right into the current dynamics of DC policymaking- make some highly visible domestic policy moves to keep people placated, while moving behind the scenes in opposite, more pernicious ways.<br />
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Thankfully, the threat of the TPP has mobilized grassroots movements and mass protests across the globe in opposition. And just about every presidential candidate, both Republican and Democrat, currently opposes the TPP. Neoliberalism may have finally gone to far. The tide may finally be turning.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-21896861583790662642015-11-09T15:47:00.001-05:002017-04-17T22:08:08.322-04:00Power is Money<div class="MsoNormal">
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<a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a>Since
bank lending creates the vast majority of the money supply, bank lending
controls the vast majority of resource allocation in our economy. That’s why it
is extremely important that policymakers fully understand the banking system,
and why it’s so tragic <a href="https://twitter.com/ericlonners/status/683787405116051457" target="_blank">that they don’t</a>.<o:p></o:p></div>
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From a
political perspective, realizing how much of the money supply, and therefore
allocation and distribution of real resources is controlled by bankers, is very
difficult. It is not easy to acknowledge that most economic activity is
dictated not by our democratically-elected government issuing money as it
spends, but by profit-chasing bankers living it up as overpaid bureaucrats. The
vast majority of what we call money is not created by government spending, but
by private bank lending. This realization forces one to rethink their approach
to all public policy issues, since public policy always involves resource
allocation in some form or another.<br />
<br />
Every
individual and every industry in this country relies on the banking system in
some way, so it’s important for all of us to understand how it actually works.
The first step in this process is to throw out any preconceived notions about
how you thing banking works, because they are almost certainly outdated at
best, and totally wrong at worst.<br />
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<o:p></o:p></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh56bxfC-sqxdkmorNxeEqwH-it2f51_NCPkeiKdVBeuXLGDzyUWEBap32iPAIi7__WKYy9iFiqxO5G44HMsCLnCVroOce2vSf_8ERK-rqbIo54gcAOzZenRAseOljW_RJC7xx9oGy7Loap/s1600/Digital-Money.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="171" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh56bxfC-sqxdkmorNxeEqwH-it2f51_NCPkeiKdVBeuXLGDzyUWEBap32iPAIi7__WKYy9iFiqxO5G44HMsCLnCVroOce2vSf_8ERK-rqbIo54gcAOzZenRAseOljW_RJC7xx9oGy7Loap/s400/Digital-Money.jpg" width="400" /></a>Recognizing
banks as credit allocation utilities, and not intermediaries of preexisting savings, changes
everything. All economic models get blow up once the reality of money as a
measurement tool, and not a quantity the price of which is determined by supply
and demand, is realized. Therefore, since most economic models treat interest
rates as a reflection of the supply/demand for money, these models become
useless. All the efforts by economists to derive meaning from interest rates
(what is “natural”, what is the “equilibrium rate”, Taylor Rule, etc) are a
complete waste of time, and distract from the necessary focus on what is
happening in the real economy. </div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br />
<!--[endif]--><o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Fiat
currency is a unit of measure and a medium of exchange, and it works great in
those roles. Savings of fiat should be a completely separate activity from the
day to day transactions in the formal monetary economy, not artificially linked
to the medium of exchange in some kind of metal commodity. Fiat costs nothing
to produce, and is unlimited in supply. Its value is ultimately derived by the
fact that it is the only thing that the US government will accept for tax
payments, which it imposes to the tune of $3 trillion a year. You can’t pay
your taxes with gold coins.<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
When the banking system lends money into existence, it only does so for the
purposes of yielding a positive financial return. This can be a very useful
incentive to drive many different types of commerce that an economy needs to
thrive. But no sensible person could argue that all money creation should be
directed only towards profitable enterprises. There are many things beneficial
to human society that cannot be achieved under a profit motive. Public
infrastructure, retirement security, education, healthcare, defense; these are
all things that we acknowledge in some form need to be managed by the
governmental sector, since they are both necessary to our lives, yet not always
feasible when run for a profit. There is no line in our Constitution, or
precedent in human history, that says that society should be solely, or even
largely organized around markets.<br />
<div class="separator" style="clear: both; text-align: center;">
</div>
<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjL6TnYphfzWizajHfPCRi9ozNH1Y5YwXM6xSpufs9ZXP0IHXYzKmhk-PkgIb-bbXyJonyC3HfFvD4ID4gqs0sn6ctaZG2qLFgbzVIJHgcjYc3Y0Ki30t_d5Ws5c54rMvVvPpaJEbaDveb0/s1600/images.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="266" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjL6TnYphfzWizajHfPCRi9ozNH1Y5YwXM6xSpufs9ZXP0IHXYzKmhk-PkgIb-bbXyJonyC3HfFvD4ID4gqs0sn6ctaZG2qLFgbzVIJHgcjYc3Y0Ki30t_d5Ws5c54rMvVvPpaJEbaDveb0/s400/images.jpg" width="400" /></a></div>
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a>One main
example is the incorrect economic argument that government borrowing raises
interest rates by “crowding out” funds that would otherwise be available for
nongovernmental use. However once one realizes that the money supply is not
fixed, and in fact largely influenced by bank lending, this point becomes moot.
Government “borrowing” could not possibly increase the cost of bank lending,
since there is nothing than the banks would otherwise use that is being
“crowded out.”<span class="apple-converted-space"> </span><a href="http://justgatekeeper.blogspot.com/2014/11/dont-bank-on-your-econ-textbook.html" target="_blank">As previously described in this blog,
bank lending is merely the creation of a new account balance for the borrower</a>.
This occurs through the simple process of a loan officer typing a number into a
keyboard. Nothing pre-existing is “used” to create the loan balance; the money
is simply typed into a computer, much like any email or spreadsheet, and
created from nothing.<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
This
leads us to the peculiarity of modern day discussions about political economy,
both among regular Joes and the policymaking elite around the world. For some
reason, public money creation is given far more attention than is necessary,
while private money creation, in addition to being a much larger force that can
quickly become unsustainable, is mostly ignored. The massive housing bubble in
the run-up to the financial crisis was ignored by almost all the economics
profession, while the public money expansion in the years after, caused by
necessary increases in government debt around the world, was given
disproportionate attention by the chattering classes. <o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br />
In neither period was the difference between public and private money creation
ever discussed in a significant way. When he looked back at the last 30 years
of economics, the UK’s Lord Adair Turner expressed his dismay that the
economics profession had obsessed over fiscal policy and levels of public debt,
while entirely ignoring the levels of private debt which ultimately caused the
financial crisis.<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcT9d47p4jmUh9N2koTnVpdEY3DJp2r9z3_MMJohBmQ9V8evno9C8WTyfeCkx-9-Jy3-w9zD9De07h4iEC1bSvBTjsGEwv7KMeURXvQJL_fWc5BA5u_CDUYwSZDXJBvY9hvUxnaMLXGfV0/s1600/AAEAAQAAAAAAAAJfAAAAJGYwY2ExYmViLTcyMjItNDJhOS1hN2NjLTI5YTQ2M2FhOWJiOA.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="245" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcT9d47p4jmUh9N2koTnVpdEY3DJp2r9z3_MMJohBmQ9V8evno9C8WTyfeCkx-9-Jy3-w9zD9De07h4iEC1bSvBTjsGEwv7KMeURXvQJL_fWc5BA5u_CDUYwSZDXJBvY9hvUxnaMLXGfV0/s400/AAEAAQAAAAAAAAJfAAAAJGYwY2ExYmViLTcyMjItNDJhOS1hN2NjLTI5YTQ2M2FhOWJiOA.png" width="400" /></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcT9d47p4jmUh9N2koTnVpdEY3DJp2r9z3_MMJohBmQ9V8evno9C8WTyfeCkx-9-Jy3-w9zD9De07h4iEC1bSvBTjsGEwv7KMeURXvQJL_fWc5BA5u_CDUYwSZDXJBvY9hvUxnaMLXGfV0/s1600/AAEAAQAAAAAAAAJfAAAAJGYwY2ExYmViLTcyMjItNDJhOS1hN2NjLTI5YTQ2M2FhOWJiOA.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a>The power
to create money is one of the greatest powers in the world, second only to use
of physical, military force. It could be argued that money creation is even
more powerful, because it occurs all day, every day, in manner so mundane as to
attract nearly no attention. If the US government, for example, sent Marines to
point guns at bankers, mortgage brokers, builders, contractors, and
construction workers, and ordered them to build 1000 new houses, the American
public would rightly be horrified. But when the quasi-governmental banking
system lends money into existence for mortgages (FDIC insured banks), the
government insures billions of dollars of mortgages from failure (FHA/VA/FCA),
then packages mortgages into securities (Fannie/Freddie), and then buys these
securities (Federal Reserve), all of which has roughly the same effect as the
previously described militaristic scenario, no controversy is stirred. The same
public purpose was achieved, but with totally different means.<br />
<br />
So
instead of provisioning Americans with housing with use of physical force, the
government supports the current monetary system in all its complex
machinations. From a purely macro point of view, if power is defined as the
ability to deploy real resources for a desired purpose, then both physical
force and money issuance are forms of power.<br />
<br /></div>
<div style="margin: 0in 0in 0.0001pt;">
<a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a><a href="https://www.blogger.com/blogger.g?blogID=8819076315297704398" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"></a>Of course, I don’t mean to suggest that the government
should use physical coercion to deploy the nation’s resources. Our current
financial arrangements have the capability of doing this peacefully and
somewhat efficiently, although improvements obviously need to be made. The
first, and biggest step toward making these improvements is educating the
public about how the nature of modern money and how the banking system
accurately works, so voters can make informed decisions about the policy
decisions that their elected officials make in this space. </div>
</div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-40260651688473072712015-11-04T14:35:00.002-05:002017-04-17T22:08:08.349-04:00The Missing Link on Gun ViolenceThe term 'Senseless Tragedy' should never be applied to mass shootings. Its a crass capitulation to willful ignorance; a weak attempt to confront brutal reality. Mass shootings are never senseless. There is always a reason, always a force that drives men into madness- to take the lives of their fellow citizens. With every tragic mass shooting, an attempt should be made to delve into the dark minds of these killers, to find out what really drove them. But this never seems to happen. Instead, people express "shock", "horror" and "outrage", that "something must be done." Then begins the same old song and dance. The left impulsively calls for more gun control. The right reacts with insane rhetoric. And then....nothing happens.<br />
<br />
Perhaps a new approach is needed. Perhaps we should actually take a look at what conditions in modern America, whether economic, social, or otherwise, lead men to these horrifying actions. A common reaction is to blame violence in TV, movies and video games. But this violence exists in media all over the world-- this factor needs to be ruled out, or at least moved to the back burner for now.<br />
<br />
So what do some of the perpetrators of the worst mass shooting in recent years have in common? A quick glance reveals a stunningly obvious similarity. With one exception, the killers at Columbine, Virginia Tech, Aurora, Newtown, Isla Vista, Charleston, and Roseburg were all white, suburban, 20-something males. They were not raised in urban areas, or around street violence. They didnt necessarily have genetic mental health issues, and had no previous criminal records. These were not your typical murderers. But they were driven to sociopathy nonetheless.<br />
<br />
However, the vast majority of gun deaths in our country dont come from mass shootings. They come from the day in, day out homicides that occur regularly in the towns and cities across America. It's a well established fact that financial stress is the number one contributor to domestic violence and divorce, which, in turn, becomes a breeding ground for gun violence.<br />
<br />
At this point, it is nearly pointless to try and regulate the tools that lead to these shootings. The fact that Americans collectively own around 300 million guns means it will be impossible to substantively reduce their availability. And while clip limits and universal background checks may make some difference, critics of those methods accurately point out that many of the mass shooters would not have been stopped by these methods anyway.<br />
<br />
The gun issue is beyond politically contentious. For decades, Republicans have refused to budge an inch -if the Sandy Hook horror couldn't get congressional Republicans to move on guns, absolutely nothing will. It seems to me that Democrats have already wasted enough political capital on this intractable mess . The power of the NRA's grassroots network in keeping Congress scared is the envy of all lobbying organizations in Washington. It's easy for Democrats to attack powerful business interests, because they dont actually have a large, natural constituency. But guns, unlike any other personal possession, hold a unique psychological grip over the millions of Americans who make up the NRA's membership.<br />
<br />
At this point in the trajectory of this issue, it seems to make much mores sense to address the underlying social and economic conditions that lead young men to such acts of violence.<br />
<br />
40 years of brutal neoliberalism has drained the country of its vitality. Maybe by destroying the middle class, wiping out upward mobility, eliminating blue-collar jobs, busting unions, neoliberalism has gutted the country and left nothing but misery in its wake.<br />
<br />
In so many communities throughout the country, anger boils just below the surface. As humans, we thrive on potential. It is the potential of improving ones lot in life that gets most people up in the morning. The American dream of working hard and having a secure, comfortable life is more than enough for most people. And when that potential is cut off, by making jobs unavailable, by making college too expensive, by forcing people to work multiple low paying wage jobs, anger naturally ensues. When taking on debt becomes necessary to meet basic needs, when an emergency room visit costs $2500, and a years worth of medication costs more than a car, people lose hope. The dreary by-products of neoliberalism grind everyone down- some to complacency, some to exhaustion, and others, tragically, to horrifying violence.<br />
<br />
As social animals, our states of mind are mostly relative. That's why saying that the poor/middle class in America are better off than the poor in other countries is a useless argument. The fact that we had a middle class, <i>and then lost it, </i>is much more painful than if we had never had a one at all. Falling out of the middle class hurts a hell of a lot more than climbing up to it.<br />
<br />
So what happens when a 20-something male looks into his future and sees nothing but drudgery? When the energy and hormones, which spring naturally at this age, cannot be directed towards productive paths forward, they are instead directed inward. Social estrangement is obviously nothing new, but it can usually be assuaged by focusing on the future, on a career, or on a family. But when these channels for personal success are also blocked off, the pressure builds into internalized rage. This rage can become all-consuming. And when ubiquitous social media makes it easy to see how well <i>other </i>people are doing, the rage can explode outward in violent expressions.<br />
<br />
Contrary to the NRA's inane talking point about " a good guy with a gun vs a bad guy with a gun", there is no such thing as good guys and bad guys. Just as all of us humans are capable of acts of compassion, all of us humans are capable of descending into violence. Unfortunately, the crushing reality of modern American life often leads to the latter.<br />
<br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-88612717330548088172015-09-24T14:12:00.001-04:002017-04-17T22:08:08.399-04:00Identity Politics and the Sclerosis of the American Left<div style="text-align: center;">
</div>
We are at an interesting point in American history. We are at the apex of a 40-year triumph of neoliberal ideology in the US, and in fact, the world. At a time where public policy challenges are greater, and more global than ever, governments are less capable and less functional than ever. As a gridlocked Congress and lame-duck executive now struggle to pass the most basic of bills to keep the government open, its worth taking a look at how exactly we got here.<br />
<br />
A quick look at our own history reveals it was not always this way. The Greatest Generation of voters and policymakers dug the country out of the Great Depression, fought a massive war on two fronts, and completely re-built the American economy in relatively short period of time. They were driven by more than just the necessities of winning wars and stopping depressions; they knew their work was deeply meaningful. They were changing not just their own lives but the entire trajectory of human society.<br />
<br />
The unparalleled prosperity in the years that followed became its own worst enemy. The relative peace and prosperity of the post-war years led to a vacuum of meaningful employment and public engagement. The advertising Mad Men of Madison Avenue took full advantage of this vacuum, filling it with a potent, but pernicious focus on the self, on consumption, on branding, and in the process created a radical new way of forming human identities.<br />
<br />
<a href="http://tcmdaily.files.wordpress.com/2010/07/worldme.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://tcmdaily.files.wordpress.com/2010/07/worldme.jpg" height="333" width="400" /></a>No longer was self-sacrifice for the greater good a significant focus of people's lives. As the first generation of humans to be inundated with advertising from birth, the baby boomers unwittingly became a massive experiment in human social psychology. The new self-importance of post-New Deal American politics served perfectly the social movements that followed, and coalesced easily into the economic revolution of the last three decades.<br />
<br />
The movements that shaped the baby boomer identities were uniquely uneconomic in nature, standing in stark contrast to those of their fathers. The Civil Rights, gay, and women's rights movements, along with sexual liberation while important, were movements focused exclusively on human identities. Discussions of economic power were almost entirely absent from these movements.<br />
<br />
Perhaps no man embodies the rise of neoliberalism than Milton Freidman. Through his adept use of public media outlets to promote his radical message of market fundamentalism, Freidman was able to direct his message of individualism to a young audience eager to separate itself from the New Deal mentality of its parents. While the baby boomer motto of "dont trust anyone over 30" expressed frustration with the social conservatism and militarism of the previous generation, it, perhaps unintentionally, also condemned the New Deal values of class solidarity and economic struggle that had created the American middle class. As these values faded from America's political consciousness, they were replaced by the Freidman-esque focus on individual identity, freedom of self promotion, and adversity to leadership from the national government.<br />
<br />
The last 30 years has show us that these identity-bases affiliations are as fragile as they are convenient. The absolute lack of any meaningful leadership from American politicians since the 1970's is plain evidence of the weakness of identity based politics. Not since Lyndon Johnson has a progressive politician taken the national stage and gone to bat for the bread-and-butter issues that are most important to America's middle class. The rise of identity politics has limited liberal movements to peripheral social issues, that while important, were addressed at the neglect of the core purposes and functions of national government. And once Ronald Reagan appeared on the scene, preaching an unapologetic message of greed, selfishness, and material prosperity, the identity politics generation was pulled right in. By this point, the Democratic party had been weakened by such an extent by identity politics, and had moved so far away from the bread-and-butter issues that had been its core, that it could not muster an effective opposition to the Reagan Revolution (and still cannot, to this day).<br />
<br />
Neoliberalism thrives on identity politics. At first glance, neoliberalism is sleek, modern, and unoffensive. It can be easily explained and transmitted, like a zombie virus,<a href="http://www.amazon.com/Principles-Economics-Edition-Gregory-Mankiw/dp/128516587X" target="_blank"> through introductory college textbooks</a>. It does not trip the political sensors of the identity politics generation. Unlike racism, sexism, or homophobia, it does not seek to deliberately sensor, constrain, or manage human behavior. But it ultimately does so, to a much greater extent, through a crushing blend of government power and corporate avarice. As a result, it has successfully slipped under the radar of so called "liberals" in the United States to an incredible degree, leading us to the economic dystopia we find ourselves in at the present day.The rise of unconventional candidates like Donald Trump and Bernie Sanders are clear indicators of the anger of the mass of America which has slowly and quietly been economically dispossessed by neoliberalism.<br />
<br />
<a href="http://s.newsweek.com/sites/www.newsweek.com/files/2015/01/16/0116mlk02.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://s.newsweek.com/sites/www.newsweek.com/files/2015/01/16/0116mlk02.jpg" height="409" width="640" /></a>The state of black America is perhaps the clearest example of how identity politics feeds neoliberalism. The civil rights movement was a legal victory that culminated with the passage of the Civil Rights Act of 1964 and Voting Rights Act of 1965. The passage of those laws finally brought an end to the overt, institutional racism of American government. No longer was political power being used to constrain minorities in such obvious ways. Ironically however, these legal victories created a veneer of political success that allowed neoliberal economic policy to thrive, which in the end dis-empowered and dispossessed Americans of all stripes, to a degree not seen since before the civil rights victories had been achieved. Poverty, unemployment, and discontent--all the products of neoliberalism- are now nearly as tragically common as before the civil rights victories of the 1960s.<br />
<br />
And these legal victories were not economic ones. As Dr. King knew all to well, the larger struggle was for economic rights. After the 1965 Voting Rights Act, King focused his efforts largely on economic issues, fighting for higher wages, union rights, and job guarantees. His assassination took place following a march in Memphis, Tennessee, in support of the black sanitary public works employees who were striking for higher wages. None knew better than King the importance of universal, guaranteed employment. Far more effective than any handout, subsidy, or welfare program, a job guarantee is all inclusive. It hires anyone wiling and able to work. Unlike other welfare programs, it could never be perceived as a special advantage given to favored minorities. This latter part of his legacy has been largely forgotten, but in King's own words it was equally important.<br />
<br />
And while minority issues are important matters of national policymaking, they are, by definition, not the issues of importance to the majority of American citizens. In a nation built on the principles of majority rule, a focus on minority issues cannot be a successful electoral strategy. Therefore, the increasing focus of liberals on to issues that don't affect the majority of the country has created enormous political backlash, and come at the expense of the necessary focus on economics and the power dynamics of global capitalism. Equal rights are much more effectively addressed through the court system, where calm, judicial analysis can be made on a case by case basis, away from the heat and tension of electoral politics. As the triumphant LGBT activists have recently demonstrated, using the judicial branch of government, instead of the politically sensitive legislative and executive branches, is a far more effective strategy for bringing about equality.<br />
<br />
Perhaps nothing is more emblematic of the triumph of identity politics, and the sclerosis of the American left, than the ascendancy of Hillary Clinton as the heir-apparent of the Democratic party. In no other time in the history of the post-New Deal Democratic party would someone who had been so close with the economic and politically powerful be considered a viable candidate. In no other time in the party's history would someone whose main name recognition was largely due to spousal choice and not administrative success be an implied front-runner. Yet here we are. The simplistic desire of the identity generation to have "the first female president" seemingly trumps her enormous flaws, both on her policy views, and as an effective candidate. The power of the Clinton dynasty is due entirely to the triumph of liberal identity politics.<br />
<br />
On economic issues, the Clintons are far to the right of Richard Nixon (and their political cynicism makes Nixon look like a amateur). Their hostility to the well-being of the blue collar, unionized American working class is unparalleled in Democratic Party history, as is their post-government coddling by the corporate community. It is only because of Hillary's perceived "progressivism" on the issues close to the bleeding hearts of identity liberals that she is anywhere close to being the party's nominee.<br />
<br />
<a href="http://vaticaninsider.lastampa.it/typo3temp/pics/a8df3307b8.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="http://vaticaninsider.lastampa.it/typo3temp/pics/a8df3307b8.jpg" /></a>Never in the course of baby-boomer adulthood has a movement arisen to challenge the backward slide of the American middle class, the militarization of police, the rise of post-9/11 security state, or the impending catastrophe of climate change. No, as long as those 401(k) balances and home equity values kept going upwards, the boomers didnt make a peep. Identity politics ultimately makes for a crass, shallow, and fickle basis for political identification.<br />
<div style="text-align: center;">
</div>
<br />
The rising insurgency of Bernie Sanders in the US and Jeremy Corbyn in the UK, along with the bold leadership of Pope Francis, may be indicators that this 40 year old political dynamic may be finally changing. The pendulum may now be swinging back to the bread and butter issues which delivered the New Deal Democratic party near total control of government for decades. Nothing could be more frightening to the global cabal of neoliberal elites. And nothing could be more necessary to the prosperity of man and earth.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-8819076315297704398.post-48429130172983586132015-08-19T11:09:00.001-04:002017-04-17T22:08:08.364-04:007 Questions about the recent banking scandals that you were too afraid to ask<div class="MsoNormal" style="text-align: left;">
<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">Banks and bank regulators have been in the news a lot
lately. You may have heard stories about how banking regulators often get too
cozy with the bankers they are supposed to keep an eye on. While this has been a
pernicious issue for years, two recently publicized scandals have brought this
problem into the news.</span></span></div>
<div class="MsoNormal" style="text-align: left;">
<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">Both of these recent controversies surround two former
employees of Federal Reserve Bank of New York (FRBNY), and their relationships
with the megabank Goldman Sachs. These stories have revealed the blurry and often
complex nature of the relationship between regulators and powerful banks. These
stories also exemplify the persistent problem of something called “regulatory
capture”, which, while sounding like a dusty legal topic, is actually a very important
issue that can affect the whole economy. <o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">The first of these two controversies arose in October,
when a Carmen Segarra, a former employee of the Federal Reserve Bank of New
York, released several audio clips that she had recorded while still employed
at the Fed. These tapes included conversations between Segarra and her bosses
at the FRBNY, as they discussed some controversial business practices being
made by Goldman Sachs. <o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">Segarra was frustrated with the light treatment and relaxed
attitudes that her higher-ups had towards this behavior at Goldman, which she
perceived to be unethical and potentially dangerous. Segarra was<span style="background: white;"> a permanent on-site examiner at Goldman Sachs during
her brief tenure at the Fed, and claimed that the Fed's lackadaisical approach
to supervision led her to record, and later release, these conversations. </span>These
substantial disagreements ultimately led to her dismissal from the Fed in 2012.
Then in October of this year, she released a few minutes of her tapes and sat
down for a </span><a href="http://www.thisamericanlife.org/radio-archives/episode/536/the-secret-recordings-of-carmen-segarra"><span style="font-size: 12pt; line-height: 107%;">lengthy
interview with NPR</span></a><span style="font-size: 12pt; line-height: 107%;">. <o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">Recently, news broke about unethical
behavior of a former employee of the same Federal Reserve Bank of New York, who
later went on to work at Goldman Sachs. This former examiner named Rohit Bansal
was caught using data from his time as an examiner and his connections with the
FRBNY to benefit his new role at Goldman Sachs. <o:p></o:p></span></span></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">1)
So, what’s the problem here?<o:p></o:p></span></span></b></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
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<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">The </span><a href="http://www.propublica.org/article/the-carmen-segarra-tapes"><span style="font-size: 12pt; line-height: 107%;">audio
tapes that Segarra released</span></a><span style="font-size: 12pt; line-height: 107%;"> revealed that senior staff at the FRBNY
frequently gave Goldman Sachs a lot of regulatory deference and went easy on
Goldman employees when they made questionable business decisions. The tapes
focused on conversations between Segarra and her colleagues, who were all part
of the FRBNY’s examination team stationed at Goldman. The most revealing quote
from the tapes comes from Segarra’s boss, who almost laughingly described one
business deal of Goldman’s as “legal, but shady.” Expressions like these were
exactly the reason Segarra recorded internal conversations at the FRBNY--which
ended up coming in handy once she was fired. It’s clear from the rest of these
tapes that Segarra’s willingness to stand up to Goldman’s behavior was resisted
by her superiors and likely led to her termination from the Fed. <o:p></o:p></span></span></div>
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<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="font-family: inherit;"><span style="background: white; font-size: 12pt; line-height: 107%;">A few weeks later the </span><a href="http://dealbook.nytimes.com/2014/11/19/rising-scrutiny-as-banks-hire-from-the-fed/"><i><span style="background: white; font-size: 12pt; line-height: 107%;">New York Times</span></i><span style="background: white; font-size: 12pt; line-height: 107%;"> reported</span></a><span style="background: white; font-size: 12pt; line-height: 107%;"> on yet another scandal between Goldman and the
FRBNY. The</span><span style="background: white; font-size: 12pt; line-height: 107%;"> article revealed that a former FRBNY
employee Rohit Bansal had been caught using private government data at his new
job at Goldman. Bansal had worked for the FRBNY for several years, and by the
time he left the Fed, he was the central point of contact for certain banks.
Once Bansal joined Goldman, he used his expertise, along with his relationship
with a former FRBNY colleague, to illegally acquire confidential regulatory
information about a client that Goldman was doing business with. <o:p></o:p></span></span></div>
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<span style="background: white; font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="font-family: inherit;"><span style="background: white; font-size: 12pt; line-height: 107%;">Once this leak was discovered,
Goldman immediately fired Bansal, and FRBNY immediately fired the man who they
believed to be the leaker. The severity of these leaks became obvious when only
days after Goldman reported the breach, federal authorities, including the FBI,
FDIC, and the US Attorney for the Southern District of New York, began an
investigation into the matter to see if any crimes were committed. </span><span style="font-size: 12pt; line-height: 107%;"><o:p></o:p></span></span></div>
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<span style="font-family: inherit;"><b><span style="background: white; font-size: 12pt; line-height: 107%;">2) I think I’ve heard of Goldman Sachs before, but what
exactly is it?</span></b><b><span style="font-size: 12pt; line-height: 107%;"><o:p></o:p></span></b></span></div>
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<b><span style="background: white; font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
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<span style="font-family: inherit;"><span style="background: white; font-size: 12pt; line-height: 107%;">Goldman Sachs is one of the largest
banks that many people haven’t heard of. That’s because Goldman Sachs is not a
commercial bank like Bank of America, Wells Fargo, or Citi, that consumers can
directly do business with. Goldman is organized as something called a “bank
holding company”, which is a fancy term for financial conglomerate. Goldman
does many things, but hosting checking/savings accounts and making consumer
loans are not among them. Goldman is actually an investment bank, which means
it deals only with other companies, and not directly with consumers. Its major
business lines include giving </span><a href="http://en.wikipedia.org/wiki/Mergers_and_acquisitions"><span style="background: white; color: windowtext; font-size: 12pt; line-height: 107%; text-decoration: none;">merger
and acquisition</span></a><span style="background: white; font-size: 12pt; line-height: 107%;"> advice, managing </span><a href="http://en.wikipedia.org/wiki/Investment_management"><span style="background: white; color: windowtext; font-size: 12pt; line-height: 107%; text-decoration: none;">asset</span></a><span style="background: white; font-size: 12pt; line-height: 107%;">s, engaging in private equity deals, and serving as a
financial broker for other corporate clients. </span><span style="font-size: 12pt; line-height: 107%;"><o:p></o:p></span></span></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">3)
What’s a bank examiner?<o:p></o:p></span></span></b></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
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<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">In the US, there are two major steps to regulation:
rulemaking and supervision. Regulatory agencies first have to write the
regulations for their respective industry, through a public process called </span><a href="https://www.federalregister.gov/uploads/2011/01/the_rulemaking_process.pdf"><span style="font-size: 12pt; line-height: 107%;">“rulemaking</span></a><span style="font-size: 12pt; line-height: 107%;">”.
Then, once these regulations are finalized, the agencies must also make sure
that businesses are complying with them. This ongoing, complex, and often fuzzy
process of ensuring compliance is called ‘supervision’, and its where these two
recent scandals have occurred.<o:p></o:p></span></span></div>
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<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">In general, government agencies that supervise banks,
at both the state and federal level, have employees called ‘examiners.’ These
examiners are people with expertise in accounting and regulatory compliance who
go on-site to the banks that are under their supervision and conduct bank
exams. During these exams, examiners comb through bank balance sheets, policies,
practices, and interview bank employees--all to ensure that the bank is
properly complying with regulations. Different agency examiners have different
jurisdictions and look for different things-- for example, examiners from the </span><a href="http://www.consumerfinance.gov/"><span style="font-size: 12pt; line-height: 107%;">Consumer Financial
Protection Bureau</span></a><span style="font-size: 12pt; line-height: 107%;"> might look to make sure a bank isn’t
unfairly charging its customers, while examiners from the Federal Reserve might
check to make sure the bank isn’t making too many risky loans. <o:p></o:p></span></span></div>
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<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">While smaller banks might only go through exams
occasionally, megabanks like Goldman Sachs have teams of examiners on site
permanently, since their business practices and balance sheets are so large and
complex that they require constant review. Carmen Segarra and Rohit Bansal were
two such examiners.<o:p></o:p></span></span></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">4)
But wait, isn’t the Federal Reserve a private bank?<o:p></o:p></span></span></b></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
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<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">Well, it’s complicated. Most people know the Fed as
the organization that sets monetary policy and manages the currency, buts its
lesser-known role as a powerful bank regulator is just as important. The
Federal Reserve is actually a system, composed of 12 regional banks located in
major cities across the US, and the </span><a href="http://www.federalreserve.gov/aboutthefed/default.htm"><span style="font-size: 12pt; line-height: 107%;">Board
of Governors</span></a><span style="font-size: 12pt; line-height: 107%;">, which is located in Washington, DC. The
Board of Governors is just that-- a board of seven men and women who write
regulations for the banking system, make policies for the 12 regional banks,
and oversee their activities. These seven governors are nominated by the US
President and confirmed by the Senate, just like the heads of other government
agencies. The Board of Governors, more than any other part of the Federal
Reserve System, most closely resembles a federal government agency. It has a “</span><a href="http://www.federalreserve.gov/"><span style="font-size: 12pt; line-height: 107%;">dot-gov” web address</span></a><span style="font-size: 12pt; line-height: 107%;">,
pays its employees on a public pay scale, and regularly reports to and testifies
before Congress. <o:p></o:p></span></span></div>
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<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">The 12 regional banks, while they are ultimately
controlled by the Board of Governors, function</span><span style="font-size: 12pt; line-height: 107%;"> more like private banks and have
their </span><a href="http://www.federalreserve.gov/aboutthefed/directors/about.htm"><span style="font-size: 12pt; line-height: 107%;">own
boards of directors</span></a><span style="font-size: 12pt; line-height: 107%;">. The presidents of these banks are
privately selected without input from the US President or Congress. Banks like
Goldman Sachs, which are regulated by these regional banks, are also <i>members</i>
of the regional banks, and have some influence into how these banks are run.
The Federal Reserve’s examiners, like Segarra and Bansal, are employees of
these regional banks.</span></span></div>
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<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
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<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">The most powerful of the regional banks is the </span><a href="http://www.ny.frb.org/"><span style="font-size: 12pt; line-height: 107%;">Federal Reserve Bank of New York (FRBNY),</span></a><span style="font-size: 12pt; line-height: 107%;">
where both Segarra and Bansal were employed as examiners. The FRBNY, located in
downtown Manhattan, is responsible for regulating and supervising banks in the
New York area, which is to say, many of the world’s largest and most complex banks
like Goldman Sachs. <o:p></o:p></span></span></div>
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<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">Ultimately, the president of the FRBNY is the most
responsible for the behavior of the examiners, and the banks they regulate. The
president of the FRBNY is a very powerful position, so the person filling the
chair is usually well known around Wall Street and Washington. For example, the
last president of the FRBNY was Timothy Geithner, who went on to become
Treasury Secretary during the first four years of the Obama administration (not
surprisingly, Geithner’s predecessor at the Treasury was Hank Paulson, who had
previously been the CEO of Goldman Sachs). The current FRBNY president is a guy
named William C. Dudley, who formerly served as chief economist to….Goldman
Sachs. Not surprisingly, Mr. Dudley’s name has shown up in the news a bit
lately, and he </span><a href="http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=ba1c89dc-8a7b-4cad-9e16-514fd6e6a489&Witness_ID=1f07a34a-5677-4aa0-92cb-562cd1b777bc"><span style="font-size: 12pt; line-height: 107%;">also
appeared before Congress</span></a><span style="font-size: 12pt; line-height: 107%;"> a few weeks ago. <o:p></o:p></span></span></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">5)
Is “regulatory capture” as scary as it sounds?<o:p></o:p></span></span></b></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
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<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">It can be! Regulatory capture is a term used to
describe how regulatory agencies, like the FRBNY, can be ‘captured’ by the
business that they are supposed to regulate. Capture is often demonstrated when
government regulators go easy on businesses, potentially because they may be seeking
higher-paying employment with these businesses in the future. This is a
particular problem in the world of financial regulation, because government
employees often make far less than the bankers they are regulating. It’s not
uncommon for regulators to quit their regulatory jobs and go work for a bank,
often for two or three times more than their government salary. So if
regulators are going about their jobs with future employment in mind, it can
compromise their ability to adequately enforce the laws on the books. Even the
best written laws aren’t any good if they aren’t firmly enforced, so bad
regulatory capture can put the banking system, and the entire global economy,
at risk. <o:p></o:p></span></span></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">6)
So what (if anything) is Congress doing about all this?<o:p></o:p></span></span></b></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
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<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">In mid-November the Senate Banking Committee held a
hearing entitled “</span><a href="http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=ba1c89dc-8a7b-4cad-9e16-514fd6e6a489"><span style="font-size: 12pt; line-height: 107%;">Improving
Financial Institution Supervision: Examining and Addressing Regulatory Capture</span></a><span style="font-size: 12pt; line-height: 107%;">.”
This hearing featured testimony from FRBNY President William Dudley, and
lengthy questioning from several Democratic Senators. Most notably, </span><a href="http://www.youtube.com/watch?v=BffmHqVy0do"><span style="font-size: 12pt; line-height: 107%;">Senator Elizabeth Warren
(D-MA) grilled Dudley</span></a><span style="font-size: 12pt; line-height: 107%;"> about the FRBNY’s capture problem, his
role in these two scandals, and his seemingly dismissive attitude about them. Warren
and Dudley went back and forth for much of the hearing, and the conversation
got testy at times. <o:p></o:p></span></span></div>
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<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">At the same hearing, </span><a href="http://www.reed.senate.gov/news/releases/reed-bill-seeks-to-make-new-york-federal-reserve-bank-more-accountable-to-taxpayers"><span style="font-size: 12pt; line-height: 107%;">Senator
Jack Reed (D-RI) introduced a bill</span></a><span style="font-size: 12pt; line-height: 107%;"> <span style="background: white;">that would require the president of the FRBNY to be nominated by the
President and confirmed by the Senate, much like the Fed’s Board of Governors
is currently. Reed’s legislation would also require the head of the FRBNY to
testify before the Senate Banking Committee and the House Financial Services
Committee at least once per year. Other proposals that were raised at the
hearing include removing the Fed’s regulatory and supervisory powers and giving
them to another agency like the FDIC, which is not traditionally as cozy with
the banking industry. </span><o:p></o:p></span></span></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">7)
But I thought the financial reform law was supposed to change things!<o:p></o:p></span></span></b></div>
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<b><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></b></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">Well, the 2010 Dodd-Frank financial reform law did do
many good things. It created an entirely new and powerful agency, the Consumer
Financial Protection Bureau, to focus solely on how financial institutions
treat their customers. It also created an umbrella organization, called the </span><a href="http://www.treasury.gov/initiatives/fsoc/Pages/home.aspx"><span style="font-size: 12pt; line-height: 107%;">Financial
Stability Oversight Council (FSOC</span></a><span style="font-size: 12pt; line-height: 107%;">) to oversee the federal
government's entire approach to financial regulation and coordinate activities
among the different agencies. <o:p></o:p></span></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;"><br /></span></span></div>
<div class="MsoNormal">
<span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">That being said, the Federal Reserve as a system was
not significantly modified by the Dodd-Frank law. Although the Fed was given
expanded regulatory and oversight powers under the law, its structure and
culture remain largely the same as before the financial crisis. Senator Jack Reed’s
recent proposals, which were included in early drafts of Dodd-Frank but later
removed, would allow <span style="background: white;">Congress to keep a direct eye
on the FRBNY, instead of only through the Board of Governors. A</span>lthough
unlikely to become law in a Republican controlled Congress<span style="background: white;">, these proposals would bring a significant change to
the current relationship between Congress and the Fed. </span><o:p></o:p></span></span></div>
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<span style="font-size: 12pt; line-height: 107%;"><span style="background: white;"><span style="font-family: inherit;"><br /></span></span></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><span style="font-size: 12pt; line-height: 107%;">The problem of regulatory capture clearly remains.
Even though employees of the bank regulatory agencies usually make more money
than other federal employees (because they are exempt from the traditional “GS”
pay scale), they still make far less than their counterparts in the financial
industry. The allure of lucrative post-government employment is a difficult
phenomenon to reverse, especially in the current political environment where government
agencies are subject to continuous sequesters, shutdowns, furloughs, and pay
freezes. However, perhaps more important than compensation is an agency’s culture
and understanding of its role in the economy. </span><a href="http://www.propublica.org/article/so-who-is-carmen-segarra-a-fed-whistleblower-qa"><span style="font-size: 12pt; line-height: 107%;">Segarra
herself put it best</span></a></span><span style="font-size: 12pt; line-height: 107%;"><span style="font-family: inherit;">-- when asked what was ultimately lacking
at the Fed, she replied “<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">lack of
backbone, transparency, thoroughness and perseverance.”</span></span><span style="font-family: Times New Roman, serif;"><o:p></o:p></span></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-25495251259198081472015-07-10T16:42:00.005-04:002017-04-17T22:08:08.329-04:00Weather GreeceWith the Greek Grexit now nearly Grenevitable, discussions have shifted from "if" to "how." If Greece does in fact dump the euro and bring backs it old currency, the drachma, how will it go about re-organizing its economy? How will it deal with the inevitable devaluation of the new drachma against the euro? What will the Greek people be able to produce and consume under this scenario?<br />
<br />
The questions are many, and there are no simple answers. However as I did in a previous blog post, I will discuss the issue in the context of a computer game I played as a child. That game was called Caesar III, which was a real-time strategy game where the player is the mayor of a certain city in the Roman empire. This town is built from scratch on an an empty map, and their are multiple moving parts and pieces that need to fit together in order for a successful city to be built. One crucial aspect of the game is that no one of the map choices has all the resources needed for prosperity. As the game continues, the citizens of your city begin demanding a wider variety of foods, drinks, and household items. Since no one map is capable of producing all these things, trade with other cities in the Roman empire becomes a necessity for success.<br />
<br />
This trade scenario requires the player to decide how much of a particular specialty good needs to be produced for all its citizens' needs to be met, while also having enough to trade to other cities in exchange for their specialty goods. For example, one of the maps has a lot of marble, but no iron to make weapons. So in that city, you focus on producing as much marble as possible, and trading it for weapons produced by other cities. In the case of Greece, it needs to find its marble, its comparative advantage.<br />
<br />
Unfortunately, Greece is not really competitive in many global markets, including agriculture, software/IT, manufacturing, financial services, or energy. But what it does have is great weather, endless miles of beaches, and rich history, all of which combines to produce a pretty unique and enviable tourist destination. Greece needs to fashion itself as the new tourism capital of Europe. With a new, cheap drachma, it could start building new hotels, restaurants, and boutique shops, along with airports and seaports to serve the incoming tourists. It could, as Iceland has, partner with airlines to provide cheap, direct flights from the dense population centers of Europe. This would help bring an inflow of Euro into Greece, which the Greeks could then use to buy whatever goods and services from the rest of Europe that they could not produce on their own.<br />
<br />
In short, the Greeks need to take advantage of every grain of sand and ray of sunshine they can. Without building it tourism industry to become a world class competitive advantage, Greece risks slipping into 3rd world status.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-53438313535815038592015-04-29T15:47:00.001-04:002017-04-17T22:08:08.375-04:00Why full employment mattersIts often easy to dismiss progressive chattering about "full employment" as another fuzzy liberal pipe-dream. An its even easier for neoliberal economists to define full employment as simply a number that seems "good enough" (of course, the official unemployment rate is a joke, as is the traditional definition of "good enough.)<br />
<br />
But full employment means more than just a number. It means that our nation is reaching its best. It means that everybody who is willing and able to contribute to society and solidify some meaning in their lives can do so. A job isnt just about what goods and services you produce, although that is important. Jobs give us things to do with our minds and bodies and give us a sense of accomplishment. A good day at work can give us confidence we might not otherwise have. And even a bad day at work can serve to take our minds off of personal struggles we may be having.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-24723932398779457212015-04-14T17:09:00.000-04:002017-04-17T22:08:08.324-04:00Regulations D, Q, and modern monetary policy (wonkish)<div class="MsoNormal">
<span style="font-family: inherit;">This long post will discuss Regulations D and Q, their history, purpose and effect on
the banking system. It elaborates on modern monetary policy operations and recent
developments that have further removed the necessity for the anachronistic reserve
requirements established in Regulation D.</span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Regulations
D and Q were written to clearly demarcate between highly liquid transaction
accounts and less liquid savings accounts/ bank CDs. Their purpose was only
relevant under the gold standard. Under the gold standard, demand deposits (checking
account deposits and physical currency) could be exchanged for gold at a fixed
rate, whereas time deposits (savings accounts/CDs) could not. </span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Therefore the
banking system needed to control the flow between the percentage of the money
supply that was not convertible into gold (savings/CDs/bonds) and that which
was (checking/cash). Reg Q’s purpose was to allow banks only to pay interest on
non-convertible time deposits as a way to incentivize customers to put their
deposits into these accounts, and therefore limit the banking system’s exposure
to gold convertibility risk. To further delineate time and demand accounts, Reg
Q also prohibited the payment of interest on demand deposits until 2011. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Regulation
D then, required banks to hold a certain percentage of central bank money
(reserves or vault cash) against certain types of deposits. The classes of
reservable deposits has changed over time, and now only net transaction
accounts, (demand deposits/checking accounts) must be reserved against:<o:p></o:p></span></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: inherit;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCgbk6fl8E3NLKH8TccDhKT0qx0XDuKvdXQYO0Gr4Vtz1MjcvLWLz-FThXh3hMg6z9Dh-xwY6eVvvRNd08Qm5jx6TTNQP2Xd8fdT2dGsCiiaR4MPnoAUR3Q1c9nChPjdQ2rb0H7JGIxtkq/s1600/rr.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="317" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCgbk6fl8E3NLKH8TccDhKT0qx0XDuKvdXQYO0Gr4Vtz1MjcvLWLz-FThXh3hMg6z9Dh-xwY6eVvvRNd08Qm5jx6TTNQP2Xd8fdT2dGsCiiaR4MPnoAUR3Q1c9nChPjdQ2rb0H7JGIxtkq/s1600/rr.png" width="640" /></span></a></div>
<div align="center" class="MsoNormal" style="text-align: center;">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">As an
another matter, Reg Q also capped the interest rate that banks could pay on
savings deposits, in order to prevent banks from “reaching for yield” (competing
for lower quality (more expensive) loans which would then have been used to
fund the higher rate paid to depositors. Another objective of capping interest
rates on deposits was to increase bank profits by limiting the competition for
deposits. Congress at the time felt that competition for deposits not only
reduced bank profits by raising interest expenses, but also have might cause
banks to acquire riskier assets with higher expected returns in attempts to
limit the erosion of their profits. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Congress
thought unpredictable movements of deposits among banking institutions in
response to interest rate competition made some banks vulnerable to failure.
Another related reason was that big money center banks could pay higher
interest rates for deposits than smaller banks, and thus could bid deposits
away from smaller regional banks. Larger banks frequently made more speculative
loans, such as for buying shares in the stock market. Lawmakers believed that
this competition for deposits misallocated financial resources away from
productive to speculative uses.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div style="border-bottom: solid windowtext 1.0pt; border: none; mso-border-bottom-alt: solid windowtext .75pt; mso-element: para-border-div; padding: 0in 0in 1.0pt 0in;">
<div class="MsoNormal" style="border: none; mso-border-bottom-alt: solid windowtext .75pt; mso-padding-alt: 0in 0in 1.0pt 0in; padding: 0in;">
<span style="font-family: inherit;">In
this way, Reg Q set a rough floor to lending quality. Reg Q’s blunt way of
preventing the “race to the bottom of underwriting quality” has now largely
been replaced by ability-to-repay standards from CFPB, and the capital
regulation system established by the Basel negotiations that began in 1988. <o:p></o:p></span></div>
</div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Regulation
D is written to limit the liquidity of savings accounts by only allowing a
certain amount of monthly withdrawals from time to demand accounts. Reg D also
imposes reserve requirements on depository institutions, which was intended as
a tool for managing the supply and price of bank money. These requirements
created a continuous demand for central bank money (reserves) above and beyond
what was needed for interbank payment settlement. Therefore by creating demand,
the Fed as the monopoly supplier of reserves could control the price of these
reserves and therefore the profitability of bank lending. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Before
1971 when the Federal Reserve’s own liabilities were convertible to gold, it
had an incentive to restrict the amount of its reserves that backed the credit
created by the banking system. So once this gold convertibility ended, the Fed slowly
began to ease its reserve lending facilities, since it no longer faced any convertibility
risk of its own. The 2003 amendments to Regulation A, which established the discount
window Primary Credit Facility as a “no questions asked” liquidity facility were
perhaps the first demonstration of this change. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Technically
however, the US left the gold standard in 1933, with only dollars in foreign
central banks convertible into gold during the Bretton Woods era which ended in
1971. Nevertheless, during this time and to some degree up to the present, the
Federal Reserve and economics profession have not fully understood the monetary
policy implications of the removal of the gold constraint. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Since the
Fed both imposes reserve requirements, and requires a positive end of day
balance in all Fedwire accounts, it has no choice to provide reserves to the
banking system, at its target rate. These reserves can be provided through open
market operations/Repos, through intraday credit through the Daylight Overdraft
facility, or finally through the discount window at a penalty rate. The demand
for these reserves is completely inelastic, much like a diver at the bottom of
the ocean needs an air supply. Not providing reserves at any price would result
in either a shortage of clearing balances or shortage of required reserves,
both of which would cause banks to bid up federal funds above the FOMC’s target
rate. Therefore, the Fed as the monopolist, has no choice but to provide reserves
in unlimited quantities at its target rate in order to defend the payment
system and ensure all reserve requirements can be met without bidding up the
federal funds rate. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">If banks
were left on their own to obtain more reserves no amount of interbank lending
would be able to create the necessary reserves. Interbank lending changes the
location of the reserves but the amount of reserves in the entire banking
system remains the same. For example, suppose the total reserve requirement for
the banking system was $60 billion at the close of business today but only $55
billion of reserves were held by the entire banking system. Unless the Fed
provides the additional $5 billion in reserves through some facility, at least
one bank will fail to meet its reserve requirement. The Federal Reserve is, and
can only be, the follower, not the leader when it adjusts reserve balances in
the banking system. Perhaps the best example of the irrelevancy of reserve requirements
is that the Fed has not changed them since April 1992, the month when I was born! However, it is important
to keep in mind that the reserve requirement itself does not matter. If reserve
requirements are 10% or 100%, either way the Fed must provide reserves at its
target rate, as explained above. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Once Richard
Nixon ended what was left of the gold standard in 1971, neither of the restrictions
from Regulations D or Q became necessary. Since neither demand nor time
deposits were convertible to gold (or anything else at a fixed rate) after
1971, the banking system faced no convertibility risk and therefore did not
need to differentiate between deposit accounts or pay interest on time deposits
to reduce such risk. Other than issues relating to funding stability, from the
banks perspective checking and savings accounts became essentially the same.
The regulatory atmosphere finally caught up to this post-gold standard reality
in 2011 when the Federal Reserve repealed the last remaining part of Reg Q
which prevented banks from paying interest on demand deposits (see side note). <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">While Reg
D still exists, it is also less relevant than ever. The movement of much of the
deposit base to money market mutual funds, and allowing banks pay interest on
both checking and money market accounts, makes Reg D’s limit on time deposit
withdrawals largely irrelevant. Further, over the past several decades most
banks have become able to effectively avoid reserves requirements through the
use of sweep accounts. These sweep accounts are set up to automatically sweep
most of a banks reservable deposits (demand) into non-reservable deposits
(time) at the end of each 14-day reserve maintenance period, which reduces most
of a banks reservable deposits. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Sweeps
surged between 1995 and 2000. All charts from the Federal Reserve.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">The
proliferation of sweep accounts has significantly reduced the percentage of
banks required to maintain reserve balances.<o:p></o:p></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIajEZ8n4auK8Nk0IPxIONkMy2wPot1hmNNT50z19wQa_Z8sQqFamSgolVON_FZvTHYkSztLY-JhOqKWxo-klHEJwm_q84NyOVIPqvgaPvqu_i_ZLumG-r2gH11Ec6-g95r1GRrIywpe0z/s1600/rr2.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="371" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIajEZ8n4auK8Nk0IPxIONkMy2wPot1hmNNT50z19wQa_Z8sQqFamSgolVON_FZvTHYkSztLY-JhOqKWxo-klHEJwm_q84NyOVIPqvgaPvqu_i_ZLumG-r2gH11Ec6-g95r1GRrIywpe0z/s1600/rr2.gif" width="640" /></span></a></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcwoueGOu1GN6eDR08mYtPbF0x8qz3UePHc3fw8vq3OitoUPY6wGwWWlk5qj-590vxbVZkFzccP2dkgjszawncIJKdloEm8CsmA4hZtbtEt3oSKvPNWUePgskpK9X3qyk2U1S6ban6pU6K/s1600/rr3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="424" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcwoueGOu1GN6eDR08mYtPbF0x8qz3UePHc3fw8vq3OitoUPY6wGwWWlk5qj-590vxbVZkFzccP2dkgjszawncIJKdloEm8CsmA4hZtbtEt3oSKvPNWUePgskpK9X3qyk2U1S6ban6pU6K/s1600/rr3.png" width="640" /></span></a></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Many
depository institutions seek to meet most of their reserve requirements through
holding vault cash. Since vault cash is necessary for the everyday business of
meeting ATM/window withdrawals, banks figure they might as well use cash to
meet reserve requirements as well. So what banks do (or at least did before
IOR) is to meet as much of the reserve requirement through vault cash, <i>and then adjust their reservable deposits so
the RR would be met by what they already had in cash. </i>This is the opposite
of what the old fashioned, textbook version of reserve requirements would
suggest. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Required
reserve balances declined sharply in the 1990s as vault cash holdings rose.<o:p></o:p></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgohN1y-lM1icaa1rU0DtIPsJfNBfe7Vpnd4WrN7B6Dp4QX-LvBjYrALZExthqExZqP4TcFq2Lmodze1hSJJ5IA2JffRAHnMudo4V9_qSJKbqQa8fWNX7ahPb2ZCJlhPPw439Cc282MuzBR/s1600/rr4.gif" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="377" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgohN1y-lM1icaa1rU0DtIPsJfNBfe7Vpnd4WrN7B6Dp4QX-LvBjYrALZExthqExZqP4TcFq2Lmodze1hSJJ5IA2JffRAHnMudo4V9_qSJKbqQa8fWNX7ahPb2ZCJlhPPw439Cc282MuzBR/s1600/rr4.gif" width="640" /></span></a></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Further,
the trillions of excess reserves in the banking system resulting from three
rounds of quantitative easing have left the banking system with enough reserves
to meet even these minimal requirements for decades into the future. Much of
the Federal Reserve’s own literature has supported both of these points. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMj061facpQibUv3yxbnk6a8jv8lN2G7SXiDQ4NCIxEIvs-g-N3MrhkmVrcvgtK9dTuFPoBiFAJ6YsmXDOnieAcyJ9kMBUx_nt20adifoP-X7epFzbp-5zcT9bwJ2BpzyOWQ790Fw7dubf/s1600/rr5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="406" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMj061facpQibUv3yxbnk6a8jv8lN2G7SXiDQ4NCIxEIvs-g-N3MrhkmVrcvgtK9dTuFPoBiFAJ6YsmXDOnieAcyJ9kMBUx_nt20adifoP-X7epFzbp-5zcT9bwJ2BpzyOWQ790Fw7dubf/s1600/rr5.png" width="640" /></span></a></div>
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">All of this
all dramatically changed during the financial crisis of 2008. As the financial
crisis was worsening the Fed faced a conundrum. Through its various new/expanded
crisis- lending facilities (discount window, TALF, Corporate paper facility,
etc), the Fed was adding trillions of dollars of reserves to the banking
system, but it still had an overnight interest rate target above zero. Having
run out of unencumbered Treasury securities to sell off its portfolio in order
to drain these added reserves and support its interest rate target, the Fed
needed a new tool (during this time the Fed actually had to rely on Treasury to
conduct a special purpose bond offering with the sole purpose of draining
reserves, known as the Special Financing Program or SFP).<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">The
Financial Services Regulatory Relief Act of 2006 had authorized the Federal
Reserve Banks to pay interest on balances held by or on behalf of depository
institutions at Reserve Banks, subject to a rulemaking by the Board of Governors,
to be effective October 1, 2011. The effective date of this authority was
advanced to October 1, 2008 by the Emergency Economic Stabilization Act of
2008, and a rule amending Regulation D was finalized just a week later. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">So in
October of 2008 the Fed gained the ability to pay interest on reserve balances,
a power which it previously did not have. This allowed the Fed to establish a
non-zero overnight interest rate without having to conduct any POMOs or Repos.
With the floor of interest rates now solidly in place, the Fed could continuing
lending emergency reserves into the banking system while simultaneously maintaining
a nonzero federal funds rate. Interest on Reserves (IOR) changed the game in
the federal funds market, and trading volume decreased significantly, by about
75%.<o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">The 2008
changes to Regulation D effectively eliminated the need for reserve requirements.
Since the Fed now has the ability to pay interest on reserve balances, it can
“sterilize” a certain percentage of the monetary base simply by incentivizing
banks to move balances out of the federal funds market and into interest
bearing reserve accounts, known as “excess balances accounts”. It can also do
this in a more limited fashion with its new Term Deposit Facility (neither of these
facilities are available to the GSEs or FHLBs, so some trading in federal funds
remains, which is why the effective federal funds rate is slightly below the 25
basis points paid on reserves). In this way, the rate paid on reserve balances
serves as a floor to short term interest rates, and the rate charged for
institutions that borrow reserves from the Discount Window or through
overdrafts represents a ceiling on short term rates. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">So with
this monetary incentive in place, there is no need to require banks to hold a certain
amount of reserves through regulation. Under the IOR system, no regulatory
requirement is needed to create a demand for reserves (although even with no
IOR banks would still need to hold reserves to meet payments). <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">This is
the way the Bank of Canada has implemented monetary policy since 1999. Canada
eliminated its reserve requirements in the 1990’s. Since then, it has set a
floor for the overnight rate through the interest it pays on settlement
(reserve) balances, known as Deposit Rate, and set the ceiling through the rate
it charges for overnight loans (discount window), known as Bank Rate. Deposit
rate and Bank rate are usually set 50 basis points apart, just like the IOR
rate and Discount rate are in the US. The overnight rate therefore trades in the
band between these two rates, and the Bank of Canada sets the midpoint of these
two rates as its target rate. This can be expressed as: Bank Rate>Target
Rate>Deposit Rate. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Concerns
that implementing monetary policy by increasing the rate paid on reserves represent
an increased cost to the government are unfounded. While it is true that the
interest the Fed pays on reserves is subtracted from what it would otherwise
remit to the Treasury, the Treasury ends up ‘paying’ either way. If the Fed
were to raise interest rates by selling off part of its Treasury portfolio, as
it has done in the past, then its earnings, and therefore remittances to the
Treasury, would decrease by about the same amount, and the yield on new
Treasury offerings would rise. (In fact, it is likely the case that banks end
up earning less under the IOR scenario, since the spread earned by Primary
Dealers banks acting as middlemen between Fed and Treasury operations was
likely higher than the current 25 basis points paid on all reserve balances).
Therefore the size of the Fed’s payments to the Treasury depend on the size of
its portfolio, not on the method used to raise interest rates. Either way, the
Federal Reserve’s earnings represent a tax on the economy, since the dollars
that it earns and remits to the Treasury would have otherwise remained in the
economy and distributed to savers, bondholders, or bank shareholders. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">QE merely
represent a swap of governmental assets. When the FRBNY purchases Treasury and
Agency securities, is removes the Treasury/agency liability and replaces it
with its own liability (reserves). Deposits merely shift from securities
accounts at the Fed (saving) to reserve accounts at the Fed (checking). This is
identical to moving money from a savings account to a checking account. Concerns
that this rise in reserve balances could lead to inflation stem from a misunderstanding
of the post gold standard banking system. Since the start of QE, many lawmakers
and banking analysts have express concern that this increase in reserves will
lead to an explosion in new money creation through bank lending ,that could put
upward pressure on prices (needless to say, these people have been completely
wrong.) However, even before QE, as described above, the Fed, as the monopolist
of reserves, had no choice but to provide reserves to the banking system in
unlimited quantities, at its target rate. Now, as before, the Fed can only
influence the marginal cost/profitability of making a loan, not a bank’s
ability to do so. <u>Bank lending is not constrained by any quantity of
reserves; it is the price of reserves that influence the marginal cost of
making a loan.</u> <o:p></o:p></span></div>
<div class="MsoNormal">
<u><span style="font-family: inherit;"><br /></span></u></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlX0bul0rI_qVVRdnZ_2fzH5A1B26zYPgtvozhNh20RC7e1MJQhvp9jPRgPjyDN7gl1qyvItapLGbSr5B3jopW4Js0wn9wg4LcvLd3DwV4vW4uerBfduP17r_bEdDG8rjwOPrODhZpA4Q1/s1600/rr6.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: inherit;"><img border="0" height="393" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlX0bul0rI_qVVRdnZ_2fzH5A1B26zYPgtvozhNh20RC7e1MJQhvp9jPRgPjyDN7gl1qyvItapLGbSr5B3jopW4Js0wn9wg4LcvLd3DwV4vW4uerBfduP17r_bEdDG8rjwOPrODhZpA4Q1/s1600/rr6.png" width="640" /></span></a></div>
<div class="MsoNormal">
<u><span style="font-family: inherit;"><br /></span></u></div>
<div class="MsoNormal">
<u><span style="font-family: inherit;"><br /></span></u></div>
<div class="MsoNormal">
<span style="font-family: inherit;">When banks
make loans, <u>they are not “loaning out reserves”</u> as is often portrayed. Reserves
are simply a liability of the central bank that can only exist in central banks
accounts, known as reserve accounts. Reserves cannot be lent “out”, or leave
the banking system (except as withdrawals of physical currency, which is not a
matter of monetary policy). In reality, banks create credit, which Reg D then requires
to be backed by a certain amount of central bank money; they do not “lend out”
anything. The textbook <u>money multiplier model only applies to countries on a
fixed exchange rate</u> where the central bank itself faces a convertibility
risk. In most countries with floating currencies, the money multiplier model
does not apply, as the Bank of England demonstrated in this <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf" target="_blank"><span style="background: white; color: windowtext;">paper</span><span class="apple-converted-space"><span style="background: white; color: windowtext; text-decoration: none; text-underline: none;"> </span></span></a><span style="background: white;">and<span class="apple-converted-space"> </span></span><u><a href="http://www.youtube.com/watch?v=CvRAqR2pAgw" target="_blank"><span style="background: white; color: windowtext;">video</span></a></u><span class="apple-converted-space"><span style="background: white;"> </span><span style="background: white;">last
year. Most of these countries have appropriately eliminated reserve
requirements after recognizing that they are no longer necessary. <o:p></o:p></span></span></span></div>
<div class="MsoNormal">
<span class="apple-converted-space"><span style="background: white; font-family: inherit;"><br /></span></span></div>
<div class="MsoNormal">
<span style="background: white; font-family: inherit;">During the “bubble” of the 2000’s when ostensibly too much lending was
going on, there were only a few billion of excess reserves in the banking system.
Now with $2.5 trillion of excess reserves, there is arguably “not enough”
lending going on. Clearly there is no correlation between quantity of reserves
and lending. <u>It’s about marginal price, not quantity</u>. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Bank lending
merely represents the creation of a new demand deposit balance for the borrower
(the banks liability) and a corresponding creation of a new bank asset of equal
value (the borrower’s liability). This is accomplished through simple
dual-entry accounting, and done completely independently of a bank’s reserve
position. Loan officers do not have to check with the CFO to see if they “have
the money” to make a loan! Once the borrower pays back the loan, both the bank’s
liability and the bank’s asset cease to exist, wiping out both sides of the
balance sheet. Therefore, eliminating Regulation D’s reserve requirements (as
was done in Canada many years ago) will have no tangible effect on bank
lending, economic growth, or inflation. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">In any
case, the Federal Reserve cannot control the money supply, as the failed efforts of the monetarists in previous decades has demonstrated. The money multiplier is simply the ratio of the broad money supply to the
monetary base (mm = M/MB). Changes in the money supply cause changes in the
monetary base, not vice versa. The money multiplier is more accurately thought
of as a divisor (MB = M/mm). Failure to recognize the fallacy of the
money-multiplier model has led even some of the most well- respected experts
astray. <u>The inelastic nature of the demand for bank reserves leaves the Fed
no control over the quantity of money</u>. <u>The Fed controls only the price,</u>
which has not been changed by QE or IOR, and would not be changed by
eliminating reserve requirements.<o:p></o:p></span></div>
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<span style="font-family: inherit;">Side note:
now that banks are allowed to pay interest on checking deposits, theory
indicates that checking account balances at banks would rise, since they no
longer represent a lost interest opportunity to the depositor. However, an
increase in checking account balances also means an increase in demand deposits,
which banks have to hold reserves against. Normally, an increase in reservable
deposits (in absence of sweeps of course) would constitute a larger “tax” on
the bank, since holding more unremunerated reserves would impose a marginal
cost to the bank. However, now that the Fed pays interest on both required and
excess reserves, the higher cost of holding more reserves against larger
checking account balances can be mitigated. <o:p></o:p></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-50278025633012921722015-04-03T13:23:00.001-04:002017-04-17T22:08:08.368-04:00My response to Chris Whalen's Op-Ed in American Banker<div style="background-color: white; color: #333333; font-family: Helvetica, Arial, Verdana, sans-serif; font-size: 14px; line-height: 20px;">
(Wall St. analyst and frequent CNBC guest Christopher Whalen wrote and <a href="http://www.americanbanker.com/bankthink/dangers-lurk-in-feds-zero-rate-policy-1073579-1.html">interesting Op-Ed in American Banker today</a>, focusing on how QE's effects are not as the mainstream believes them to be. In this article, Walen takes on a few MMT talking points, focusing on how the Fed's asset purchases remove interest income from the economy and are therefore more biased towards the deflationary side. The article is pasted below, with my comment in italics. )</div>
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Former Federal Reserve chairman Ben Bernanke argues <a href="http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30-why-interest-rates-so-low" style="color: #336699; text-decoration: none;" target="_blank">in a new blog post</a> that low interest rates are a reflection of the state of the economy and that a zero interest rate policy will somehow improve economic growth and employment. But he forgets the warnings of economists such as Walter Bagehot and John Maynard Keynes about the dangers of keeping interest rates too low for too long.</div>
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<i><span style="color: blue;">I assume those dangers are taken to be "misallocated prices or resources"? Seems to forget that rates were low during 40s, 50s, and 60s. </span></i></div>
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In fact, both zero rates and quantitative easing, or QE, are actually making deflation worse. (Although the Fed officially ended its bond-purchasing program in October 2014, it continues to reinvest proceeds from the bonds it already owns.)</div>
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<i><span style="color: blue;">Agree.</span></i></div>
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These policies are also causing a precipitous decline in consumer demand, which is visible in lower prices for key commodities such as copper, oil and natural gas. And they come at a long-term cost to individual investors and financial institutions.</div>
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<i><span style="color: blue;">Obviously we have weak aggregate demand right now, which QE makes worse. But blaming low commodity prices only on QE goes to far IMO. Its really global austerity that is to blame for weak demand. </span></i></div>
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In the fourth quarter of 2014, the <a href="http://www.businesswire.com/news/home/20150330006051/en/Kroll-Bond-Rating-Agency-Releases-%E2%80%9CReview-Preview#.VRwf_Y5V0Xg" style="color: #336699; text-decoration: none;" target="_blank">total cost of funds</a> for all U.S. banks was just $11 billion, versus over $110 billion in 2008. Meanwhile, as Kroll Bond Rating Agency<a href="https://www.krollbondratings.com/show_report/2100" style="color: #336699; text-decoration: none;" target="_blank">observes in a research note</a>, banks earned $119 billion in gross interest income in the same quarter — illustrating the huge wealth transfer from savers to debtors occurring under the Fed’s policy of financial repression. </div>
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<i><span style="color: blue;">Ok, but what were bank gross interest incomes before QE? He doesnt say, so that $119 billion figure is out of context. And if banks are earning so much interest income, why are their earnings and share prices still so low? Also, I am hearing the opposite from the Credit union/ community bank world....they are saying that net interest margins are tighter than ever. Maybe it is different for mega-banks? True that whatever number it is demonstrates a shift of income from savers to debtors, but in a nation where most of the populace are net debtors, this is a GOOD thing. Lower rates on home mortgages, auto loans, consumer loans, student loans, etc. Most savers are the wealthy who are doing fine anyhow. </span></i></div>
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Savers and investors do not live in the theoretical world of “equilibrium interest rates.”</div>
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<i><span style="color: blue;">Of all the theoretical worlds, I dont think one with 'equilibrium rates' is the one I'd chose. Something more like Middle Earth perhaps ;)</span></i></div>
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Net interest income for U.S. banks is higher than ever in dollar terms. But the negative impact of low interest rates is clearly reflected in falling returns on earning assets. U.S. banks earned $108 billion in net interest income in the fourth quarter, just 0.69% of the $15 trillion in total assets, versus 0.80% in 2010, when system assets totaled just $13.3 trillion, according to the Federal Deposit Insurance Corp. In other words, bank assets increased by 12%, but income per dollar of assets fell almost 10%.</div>
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<i><span style="color: blue;">Yes, but those asset prices have been propped up by QE...so the returns post QE will obviously be lower. When asset prices go up, rates go down. So while interest income streams may be lower, bank assets are also worth more, which boosts their capitalization which is arguably more important. This is especially true now that capital requirements and testing have gotten more stringent. </span></i></div>
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Bank earnings and asset returns are likely to continue experiencing pressure through 2015 and beyond as institutions try to offset declining net interest income with efforts to boost fee revenues and reduce operating costs. </div>
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<i><span style="color: blue;">True. Banks now relying more on checking account fees/overdrafts for income.</span></i></div>
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But more importantly, the steady decline in bank asset returns provides a striking illustration of why the Fed’s policies of zero interest rates and quantitative easing are not working.</div>
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<i><span style="color: blue;">Depends what "working" is supposed to mean! If it working means stimulus, then yes.</span></i></div>
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The decrease in banks' interest expense comes directly out of the pockets of depositors and investors. John Dizard of the <em>Financial Times</em> <a href="http://www.ft.com/intl/cms/s/0/658a099a-c976-11e4-a2d9-00144feab7de.html#axzz3Vy7Wwttd" style="color: #336699; text-decoration: none;" target="_blank">wrote recently</a> that it has become mathematically impossible for fiduciaries to meet beneficiaries’ future investment return target needs through the prudent buying of securities.</div>
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<i><span style="color: blue;"><span style="font-family: Helvetica, Arial, Verdana, sans-serif;"><span style="font-size: 14px; line-height: 20px;">Right, but borrowers save an equal amount that is lost to savers. Again most of the country are borrowers, not savers/investors so this is a net positive for most of the populace. Interest rates are like a see-saw since every dollar borrowed is a dollar saved: Raising rates hurts borrowers, lowering rates hurts savers-- in equal amounts, except for the $17 trillion in Treasury securities which are a NET asset for the economy. Lower rates on Treasury securities do represent a net loss for the economy, since the "savings" from lower Treasury rates just disappear into the Treasury General Acount ie reduce the deficit. </span></span></span></i><br />
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<i><span style="color: blue;">Since many pension funds are required to purchase mainly Treasuries I can see how lower rates hurt them. They may need to shift into riskier investments/change their prospectuses to meet growth targets in the future, since the Fed has corned the market of safe Tsy debt. But this shift in portfolio allocation means more capital directed towards private business, which actually need funds, unlike the US government which is the issuer of dollars.</span></i></div>
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The stated goal of the Fed's policies is to boost economic growth and employment. But in practice the policies fall short of the mark, because zero interest rates are taking trillions of dollars in income annually out of the global economy.</div>
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<i><span style="color: blue;">Agree with the theory, but I don't see how trillions are removed. At most, the Fed sends about $100 billion back to Treasury. The rest is reflected in savings for borrowers, which is not a loss to the economy. Any macro difference would be due to difference in propensity to spend between savers and borrowers. </span></i></div>
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While the Fed pays banks 25 basis points for bank reserve deposits, the remaining spread earned on the Fed’s massive portfolio of Treasury and agency securities purchased via quantitative easing is still being transferred to the U.S. Treasury. This policy does nothing to support private credit creation or job growth.</div>
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<i><span style="color: blue; font-family: Helvetica, Arial, Verdana, sans-serif;"><span style="font-size: 14px; line-height: 20px;">Agree completely. This is a dumb policy that acts as a tax. But it does reduce TEH DEFICIT, which is supposed to increase confidence and job growth duh!!</span></span></i></div>
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Indeed, the Fed should <em>increase</em> the rate paid on bank reserves immediately and thereby neutralize transfers to the Treasury.</div>
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<i><span style="color: blue;">This would require raising IOR which means increasing the FFR target, something that may happen later this year but gradually at best. I dont see the public purpose of raising rates just to boost bank income... Remaining t</span></i><i><span style="color: blue;">ransfers to Treasury should be offset by payroll tax cuts in any case, or at least be credited to the SS Trust Fund. </span></i></div>
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Moreover, zero rate policy as practiced by the Fed and now by the European Central Bank is actually depressing private-sector economic activity by taking money out of the hands of consumers and businesses.</div>
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<i><span style="color: blue;">Only those that are NET savers/fixed income, which is minority. </span></i></div>
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And by using bank reserves to acquire government and agency securities via QE, the Fed has been artificially pushing up the prices of financial assets around the world even as income and GDP stagnates.</div>
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<i><span style="color: blue;">Only because Treasury has been selling its "debt" at a discount in the first place. No public purpose to this. Treasury only issues long term debt because private investors want it, not because it needs to. Therefore, the Fed purchasing Treasury debt =just as if it had never been issued in the first place. </span></i></div>
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Public companies are using low interest rates to fund stock buy-backs instead of making new investments.</div>
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<i><span style="color: blue;">But QE has lowered rates all through the term structure, making it cheaper for business to borrow money/issue their own securities, which is a good thing! No reason for US government to be competing in the capital/paper markets with private businesses which actually need the money! The fact that companies are using these funds for buybacks and not new capital investment is because aggregate demand/sales remain low, so no reason to make real investments at this time.</span></i></div>
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Higher asset prices due to purchases by the Fed and ECB under QE are clearly a temporary phenomenon. Without a commensurate increase in national income — impossible with zero interest rates — the elevated asset prices resulting from QE cannot be validated and sustained.</div>
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<i><span style="color: blue;">Not entirely true. Ever heard of fiscal policy? We can easily boost national income by just spending more/taxing less! Appropriate fiscal policy can support any level of asset prices. </span></i></div>
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Thus with the end of QE in the U.S. and the possibility of higher interest rates, global investors face the decline of valuations for both debt and equity securities. This reality is already weighing on global financial markets.</div>
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<i><span style="color: blue;">Except rates have continued to go down post QE, and weak growth means this will likely continue..</span><span style="color: #333333;">.</span></i></div>
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Zero rate policy and QE do not address the core problems of hidden off-balance-sheet debt that caused the 2008 financial crisis. That is, banks and markets globally still face tens of trillions of dollars in on- and off-balance-sheet debt that has not been resolved.</div>
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<i><span style="color: blue;">True. Does anyone know what happened to all those CDOs?</span></i></div>
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Bad debt is a drag on economic growth, from German banks' loans to Greece to underwater mortgage loans in the U.S. Governments in the U.S. and EU refuse to restructure the bad debt because doing so would force banks to take losses and incur further expenses for already cash-strapped governments. </div>
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<i><span style="color: blue;">Eurozone governments are cash strapped, ours is not!</span></i></div>
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But no matter how low interest rates go and how much debt central banks buy, the fact of financial repression in which savers are penalized to the advantage of debtors has an overall deflationary impact on the global economy.</div>
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<i><span style="color: blue;">"Financial repression" is a loaded term. With a fiat currency with a natural rate of zero, any rate above zero is a subsidy to passive savers that only occurs because of central bank intervention to support this rate in the first place! So the Fed's current ZIRP is just the end of a subsidy, not repression of any sort. However, it is obvious that the public's understanding of this has not kept up, which is a political problem. </span></i></div>
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To be clear, the Fed was right to aggressively lower interest rates after the 2008 crisis. But continuing with zero interest rates and quantitative easing for seven years after the crisis is in conflict with the goal of increased employment and growth. By robbing individual savers and financial institutions of income, and artificially boosting asset prices, the Fed and ECB are unwittingly creating the circumstances for the next financial crisis.</div>
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<i><span style="color: blue;">Nothing is 'artificial' about one public policy versus another. Both are just policy choices--see my previous blog post on Bernanke! Savers aren't being robbed, just no longer subsidized. People who have saved in the stock market instead of bank accounts/CDs are doing very well. </span></i></div>
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The Fed and ECB should therefore abandon zero rates and quantitative easing and move to gradually increase interest rates to restore cash flow to the financial system. Mr. Bernanke and his former colleagues on the Federal Open Market Committee ought to recall Adam Smith's famous dictum that the “great wheel of circulation" is the means by which the flow of goods and services moves through the economy. If the Fed really wants to fight deflation and eventually hit a 2% inflation target, then we must embrace policies that make the proverbial wheel turn faster, not slower. We can do this by gradually ending financial repression and restoring balance to global monetary policy.</div>
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<i><span style="color: blue; font-family: Helvetica, Arial, Verdana, sans-serif;"><span style="font-size: 14px; line-height: 20px;">So we agree that QE does not help the economy, but dont agree on way forward. I think ZIRP should be made permanent, and economic growth should be run through fiscal policy, which not only works better but is more closely in line with our Constitutional principles (spending for the "general welfare"). </span></span></i></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-71338943755880975722015-03-31T21:58:00.001-04:002017-04-17T22:08:08.388-04:00What's Natural?<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuR913gRuGb4XkqbqnKAK6X3fvDtKuD4XgjWV0m7Dc5v3KMpOvHTgtZhLblk8Wj-eNdv6O9ahdwHpBi-XJkkbY-Z2JKZK2d9qOLNJjYL2adRhu9O_IE6xqEic5V9Lkvb64vt3Jxyfpep5k/s1600/natural+ben.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" height="552" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuR913gRuGb4XkqbqnKAK6X3fvDtKuD4XgjWV0m7Dc5v3KMpOvHTgtZhLblk8Wj-eNdv6O9ahdwHpBi-XJkkbY-Z2JKZK2d9qOLNJjYL2adRhu9O_IE6xqEic5V9Lkvb64vt3Jxyfpep5k/s1600/natural+ben.JPG" width="640" /></a></div>
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<span style="text-align: center;"><i> "Hey bro, betcha I can chug this between 0.00 and 0.25 seconds!"</i></span><br />
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We hear the word 'natural' all the time in our busy modern lives: natural remedy, natural ingredients, all-natural, natural grains, etc. However, as any savvy shopper and/or reader of Consumer Reports knows, the word "natural" has no meaning when applied to consumer products. There is no one industry or governmental definition or standard of what consists of "natural", so corporations can, and do, freely slap the "natural" label on just about anything they want.<br />
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However, this blog post isn't going to be about lying advertisements, because I don't have the rest of the decade to sit at this computer. No, this post is about the annoying tendency of economists to use the word "natural" in their field of study, even though it almost never applies. Economics is a study of human systems; systems that have been deliberately contrived in some way or another by human activity. Nothing about economic systems are natural, since both property rights and currency, the two building blocks of any "market" system, always have a governmental orgin. The structure, distribution, and quantity of property rights and currency are dependent on government policy, and by proxy, the people who hang around the halls of power when these policies are made.<br />
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So it was with slight annoyance/great frustration/indignant fury/neurotic hysteria that I read <a href="http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30-why-interest-rates-so-low" target="_blank">this recent blog post </a>by former Federal Reserve Chair Ben Bernanke. It seems Bernanke is the latest of the Bearded Economists (BE) to join the blogosphere (welcome Ben!), but unfortunately he got off to a bad start. In his very first day of blogging, he decided to dive into the topic of what the "natural" rate of interest is, and the economic theories that compete to decide what this "natural" rate is. No amount of verbal contortions could get Bernanke around the fact that there is simply no such thing as a "natural" rate of interest on currency, for the simple reason that currency itself is not natural. US Dollars don't fall out of the sky or grow on trees, nor did they ever shoot out of the end of Moses' staff. Currencies are simply the products of the entities that issue them, governmental or not. As long as the issuer of said currency does not promise to convert that currency, on demand at some fixed rate, into something else, than that currency has no natural "own" rate, aka interest rate.<br />
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Just like the letters in this sentence, US dollars cost nothing to produce. They are merely typed into existence by government employees. Therefore, they carry no "natural" rate of interest or growth, any more than the letters in this sentence can naturally grow. When I come back and re-read this blog post in 6 months, it will have the same amount of letters in it (unles i mak sum editts, off cours). This also happens to be the case with my savings account-- barring any deposits/withdrawals, the balance in my savings account will have the same amount of dollars in it in 6 months, because the rate of interest paid on that account is so low that it only amounts to a few dozen cents per year. This is not because the "natural" rate of interest on my savings account has changed, or there is something unusual about Wells Fargo Account #2248-955118-89! (not my real account number). This is simply because the Federal Reserve, you know, that organization that Mr. Bernanke used to be the head of, has decided that current interest rates should be next to zero. And while I happen to like this zero rate policy (because I believe that no one is entitled to earn any particular rate of interest on federally insured bank deposits that just sit around doing nothing), I don't pretend that it is in any way "natural."<br />
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This near zero rate is not any more or less natural than if it was, say 18%, as it was during the Paul Volcker days. Although Volcker raised rates this high in order to destroy labor unions, the middle class, America, etc. nobody claimed that they were "unnatural." The rate in 1982, as it is now, was just policy choice like any other. It wasn't delivered to them by Jesus. The men and women (ok, mostly men) on the FOMC just pick a number for the overnight interest rate and tell the New York Fed to fiddle around on their computers until that becomes the rate. If the government wants the interest rate on its own liabilities (US dollars) to be zero, than it can be zero; if it wants the rate to be 40%, it can be 40%. Neither rate is natural.<br />
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Going a little deeper, the Wicksellian Monetarists, of which Bernanke appears to be one, believe that at any one time there is a "natural" rate of interest <i>that will lead to full employment. </i>A few of the obvious problems with this Wicksellian or IS/LM theory are that-<br />
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1) it was devised under a gold standard economic system which was completely different and no longer exists<br />
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2) no one can seem to agree what full employment really is<br />
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3) what employment metric do you even use to define "full"<br />
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4) We now live in a world with fiat currencies, and computers, and global trade, and robots, and a global labor force, and highly interconnected banking systems, and, and, and.....<br />
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One sentence of his blog really set me off, however. According to Mr. B,<br />
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"Government spending and taxation policies also affect the equilibrium real rate: Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment."<br />
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Hmmm how about that? If anything, the trend lines during Bernanke's economic career would indicate THE OPPOSITE:<br />
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Thankfully, Mr. Bernanke did get some things right, like saying that the Fed has no choice but to set SOME short term interest rate. However, as far as I can tell, he didnt take the next step and assert that the Fed's short term rate influences <i>the entire yield curve</i> of both paper and capital markets (the latter less directly):<br />
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And that's just the effect of the federal funds rate changing. What Bernanke doesnt say is that the Fed can (and has, in the Eccles era) target any point along the yield curve it wishes. It can announce price targets and buy/sell till that target is hit, or simply offer its own long-term term deposits at some rate. For example, if the Fed wanted to set the floor for 30-year mortgages at 8%, it could offer 30-year term deposits at 8%, ensuring no 30-yr mortgage would ever be issued at less than 8%.<br />
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So if your forehead has not yet connected with your desk, you are now better at macroeconomics than most of 'em. Now go have yourself a cool, crisp, refreshing* can of Natural Light.<br />
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<i>*disclaimer: It is none of these things**</i><br />
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<i>**things includes "beer"</i><br />
<br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-66124459586253763992015-02-16T12:09:00.003-05:002017-04-17T22:08:08.386-04:00The destructivness of gold-fetishism on full display in AlaksaToday, <a href="http://www.washingtonpost.com/national/health-science/internal-memos-spur-accusations-of-bias-as-epa-moves-to-block-gold-mine/2015/02/15/3ff101c0-b2ba-11e4-854b-a38d13486ba1_story.html?hpid=z1">WaPo reports</a> on a massive political fight going on between US EPA, Alaskan natives, fishermen, environmentalists, and a Canadian gold mining company:<br />
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<i>"Just north of Iliamna Lake in southwestern Alaska is an empty expanse of marsh and shrub that conceals one of the world’s great buried fortunes: A mile-thick layer of virgin ore said to contain at least 6.7 million pounds — or $120 billion worth — of gold.</i><br />
<i><br /></i><i>As fate would have it, a second treasure sits precisely atop the first: the spawning ground for the planet’s biggest runs of sockeye salmon, the lifeline of a fishery that generates $500 million a year.</i><br />
<i><br /></i><i>As early as this spring, the Environmental Protection Agency is expected to invoke a rarely used legal authority to bar a Canadian company, Northern Dynasty Minerals Ltd., from beginning work on its proposed Pebble Mine, citing risks to salmon and to Alaska’s pristine Bristol Bay, 150 miles downstream. The EPA’s position is supported by a broad coalition of conservationists, fishermen and tribal groups — and, most opinion polls show, by a majority of Alaskans."</i><br />
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So what we have here is a fight between fake wealth and real wealth. The gold types want to put real wealth- this area of pristine wilderness which supports a massive salmon fishery (ie high protein, low fat FOOD) at risk in order to produce fake wealth- 6.7 million pounds of a soft metal of limited utility (ie GOLD). Its a sad state of human affairs that we would risk real wealth to extract something of superficial value, that derives most of its "worth" from ancient superstitions, and artificial scarcity from being melted into bars and locked away.<br />
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This comes down to FOOD vs. GOLD. Which would you rather have?<br />
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Thankfully it appears that US EPA will make the decision to block this project and save the real wealth....at least for now.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-48120103926239957762015-02-02T17:44:00.002-05:002017-04-17T22:08:08.362-04:00The Federal Reserve's independence from public input<div class="MsoNormal" style="margin-bottom: 0.0001pt;">
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<span style="font-family: inherit;">As someone who works in financial regulatory compliance, I regularly hear about various types of risk- credit risk, reputation risk, liquidity risk, etc. Recently however, one type of risk has been consuming a lot of time and energy in the banking world- that of interest rate risk. Interest rate risk is simply what might happen to the balance sheet of a depository institution should its cost of short term funding rise <i>as a result of deliberate policy decisions from the FOMC. </i> Policy and compliance staff at DIs have been spending time developing strategies to mitigate interest rate risk, which usually involves some combination of limiting fixed rate lending, and hedging with plain-vanilla derivative investments. <o:p></o:p></span></div>
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<span style="font-family: inherit;">Most of the MMT community seems to agree that there is nothing wrong with our current zero interest rate environment, and that it should be made permanent--so from our point of view all this IR risk mitigation is a waste of time, since the Fed should just leave rates at zero forever and control credit growth by regulating underwriting and capital standards. <o:p></o:p></span></div>
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<span style="font-family: inherit;">I would argue that changes in monetary policy are just as, if not more, intrusive and burdensome to financial institutions as other types of central bank action. During the traditional rulemaking process, there is (quite appropriately) long periods of agency research, thought, and regulatory development, with opportunities for public comment along the way.<o:p></o:p></span></div>
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<span style="font-family: inherit;">However when it comes to monetary policy, these ideas don't seem to apply. Instead, it is taken as a given that the FOMC-<o:p></o:p></span></div>
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<span style="font-family: inherit;">1) Has all the information in needs<o:p></o:p></span></div>
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<span style="font-family: inherit;">2) Knows what it is doing<o:p></o:p></span></div>
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<span style="font-family: inherit;">3) Can just do whatever it wants<o:p></o:p></span></div>
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<span style="font-family: inherit;">4) Can ignore public input<o:p></o:p></span></div>
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<span style="font-family: inherit;">5) Can safely ignore the “full-employment” part of its dual mandate<o:p></o:p></span></div>
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<span style="font-family: inherit;">All of the financial and economic media/punditry takes all these factors as a given and never challenges them. The FOMC is given an astounding amount of deference and goodwill, despite the increasing evidence (from minutes and transcripts) that it cant come to a consensus on what is going on in the economy or what its decisions actually do. <o:p></o:p></span></div>
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<span style="font-family: inherit;">As a political matter, legislators and pundits frequently make comments about “oppressive regulations”, “red tape” and “out of touch bureaucrats” when discussing regulatory agencies. However when it comes to the FOMC, which is one of the least accountable organizations of the federal government, and whose decisions have broad consequences for the banking system and labor market, none of these terms are ever used (BTW, courts have also ruled that the FOMC can't be FOIA'd). People just seem to let the FOMC do whatever it wants, as if it were a mystical tribe of holy oracles, whose intelligence is just to stunning for us lowly commoners to comprehend. </span></div>
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<span style="font-family: inherit;">So even more scandalous, in my view, is that the standard rulemaking procedures established under the Administrative Procedures Act do not <u>at all </u>apply to FOMC decisions to change interest rates. The primary mode of changing interest rates is the federal funds target rate, which is voted on by the FOMC and carried out by the Federal Reserve Bank of New York. This particular action does not involve amending existing regulations, so I can see how at least this part could escape public input. <o:p></o:p></span></div>
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<span style="font-family: inherit;">However, open market operations are no longer the Fed's main tool. With the banking system now holding trillions in excess reserves as the result of 3 rounds of QE, the Fed cannot easily change interest rates through open market operations as in the past. It has also indicated that it does not want to rapidly shrink its portfolio. So instead, the Fed can change the rate it pays on required and excess reserve balances, which serves as a floor to interest rates. Thankfully, the rates paid on required and excess reserves <u>are </u>set by regulation and codified in the Code of Federal Regulations. <span style="background-color: white;">C<a href="http://www.ecfr.gov/cgi-bin/text-idx?SID=4dda3ee469f3700e5f5397a580628f52&node=se12.2.204_110&rgn=div8">FR section </a></span><span style="background-color: white;"><a href="http://www.ecfr.gov/cgi-bin/text-idx?SID=4dda3ee469f3700e5f5397a580628f52&node=se12.2.204_110&rgn=div8">§204.10, "Payment of interest on balances"</a> is where the Fed established the rates it pays on reserves. It has been changed only once since the interest on reserves program was established in late 2008. </span></span><br />
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<span style="font-family: inherit;">The Fed also loans out reserves directly through its discount windows, the rates of which <u>are also </u>set in regulation (smaller amounts of intra-day liquidity are also provided through daylight overdrafts which have similar costs to DW lending, however post-QE with trillions in excess reserves, the volume of overdrafts has plummeted to near zero). <o:p></o:p></span></div>
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<span style="font-family: inherit;"><a href="http://www.ecfr.gov/cgi-bin/text-idx?SID=0a307e178bf7a5ed2b281b8c5f5a3264&node=pt12.2.201&rgn=div5#se12.2.201_151" target="_blank">Section §201.51 of the Federal Reserve Board’s Regulation A </a>is “<i>Interest rates applicable to credit extended by a Federal Reserve Bank.”</i> This section of the US Code of Regulations (CFR) establishes the rates that Federal Reserve Banks must charge to institutions that borrow reserves through the Primary Credit Facility and others. This borrowing price is one of Fed’s tools in implementing monetary policy. As a matter of policy, the Fed usually keeps these discount window rates slightly above its targeted federal funds rate, so every time the FFR target is changed, the discount window rates are adjusted accordingly.<o:p></o:p></span></div>
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<span style="font-family: inherit;">Therefore, it would seem that in order to change these rates, the Fed would have to initiate the rulemaking process, since amending regulatory text always requires this process. However, as I have recently realized, the Fed does NOT have to follow APA procedures when amending the interest rates it pays on reserves or charges from the window. Each time the Fed amends Regulations A or D to change these rates, it does use a rulemaking. However, unlike other agency rulemakings, the Fed simply releases these changes as final rules, skipping the public notice-and-comment stage altogether. This loophole completely robs the public of any chance to comment or lobby on the potential effects of such an interest rate change. <o:p></o:p></span></div>
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<span style="font-family: inherit;">For example, each of these rules are published as final in the Federal Register, and each states near the end-<o:p></o:p></span></div>
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<span style="font-family: inherit;"><i>Administrative Procedure Act</i><o:p></o:p></span></div>
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<span style="font-family: inherit;"><i> The Board did not follow the provisions of 5 U.S.C. 553(b) relating to notice and public participation in connection with the adoption of these amendments because the Board for good cause determined that delaying implementation of the new primary and secondary credit rates in order to allow notice and public comment would be unnecessary and contrary to the public interest in fostering price stability and sustainable economic growth. For these same reasons, the Board also has not provided 30 days prior notice of the effective date of the rule under section 553(d).</i><o:p></o:p></span></div>
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<span style="font-family: inherit;"><a href="http://www.gpo.gov/fdsys/pkg/FR-2008-12-29/pdf/E8-30819.pdf"><span style="color: blue;">(Here's an example) </span></a><o:p></o:p></span></div>
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<span style="font-family: inherit;">The crucial text here is “The Board for good cause determined that delaying implementation….in order to allow notice and public comment would be unnecessary and contrary to the public interest.” This is quite an astounding statement that no other regulatory agency could possibly get away with. If the EPA, for example, simply decided that allowing public comment on a Clean Air Act regulation “would be unnecessary and contrary to the public interest”, it would raise an unbelievable shitstorm from both chambers and aisles of Congress. <o:p></o:p></span></div>
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<span style="font-family: inherit;">As any federal regulator will tell you, public notice-and-comment consumes an large amount of agency time and resources and is a crucial step in developing policy. Some of the reasons for this are good ("the public" should have input into how its country is run), while some are bad (when it comes to influencing regulations, "the public" usually means wealthy corporate lobbyists). <o:p></o:p></span></div>
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<span style="font-family: inherit;">So lets get some perspective here. How is it that the Fed doing something significant-- changing one of the main "prices of money"-- constitutes “good cause” to ignore the APA, but the EPA, for example, taking actions to save our air, water, food, and climate does not? I would argue that the EPA has just as important of a role in determining our quality of life as the Fed, and rightfully must follow the public notice-and-comment process set forth in the APA. Somehow the Fed does not. </span><br />
<span style="font-family: inherit;"><br />This loophole should be the focus of any Fed reform efforts in the 115th Congress. Like it or not, the FOMC still has significant influence over the economic affairs of our country. So instead of trying to "audit the Fed" or change its structure, large strides could be made by simply forcing the Fed to take public comments on its important monetary policy actions. This would give labor groups and progressive economic think tanks a chance to make their ideas and opinions known to the otherwise cloistered FOMC. While I hope the day never comes, if the Fed does eventually decide to raise interest rates, it should hear from We the People first. </span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-77300375702676085002015-01-20T11:41:00.001-05:002017-04-17T22:08:08.392-04:00The Triumph of Neo-liberalism and why we love "The Walking Dead"<div class="MsoNormal">
One of the most popular shows on television for the past few years has not been a reality show, game show, or sports series. It hasn’t been produced or broadcast by the Big 3, HBO, or Showtime. This show, which now regularly beats out Sunday Night Football in the ratings, is AMC’s “<i>The Walking Dead”</i>, a zombie-horror-drama now in the midst of its 5<sup>th</sup> season. Set in rural Georgia, the show follows an ever-dwindling group of survivors in a post-zombie apocalyptic world. Despite its thin back story and tortoise-paced plot, “<i>The Walking Dead</i>” carries an enormous thematic appeal—that of a modern American society that has completely collapsed, relegating its survivors to a pre-industrial way of life. </div>
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While the show is well known for its outstanding makeup, set designs, and zombie special effects, its real appeal comes from something much more profound. In our 2015 world plagued by staggering income inequality, collapsing middle-classes, impending irreversible climate change, and a gridlocked, non-respondent political system, there is an element of gratification that comes from viewing the collapse of society play out on screen, in all its bloody-gory goodness.<o:p></o:p></div>
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Fiction writer and son of famed film director Mel, Max Brooks has written a handful of books on the subject, including <i>"World War Z</i>," which was recently made into a movie. <a href="http://www.wpr.org/world-war-z-author-explains-appeal-zombie-apocalypse-stories">Brooks said when</a> people start to become uncertain about the world around them, apocalyptic fiction tends to thrive. “I think we instinctively want to explore the apocalypse when we see what we think is the system breaking down… people have a sense that things aren’t working.”<o:p></o:p></div>
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However, Brooks noted that straight-up apocalypse stories aren’t as appealing. And that’s where zombies come in. “It’s human nature to look ahead, but it’s also human nature to turn away if it’s a little too real,” Brooks said. “So, you put a little science fiction on there, you make the catalyst fake … say, zombies … and then you can watch the apocalypse.” As a metaphor, zombies can work on many levels. “I think they’re a Rorschach test for whatever scares us,” Brooks said. “They’re also a great metaphor for major global catastrophes, which we’ve been battered with for the last decade.”<o:p></o:p><br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHhJvBuQ_htvn4knb4ulrOcXr8VilsRWNuclfz9PitwRKomHAhAwQVBKQ26pUSG6IbRP90-SN2siwl_LRHfNsn333F0DCQQBvB9YXKHtBh4tfju-ocNkUpVp8x9Au3ON_gnb5SPKMDfL7v/s1600/zomb1.JPG" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHhJvBuQ_htvn4knb4ulrOcXr8VilsRWNuclfz9PitwRKomHAhAwQVBKQ26pUSG6IbRP90-SN2siwl_LRHfNsn333F0DCQQBvB9YXKHtBh4tfju-ocNkUpVp8x9Au3ON_gnb5SPKMDfL7v/s1600/zomb1.JPG" height="329" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Photo from last week's meeting of the American Economic Association (c)AMC</td></tr>
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There is something deeply satiating about a world where the complexities of modern society have collapsed under the strain of an unknown and unstoppable disease. Now obviously, tapping into a society’s collective fear and hopelessness and reflecting it dramatically on screen is not a new entertainment strategy--how many dozens of nuclear holocaust movies were made in the 50s and 60s? Nevertheless, it’s tempting to fantasize a world where human fear and incompetent national leadership, having already wrought irreparable damage upon the United States, finally leads to its dramatic demise. The Walking Dead’s post-apocalyptic scenario, in which a weak government and populace gripped by fear was unable to stop a plague that robbed people of their humanity, does not seem all that farfetched when considering what neoliberalism has already done to our real-life America.</div>
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On a recent roadtrip to Florida, large swaths of Interstate 95 were clogged with traffic, forcing me to take the back country state routes through South Carolina and Georgia (coincidentally where <i>The Walking Dead</i> is filmed). While driving this route is much slower, it gave me a chance to take in the scenery of the rural south. Mile after mile of abandoned strip malls and dilapidated motels. Vacant lots strewn with garbage and choked with weeds. Downtowns consisting only of a lonely gas station, post office, used car dealership and the occasional payday loan shop. Places where the American middle class was born, lived, and died….but not completely. A spark of life always remains-- not enough to thrive, but just enough to frighten.<o:p></o:p></div>
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And for those (few) of use with a firm grip on the reality of money in the modern world, we can feel a little like Rick Grimes and his wandering band of not-so-happy warriors. What chance does a small group have against an entire planet swarming with bodies and minds captured by an unstoppable plague? How is it that so many of the elite and the experts could be so wrong? How could something so harmful, so destructive to mankind be so impervious to traditional weapons (in our case, basic financial mechanics)? In our world, it is neoliberal ideology that is the zombie virus. Spreading through fear and panic, it undermines our faith in our fellow man and civil government, and robs millions of people of their ability to live up to their full human potential.<o:p></o:p></div>
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And while <i>The Walking Dead’s </i>producers may not yet have been able to explain exactly how the zombie strain operated and spread so quickly, we know exactly where neoliberalism came from and how it has so rapaciously spread through our modern society. In our zombie world, the wealthy and powerful are the progenitors, the economists and politicians are the willing vectors, and the citizenry is left to stagger through the countryside in a frightened and impulsive daze. <o:p></o:p>We all know that zombies can only be brought down with a direct blow to the head, and this zombie ideology is no different. It needs to be attacked at the top-- head on. Simply hacking around the edges wont do much good.<br />
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Thankfully, unlike the zombie strain, the cure for neoliberalism has been with us the whole time. Explain to people how modern money is a flexible tool that can be used to build society in any way we want, and watch neoliberalism collapse like old Soviet communism. Eliminate the notion of financial scarcity and neoliberalism will go along with it. The only thing standing between us and a prosperous society is this space between our ears, so long as we can keep it healthy. Just don’t get bitten.</div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-35315302558841563342014-12-12T11:59:00.000-05:002017-04-17T22:08:08.340-04:00What I heard at the Consumer Federation of America’s annual Financial Services Conference <div class="MsoNormal">
<span style="font-family: 'Times New Roman', serif;">Every
year, the Consumer Federation of America (CFA for short) hosts a financial
services conference, which brings together consumer advocates and financial industry
experts for presentations and discussion. This year’s conference focused on
emerging issues like Big Data, the CFPB, and overdrafts.</span></div>
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<span style="font-family: "Times New Roman",serif;">The conference
kicked off with remarks from Eric Belsky, the new director of Community Affairs
at the Federal Reserve Board. Belsky explained that since the transfer of many
of the Fed’s powers to the CFPB, his Community Affairs office has been focusing
on supervision of state banks for compliance with consumer protection laws, the
Community Reinvestment act, Flood Insurance, and the Servicemembers Civil
Relief Act. His office also supervises large banks for Fair Housing Act compliance.
<o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">Belsky
also noted that the Fed is trying to take a more risk focused approach to
supervision, especially on new financial products and bank relationships with 3<sup>rd</sup>
party vendors. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">Next was a
panel discussion on the CFPB’s enforcement actions, featuring Hunter Wiggins,
the CFPB Deputy Enforcement Director for Policy and Strategy. The panel began discussing
how financial regulatory agencies in the past had constantly been behind the
curve, focusing on cleaning up the last crisis and ignoring the growing one. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">Wiggins
then explained the Bureau’s approach to enforcement. When determining what
cases to pursue, the Bureau’s enforcement teams look at the number of victims,
whether consumer harm is temporary or long lasting, the size and composition of
vulnerable populations, and if private litigation options have been used or are
available. This results in about half of the enforcement teams focusing on the “core
work” of mortgage origination/servicing, fair lending, payday, auto, etc. The
other half is devoted to “cross product” issues and evaluation of emerging
products. So far in 2014, the Bureau has made 36 such enforcement actions,
covering a large swath of the financial services marketplace. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">The
first point of contact that Bureau attorneys have with business is often when
delivering Civil Investigative Demands, or CID’s. Mr. Wiggins stated that the Bureau’s
CIDs, which can often be very demanding and go into the thousands of pages,
have gotten more precise over time. <o:p></o:p></span></div>
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<b><span style="font-family: "Times New Roman",serif;">Big Data panel<o:p></o:p></span></b></div>
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<span style="font-family: "Times New Roman",serif;">The next
panel was on the use of “Big Data”, focusing on how credit bureaus, furnishers,
and insurance companies use all sorts of new data in their businesses. The consumer
advocate in the panel stated that while ECOA and FCRA were good at protecting
consumer information in the early days, the rapid development of digital
technology and social media presents new opportunities for consumer harm and
privacy violations. He also stated that the tendency of new/young firms,
especially in Silicon Valley, to move too quickly into these new data mining
fields can be a recipe for mistakes and consumer harm. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">One of the
more memorable statements came from the “big data” expert on the panel, who
revealed that some analytical firms claim to be able to predict credit scores
based on how many exclamation points a person uses in their social media posts.
Some of these firms can also track and record where a person clicks on a webpage,
what they “like” on Facebook, and what they search for on Google. Companies can
then use this data to predict credit scores and target their marketing of
various financial and insurance products. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">The
downside is that this sort of data analysis can give inferences and establish
correlations between certain behaviors, but it cannot prove social causations. The
main takeaway here is that increasing use of big data reduces consumer surplus
in the lending/insurance markets. Any benefit of the doubt that consumers may
get from service providers is lessened when doubt can be filled with this new
information. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">The
panelists stressed that going forward, more federal regulations may be needed
in this data collection field, because the machinery is far too complicated for
consumers to understand and make informed decisions upon. A basis for these
regulations may be a “right to be forgotten”, where consumers can opt to use social
media and software applications without being tracked. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">The
afternoon panel on overdrafts featured CFPB Deposit Markets director Gary
Stein, Pew Research’s banking expert Susan Weinstock, consumer advocate Sarah
Ludwig, and Bank of America SVP for Check/Debit products Kevin Condon. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">The panel
began with an analysis of the 2009 overdraft rule from the Federal Reserve.
Despite the “opt-in” system established by this rule, the amount of overdrafts
and account closures due to overdrafts has increased. The basic conclusion is
that the Fed’s opt-in system was too confusing for consumers to understand and
thus failed to work. Research from the Woodstock Institute also found enormous
variations in how overdraft programs were explained at different banks. Bank
employees often made errors in explaining these programs, and one employee was
even found pitching overdraft protection as a way to “avoid fees.” According to
Ludwig, the difference in opt-in rates across banks is further evidence that the
Fed’s form is terrible. And while Ludwig praised credit unions, she also aggressively
criticized overdrafts fees in general, focusing on their tendency to hit lower
income consumers the hardest. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">Stein
explained that according to the Bureau’s research, about 25% of all checking accounts
overdraft at least once per year, and young people are far more likely to incur
overdrafts than old. Ludwig noted that the banking industry made $32 billion in
overdraft fees in 2013. Weinstock also noted that in a certain minority neighborhood
in Los Angeles that her organization studied, more people were kicked out of
the banking system due to overdrafts than from losing a job during the Great
Recession. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">The panel
agreed that generally, overdraft penalty fees are the most expensive form of
overdraft, while overdraft protection/courtesy pay is cheaper for consumers. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">According
to Condon, Bank of America’s “Safe Balance” checking account product is a zero
overdraft account. However, it carries a monthly fee and can’t have checks
written on it. Codon also explained that Bank of America banned debit card
overdrafts after the 2009 Regulation E change, and that BofA markets its “Safe
Balance” accounts to customers who frequently overdraft. <o:p></o:p></span></div>
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<span style="font-family: "Times New Roman",serif;">Stein also
took some time to explain the Bureau’s new prepaid card proposal. The Bureau is
proposing to treat overdrafts on prepaid cards as extensions of credit, which will
therefore be covered under Reg Z credit protections. Issuers of these cards may
also be prohibited from forcibly clearing overdrafts with funds from a related transaction
account. However, Weinstock noted that very few prepaid card issuers currently
offer overdraft or credit extensions on their cards. <o:p></o:p></span></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-5093313038349940082014-11-17T10:40:00.001-05:002017-03-12T17:05:38.959-04:00Don't 'bank' on your econ textbookIf I had a dollar for every time an economist says something wrong about the modern economy, I'd be able to buy up an entire economics department <a href="http://www.publicintegrity.org/2014/03/27/14497/inside-koch-brothers-campus-crusade" target="_blank">(a-la Koch brothers)</a>.<br />
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In many of my previous posts in this blog, I've detailed how economists chronically misunderstand debt, deficits, interest rates, inflation, and trade. But so far I've ignored what is probably the biggest gaping hole of knowledge in the economics profession: the retail banking system. There is almost a laughable difference between the way economists explain banking, and the way that people who actually work in banking know how the system operates.<br />
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Economists remain wedded to very outdated, stylized views of banking that ceased to exist a long time ago. The overly simplistic money multiplier is perhaps the most inaccurate of these views. You've probably heard an economist describe banks as special kinds of private businesses that take money from savers/depositors, and recycle that money back into the economy through lending. This is called 'fractional reserve banking', which, like competent leadership of the Washington Redskins, has not existed for decades.<br />
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Banks have a very important role in the US economy. The government has empowered them with the ability to create credit based on creditworthiness and public need. In the simplest terms, modern US banks are <u>credit allocation utilities,</u> and serve as our conduits into the federal government's payment system. Our modern economy would not exist without either of these facilities, especially the payments system. If you have ever used cash, check, debit, or ACH to acquire a good or service, then you have used the federal government's payment system. This payment system consists of wires between banks, which allows the deposits of difference banks to clear at par (face value). For example, if a customer of Bank A writes a $100 check to a customer of Bank B, then $100 is debited from Bank A's dollar account at the Federal Reserve, and credited to Bank B's dollar account at the Federal Reserve. Just like we have tubes and wires for water, sewer, cable, phone and internet, banks are tubes and wires for money. And just as competition among utilities leads to bad outcomes (duplicative infrastructure and poor service), competition among bankers for lower and lower lending standards leads to other bad outcomes (financial crises).<br />
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When it comes to credit creation, this is the arrangement: The federal government allows licensed banks to create an infinite amount of money out of thin air, and charge interest on it. The federal government also allows the liabilities created by individual banks to clear at par with each other, via the interbank payment system (Fedwire), and insures these liabilities (through the FDIC). Depending on the temperament of the bankers, and the state of the economy, banking can be a very easy and profitable enterprise. For example, in the old days of basic S&L banking, people used to joke about the "3-5-3 rule." Bankers would take in deposits at 3% interest, make mortgages at 5% interest, and be on the golf course by 3pm.<br />
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In exchange for these privileges, banks have to comply with the regulations that the federal government writes for them. These regulations can be roughly grouped into three categories: prudential (protecting the safety and soundness of the banks themselves), consumer protection (protects consumers from being ripped off by banks, mainly through disclosure requirements), and a group of rules called the 'Bank Secrecy Act', which prevent money laundering, and allow government agencies to monitor and track potential terrorists.<br />
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When a US bank creates credit, a the loan officer simply keystrokes a new deposit into an account. So when banks create credit, they create <u>their own liabilities, which themselves are not US dollars. This bank money is denominated in US dollars, and is cleared by US dollars, but it is not US dollars.</u> This is crucial to understanding the banking system. Only the US government can create a US dollar, which is its own distinct liability. Banks cannot create US dollars, since dollars are not their liabilities. Banks create bank money, which are their own liabilities. So while bank lending does create new <u>money</u>, it does not create new <u>US dollars.</u> Only deficit spending from the US federal government can create new US dollars. Therefore, the amount of US dollars in the world does not change as the result of bank lending. When a bank orders cash to fill its ATM, its dollar account at the Federal Reserve is debited by the same amount of cash as it receives. The size of this Federal Reserve account is not affected by lending. This is the same account that is used to maintain reserve requirements and make payments to other banks on behalf customers.<br />
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For example, if you get a $250,000 home loan at Wells Fargo, you receive $250,000 in your Wells Fargo checking account. This money is your asset, and the bank's liability. In exchange, the bank creates the mortgage, which is their asset and your liability. This is called dual-entry accounting, and is the best way to understand modern banking. When you pay off the mortgage, this process happens in reverse. The deposits created by the loan are destroyed, and the mortgage disappears. Both your and the bank's liability vanish once the mortgage is paid off in full.<br />
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Banks are not part of the private sector, since they could not exist without the Federal Reserve System and deposit insurance provided by the FDIC (to say nothing about how the Fed and Treasury rescued the banking system in 1933, 1991, and 2008/9 -plus every time the FDIC puts a failing bank into conservatorship). Banks also do not recycle your deposits into loans. In modern times, banks are infinitely funded, and only rely on consumer deposits as one source of liquidity. <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf" target="_blank">This bloody brilliant paper </a>and <a href="http://www.youtube.com/watch?v=CvRAqR2pAgw" target="_blank">a video</a> from the Bank of England (the central bank of the UK) confirms exactly what I am saying here.<br />
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As members of the Federal Reserve System, banks can always get the reserves they need to meet reserve requirements, from the federal funds market, the discount window, or overdrafts. Since the Fed itself mandates these reserve requirements, the Fed also always provides the reserves necessary for these requirements to be met. Since we are no longer under a gold standard, the Fed does not have to worry about its liabilities (reserves/dollars) being called in for gold, and can therefore flexibly create/lend these reserves as necessary to meet the requirements it imposes. As the requirer and monopoly issuer of these reserves, the Fed always provides them in infinite amounts, but at certain and variable prices which are voted on by the Federal Open Market Committee. This price of these reserves is what people usually refer to as 'interest rates.'<br />
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Note that reserve requirements are entirely different from <u>capital requirements</u><i><u>.</u> </i>Reserve requirements are about setting monetary policy. Capital requirements are prudential measures intended to maintain the safety and soundness of the banking system.<br />
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At its core, retail banking is a simple activity, with best practices that are well known and established. Like other utilities, it should be a boring and marginally profitable enterprise. The US used to have such a simple, sound banking system in the five decades after the Great Depression. Then, when a fever of deregulation took over in the 1980's, banking was unleashed into the wild, rapacious, and highly profitable business of rent extraction that it is today.<br />
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If you've reached the end of this blog, congratulations! You now have a better understanding of the banking system than many economists. Now feel free to use that overpriced textbook as kindling or to even out a wobbly chair.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-38573953995409315262014-10-09T11:09:00.002-04:002017-04-17T22:08:08.346-04:00Macro updateSo far this week, we've had several pieces of economic news, which have significantly affected the stock market. We had a new CBO deficit projection for the year, a release of minutes from last week's FOMC meeting, and new unemployment numbers today. This month will also likely see the completion of the so called "taper" of the Fed's Quantitative Easing program, meaning that the Fed's net additions of US Treasury and Agency Mortgage-Backed Securities to its System Open Market Account portfolio will go to zero after October 31. The stock markets and financial media have been all over the map in interpreting this information, with a triple digit loss on the Dow on Tuesday, followed by a triple digit gain on Wednesday, and another triple digit fall today.<br />
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On the fiscal side, the deficit is the smallest it has been since.....2008--you know, that year we went into a recession. According to CBO, total federal outlays were about the same as last year, but revenues increased by about $200 billion, bringing down the deficit. If we were a country like Germany, which does not spend its own currency, this news might be a reason to celebrate. However, we in the US spend our US dollar, which is our own sovereign, nonconvertible fiat currency. That means that more dollars the US government spends, the more that are added to the economy. Conversely, the more dollars the the US government redeems through taxation, the less dollars that are left to the economy. So for an economy to grow, it needs a constant stream of new dollars added to it--and the only way this happens is through federal "deficits." I put word deficit in quotes, because it is really an inappropriate term for modern public finance. The word deficit comes from 'deficient', which means a running out or lacking of "things." Problem is, since 1933, US dollars have not been materials 'things that can be run out of, because they cannot be consumed or redeemed for anything other than themselves. US dollars are created by decree-- the Fed and Treasury declare them into existence by simply marking up bank accounts, to the tune of billions of dollars a day. So this shrinking deficit represents a shrinking amount of dollars being added to the economy-- not a good thing when we have so many resources, labor and otherwise, still sitting idle in the US.<br />
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On the monetary side, we had a release of the minutes from the last meeting of the Fed's FOMC, where we heard members discussing the continuing weakness of the labor market, the lower than expected inflation, and potential continuing need for what they believe is "stimulus." This news of potential stimulus caused the Dow to jump by almost 300 points and wiped out the losses from the previous day. However at this point, policy observers should have serious doubts that the FOMC actually knows what it is doing. Its member's comments and statements have been all over the map...sometimes things are improving and rates may need to go up, sometimes things are weaker than they seem and rates need to stay low (the latter of which we just heard them say). They also still seem to cling on to the belief that low rates and large scale asset purchases (QE) are an economic stiumulus, despite 6 years of contrary evidence. They haven't seem to have caught on to the fact that QE hasn't even succeeded at its ostensible goal of bringing down long term rates (it has actually done the opposite:)<br />
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To make matters worse, these FOMC statements cause the markets to jolt back and forth based just on reading the tea leaves and trying to guess intentions. Not a good way to make policy in the 21st century.<br />
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Its high time that the Fed consider Warren Mosler's thoughts on this: that low interest rates, while doing relatively little to stimulate bank lending, actually cause a drag on the economy, because all the trillions of dollars in outstanding assets and savings produce much lower yields for their owners. These asset holders therefore have much less interest income, which means they have less to spend. This is roughly equivalent to a tax increase on these asset holders. To make matters worse, most of the interest income that the Federal Reserve Banks earn on their increased holdings of Treasuries and MBS, by law, have to be remitted back to the Treasury. These remittances reduce the deficit in the same way as a tax increases reduce the deficit (and therefore the number of dollars in the economy)<br />
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So this "tax increase", along with the additional $200 billion collected by the IRS, represents a significant drain on the purchasing power of American citizens. This means that some other entity in the economy ie private sector creditors, have to spend more than their income to offset the federal shrinkage, otherwise X amount of produced goods/services will go unsold. Problem is, this private credit expansion via new originations of mortgage, student, commercial, and auto loans, as well as credit cards, never expanded very rapidly following the financial crisis, and now appears to be tapering off from even these low levels. This leaves foreigners as the only remaining source of net demand via "spending more than their income". But with China and Europe rapidly decelerating in the past few months, export led growth aint happening either.<br />
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One bit of recent good news has been the fall in oil prices. If this translates to lower gas prices for US consumers, this means we will have more money left over to spend on other things-- meaning a higher quality of living and more domestic demand. However this good news has a big downside as well. You know all that incredible job growth that states like North Dakota have seen over the past few years? Thats because higher oil prices have finally made the very expensive extraction techniques (fracking, shale, oil sands) that they use more economical. The problem is that these techniques, which have led to the much celebrated US energy boom, are only economical feasible if oil stays above around $78 a barrel. Oil prices are now near 2-year lows and sliding further. This puts many of the US oil operations, and the tens of thousands of jobs that they support, in serious jeopardy.<br />
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So I'm not suggesting any sudden collapse a-la-2008. However, there is little reason to expect any significant growth in the coming months. Remember, economic growth does not fall from the sky-- its always a result of policy choices. And the unfortunate reality now is that our policymakers have chosen to remain ignorant of how the economy actually works, and are therefore incapable of implementing any growth-restoring policies.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-174600390788954592014-09-29T15:32:00.000-04:002017-04-17T22:08:08.314-04:00Congress now considering expanding energy exports<a href="http://www.politico.com/story/2014/09/oil-export-ban-republicans-111404_Page2.html#ixzz3EjZ6xlym"><span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: #888888; text-decoration: none;"><span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;">Via Politico:</span></span></a><br />
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><i><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: #222222;">"The petroleum industry’s crusade to lift
the four-decade-old ban on crude oil exports is shaping up as next year’s
hottest energy debate, and potential White House contenders like Gov. Chris
Christie and Sens. Rand Paul and Marco Rubio are already on board.</span></i><i><span style="border: 1pt none windowtext; color: #222222; padding: 0in;"><br />
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<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">Some GOP fans of crude exports are ready to move
even without party unity. Asked if he had qualms about getting ahead of his
leaders in pushing to end the ban, Oklahoma Sen. Jim Inhofe said, “No. Because
it’s right.”</span><br />
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<span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">Another outspoken export advocate is Alaska Sen.
Lisa Murkowski, who’s in line to chair the Energy and Natural Resources
Committee if Republicans retake the chamber.</span></span></i><span style="color: #222222;"><o:p></o:p></span></span></div>
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><i><span style="color: #222222;">Democrats face their own divide on the issue. The White House
has left the door open to re-examining the ban, former top economic adviser
Larry Summers called for its demise this month, and Energy Secretary Ernest
Moniz last year described barring exports as a 20th-century policy. In June,
the Commerce Department caused a stir with the news that it had approved
licenses for two oil producers to export limited amounts of a lightly processed
ultralight crude known as condensate. The administration appears “ready to go
where the Hill is on this,” Catanzaro added."</span></i><span style="color: #222222;"><o:p></o:p></span></span></div>
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<span style="font-family: Helvetica Neue, Arial, Helvetica, sans-serif;"><span style="background: white; color: #222222; line-height: 107%;">The fact that this issue in now being seriously debated
points to the stupidity and corruption of our Congress. Exporting oil and gas
makes absolutely no sense for US consumers. For years, all we heard was that we
had to develop domestic oil resources to rid ourselves of foreign oil
imports--and the second that trend starts to reverse, the Republicans want us
selling our natural resources to foreigners. Whatever you may think about
fracking and drilling in environmentally sensitive areas, at the very least you
should want these fuels to by consumed by Americans, since we are the ones
taking all the health/environmental risks from the extraction processes.</span><span style="color: #222222; line-height: 107%;"><br />
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<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">In all honesty I hope the Repubs continue to
push forward on this issue, because it would perfectly demonstrate how they
never really cared about reducing gas prices-- it was always about profits for
their industry donors. It would be impossible for them to ever construe oil
exports as a good thing for the American consumers for whom they pretend to
care so much about. And this is from the same people that always said we cant
afford environmental protections because it may cause energy prices to rise.
Now they want to be able to sell our oil to higher bidding foreigners, which
borders on treason in my book. Selling our domestic energy for foreign
fiat...brilliant idea guys!</span></span></span><o:p></o:p></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-47541683887311506002014-09-24T11:07:00.002-04:002017-04-17T22:08:08.360-04:00There is no lending solution to an income problem<div class="MsoNormal">
Working people need more income, not more debt. Yesterday’s release of <a href="http://www.consumerfinance.gov/hmda/">Home Mortgage Disclosure Act (HMDA)</a> data revealed that lending to African-Americans slipped to 4.8 percent in 2013 from 5.1 percent in 2012, while whites are taking a bigger chunk of the mortgage market-- <a href="http://www.bloomberg.com/news/2014-09-24/lending-to-minorities-declines-to-a-14-year-low-in-u-s-.html">70.2 percent ofborrowers last year, and 69.9 percent of borrowers in 2012.</a> While this new information is terrible and unsurprising, I fear that it could lead to a renewed push for weakening of lending standards, under the banner of expanded credit opportunity.<o:p></o:p></div>
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In my experience as an intern in the Consumer Financial Protection Bureau’s Office of Community Affairs, I regularly interacted with advocates from community, religious, ethnic, and consumer protection groups. They were all lovely people who were smart, passionate about what they did, and tough as hell. The success, and even the existence of the CFPB is testament to their ability to stand up against powerful banking lobbyists, who were usually paid much more than them. And while I agreed or at least sympathized with most of what these folks advocated, there was one issue where I found their means to be questionable. <o:p></o:p></div>
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While I think the <i>ends </i> that they were advocating for (equality of opportunity, empowering minority groups and the poor, fair lending) were all fantastic, the means that they advocated for often left me shaking my head, especially when it came to credit availability. The overriding thought process of these advocates was that minorities needed more access to credit, aka debt. Unfortunately, this often meant that these advocates supported <i>weaker</i> lending standards, and found themselves in the odd position of agreeing with banking industry lobbyists. This was especially true during the development of the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules. <o:p></o:p></div>
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However, I always felt that these folks were advocating for the wrong tools. <u>The economic struggles of the poor and minorities stem from a lack of income, not a lack of debt.</u> It is high levels of unemployment and deterioration of unions that have caused a collapse in incomes, and therefore creditworthiness, in these communities. Therefore, restoring income growth should be the primary focus of minority and consumer advocates. Lowering lending standards to meet these lower incomes is certainly not the solution to this problem, as we already tried this experiment in the last decade. No amount of lent money can replace a lack of earned money, and deliberately weakening underwriting standards to paper over insufficient incomes is a fool’s errand. As we now know, it was minority groups, especially African-Americans, who lost, and have not recovered, the most wealth in the financial crisis, since most of their wealth was in their homes. And of course, at the height of the bubble, many fly-by-night originators were more than happy to push out ARM NINJA loans to minority communities, who were rarely able to make payments after the teaser periods expired. <o:p></o:p></div>
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The political implications of this are even scarier. We already know how conservatives love to blame the entire financial crisis on the federal government incentivizing lending, (through the GSE's and Community Reinvestment Act) to “those people.” I fear that trying this experiment again will not only set minorities back, but it will further inflame the lunatic fringe that empowers the very politicians who make income inequality worse.<o:p></o:p></div>
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As far as I know, the MMT community is the only one that clearly elucidates the relationship between national spending, incomes, lending, and debt. I think it’s vital that the ethnic/community/consumer groups come to fully understand MMT and the stock/flows that we describe. Without it, they may continue to walk down the beaten path, and over the cliff once again. </div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-84895462160887489112014-07-08T10:09:00.001-04:002017-04-17T22:08:08.397-04:00Update on the Fed's new Term Deposit FacilityIts been a few months since <a href="http://mikenormaneconomics.blogspot.com/2014/05/federal-reserve-to-begin-test-running.html">my earlier post discussing the Fed's new Term Deposit Facility</a>. Since then, the scope of this program has grown significantly, with auctions growing from around $25 billion per week, <a href="http://www.federalreserve.gov/newsevents/press/monetary/20140701a.htm">to a massive $125 billion in last week's auction.</a><br />
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These term deposits are simply one-week CD's offered by the Fed. Participating depository institutions have their reserve accounts debited, and then re-credited 7 days later, plus the small, but free amount of interest. While each institution can only tender a maximum of $10 billion, the amount of participating institutions has more than doubled since March of this year-- from 27 to 58. Not surprisingly, this growth in participation follows the Fed's gradual raising of the rates it will pay, from 26 basis points in March, to 30bp just today. Not surprisingly, the 26bp auctions had fewer participants than the 29 bp auction, since many institutions likely figured that getting a one-basis point spread over what they receive on their excess balance accounts (25bp) was not worth the trouble. <a href="http://www.federalreserve.gov/newsevents/press/monetary/20140509a.htm">For now, the Fed has stated that 30 basis points will be the ceiling for this round of term deposit auctions</a>, with the first 30bp auction set to go off today.<br />
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The size of this latest auction demonstrates the ease to which the Fed can drain reserves if it chooses to. It simply states the rate that it will pay on term deposits, and accepts bids. Last week in a matter of hours, the Fed was able to drain $125 billion in reserves from the banking system, with no problems. It will be interesting to see how much higher the Fed may decide to pay on its Term Deposits, and how large these auctions may become as a result. Unfortunately, the Fed states on multiple TDF related pages that the auctions "are a matter of prudent planning and have no implications for the near-term conduct of monetary policy."<br />
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It remains to be seen if this statement holds true in the future, since it seems to me that these term deposits are an easier way of raising rates if the Fed needs to, as opposed to trying to sell off their securities portfolio and expose themselves to potential losses. From a political standpoint, it will certainly be easier to expand the TDF than to try and "unwind QE", as many analysts put it.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-74568065788694295972014-06-23T10:43:00.001-04:002019-08-09T12:19:11.337-04:00Crying for Argentina<div class="MsoNormal">
<a href="http://dealbook.nytimes.com/2014/06/16/supreme-court-denies-appeal-by-argentina/?_php=true&_type=blogs&_r=0" target="_blank">Last week, the US Supreme Court made a decision</a> that
could force Argentina to pay American billionaire hedge fund managers the full
value of its decade-old debts. Argentina’s dollar denominated/pegged debt is
one of many cruel legacies of the Washington consensus government
under Carlos Menem. Menem was known for being buddy-buddy with Bill Clinton,
and excluded the same sort of chill machismo as Clinton, while turning his
country into an internationally financed Ponzi scheme. In the 90’s, he was
lauded as a hero of fiscal discipline and inflation control, but his real
achievement was severely eroding Argentina’s sovereignty and allowing it to
become a petri dish for reckless neoliberalism. As poorly managed as Argentina
had been before the neoliberal experiment, it should now be clear that
establishing a currency board and pegging the peso to the US dollar was a disastrous
“solution.” <o:p></o:p></div>
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Argentina has been
struggling for years to build up its dollar reserves by exporting an enormous
amount of its agricultural production, at the cost of increased food prices for
the poor. Argentina has also seen millions of acres of its virgin land transformed
into soybean farms, with all the environmental consequences from the herbicides
and fertilizers that go along with it. Meanwhile, the US refuses to allow
imports of Argentina’s higher valued agricultural goods, such as meat and
citrus, due to grossly outdated health and safety measures that masquerade as
protectionism for America’s welfare farmers. On the one hand, US policy is
forcing Argentina to pay back debts in dollars, and on the other hand, US
policy is making it difficult for Argentina to actually acquire those dollars! Along
with the current disaster in Iraq, it’s hard to see how our current leadership
could do a better job of turning the entire world against the US. <o:p></o:p></div>
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The recent series of decisions from our neo-con court system may force
Argentina to pay back these illegitimate debts, which could drain billions of
its hard earned dollar reserves. This is crony capitalism of the worst kind; investors like Paul Singer are using America’s court system to force
the sovereign government of Argentina back into client-state status. The
already unstable Argentine peso<a href="http://www.reuters.com/article/2014/03/24/us-argentina-soy-hoarding-analysis-idUSBREA2N0M520140324">,
which has caused some farmers to start reverting to commodity currency</a>, could
fall even further as the result of this decision. In the purest sense, it’s
hard to see how human welfare, except for the top 0.001%, will improve as a
result of this decision. <o:p></o:p></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-8819076315297704398.post-30895541230075146872014-05-23T13:54:00.001-04:002017-04-17T22:08:08.337-04:00BREAKING NEWS- CBO warns of impending email scarcity<div class="MsoNormal">
Washington- The Congressional Budget Office today released a
report warning of an impending scarcity of electronic messages and digital data
communications, commonly known as ‘emails”. “For too long, Americans have been
recklessly sending emails, with no regard to future emails”, said CBO director
Douglas Elmendorf. “We are now downgrading our Outlook outlook for the next 10
years. Unless C<span style="font-family: inherit;">ongress can get it’s emailing under control, our nation’s
ability to send digital communications in the future will be compromised." </span></div>
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<span style="font-family: inherit;">According to the report, at the current rate of emailing,
even our retirees who still use MSN could be in danger. Additionally, the Gmail
Trust Fund is running low, and is on track to be completely defunct of clicking-capacity
by 2032. Fix the Emails CEO Paul Paulson was quick to join the fray, saying “for
too many years, we have been sending more emails than we have been receiving.
This profligate emailing is unsustainable, and we immediately need to enact
reforms to get us on a path to balanced-emailing. Its not like we can just create emails ad-hoc, or something!” Former Wyoming Senator Bart
Simpson added: “40 years ago when I was 83, we were still buying stamps and
licking envelopes. If we’re not careful, the country could be forced to default
back to snail mail. How will my long-lost Nigerian relatives contact me then?” said
the nervous Senator.</span></div>
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<span style="font-family: inherit;">Representative Paul Ryan had been eagerly awaiting this
report, saying “If we keep borrowing these emails from China, eventually they
are going to email us back. One day our children and grandchildren will suffer
under the weight of having to read these Chinese emails. If you thought the
Nigerian prince emails were bad, wait till you see the Chinese ones”, Ryan
exclaimed. E-mail-conomist experts have concluded that these Chinese emails are
even more dangerous than previously thought. A recent study from the Center for
Responsible Messaging indicated that no
matter how many of these Chinese emails stuff your inbox, you’ll just be
emailing again in an hour or two. <o:p></o:p><span style="background-color: white; color: #222222; line-height: 10.559999465942383px;">Perpetually accurate and prescient investor Peter Schnitt added "we are on the verge of a messaging collapse, and hyper-emailing is right around the corner. This is a great time to buy gold!"</span></span></div>
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However, notable economist Paul Krugperson had a slightly
different view. “Right now, email interest is too low, because the NSA has been
pumping trillions of emails into the economy. We actually need to send more
emails in the short term, not less. As long as we eventually balance our emails
in the long run, we should be fine. Want proof? Just look at these lines on a
graph that someone made up 40 years ago” the economist said. At press time, the
Postmaster General was not available for comment. <o:p></o:p></div>
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Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-8819076315297704398.post-65292242811170992242014-04-14T14:39:00.003-04:002017-04-17T22:08:08.384-04:00Latest Pew Research Report- Interesting data, misleading rhetoric<div class="tr_bq">
<a href="http://www.pewresearch.org/next-america/">Check out this latest report from Pew: </a></div>
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The demographic data is nicely displayed, and in a clear, thought provoking way. However, the next to last segment entitled: "Saving the Safety Net" reads like it was written by Maya McGuiness and the Fix the Debt Hacks. It is very uninformed and misleading, disguised in an otherwise useful media piece:<br />
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<blockquote style="border: 0px; font-family: Georgia, 'Times New Roman', Times, serif; line-height: 25.600000381469727px; margin-bottom: 1.25em; padding: 0px; vertical-align: baseline;">
<i>"But the status quo is unsustainable. Some 10,000 Baby Boomers will be going on Social Security and Medicare every single day between now and 2030. By the time everyone in this big pig-in-the-python generation is drawing benefits, we’ll have just two workers per beneficiary – down from three-to-one now, five-to-one in 1960 and more than forty-to-one in 1945, shortly after Social Security first started supporting beneficiaries. </i></blockquote>
<blockquote style="border: 0px; font-family: Georgia, 'Times New Roman', Times, serif; line-height: 25.600000381469727px; margin-bottom: 1.25em; padding: 0px; vertical-align: baseline;">
<i>The math of the 20th century simply won’t work in the 21st. Today's young are paying taxes to support a level of benefits for today's old that they have no realistic chance of receiving when they become old. And they know it – just 6% of Millennials say they expect to receive full benefits from Social Security when they retire. Fully half believe they’ll get nothing."</i></blockquote>
Its a good thing that I'm bad at math, since the author of this piece didnt bother to do any- apparently rhetorical flourishes will suffice. And hey, who knew all that 20th century math expired on December 31, 1999?<br />
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The only thing wrong with the financing of federal programs is the public's perceptions of them, and poorly researched pieces like this one are part and parcel of this problem. I can however concur with the finding the just 6% of millennials think that we will get full benefits when we retire. The ceaseless and well funded propagandizing on this issue has been successful in making my generation very cynical. This hopelessness runs deep in our perceptions of government and economics, thanks in part to the almost fetishized doom-and gloom scenarios from "serious experts." MMT in contrast, provides sunlight and fresh air to US policy discussions, and in my view is the best antidote to the "learned helplessness" that permeates my generation.Unknownnoreply@blogger.com0