Bernanke Leaves Fed with Record Balance Sheet of 4.1 trillion

[Attic]

For once, we agree. The Fed expanded operations & increased profits tremendously to meet market demand for liquidity. They have a unique ability to do that.

Under the circumstances, it was a wise business move and a wise move wrt the economy.

I find this a bit stunning to champion fed profits if we consider how the fed makes a profit.

Do we not know what the sole driver of the massive increased profits the fed remitted to the treasury was?

The fed increased profits by printing a book from 800billion to over 4 trillion. Of course profits increase when you print money to buy performing debt assets. Helps to when what you are buying with printed money is bid up by your continued printing and buying spree. The fed may deserve accolades for it's choices, but not for it's profits FFS. The fed has a unique and very precarious option to print money to achieve it's dual mandate, their profit is related to their printing efforts. After they pay a 6% dividend to private owners the Fed remits the rest to the treasury as a bit of a check against it printing itself out of control. This is more a slight of hand though as the Fed's printing efforts obviously benefit the gov so there is incentive to print as far as treasury is concerned.

QE1 was undertaken at the time with the important consideration that the book purchases would not only be wound down but sold back. So not only would the fed balance sheet stop increasing as it has continued to do since 800billion, but it would move back down to 800billion. 5 years later we are at 4.1trillion and growing. This was the main concern, a required growing book once the initial effort was undertaken. Let's see if the taper gets to a point where the balance sheet actually stops growing. Winding down the balance sheet is another ballgame. The fed will have to let it's book mature. It can't sell unless it does so at a loss and this would beget larger losses. This was not the stated goal or intent when QE was initially undertaken. When you buy up a bunch of debt with cheap coupons and then rates start to climb up what happens? The fed is currently at nearly 500billion of LOSES if it sold it's book today, not considering that added downward pressure on it's book if it started selling instead of accumulating debt assets. I doubt we'll see the fed balance sheet ever go under 4 trillion again, mainly due fiscal issues presiding in the economy that are not going away, but important independent of that as well as it has ushered in a new era of central banking.

Beyond that, the results during the period of QE are clear. The wealthy got a lot more wealthy, everybody else got more poor. Using the "it could of have been worse" to rationalize such an outcome is the common method of those who were primary beneficiaries of the Feds printing spree.

The GFC was a stunning option for a change from the status quo. We got, the same old same old. Crony capitalists were bailed out at everybody else's expense and it means a consolidation of power in large corporations will continue despite Obama's or those who share his vision of an empowered middle class best intentions..

 

[Texashiker]

<snip>

Beyond that, the results during the period of QE are clear. The wealthy got a lot more wealthy, everybody else got more poor. Using the "it could of have been worse" to rationalize such an outcome is the common method of those who were primary beneficiaries of the Feds printing spree.

Well said.

I would like to add that wall street has become addicted to free fed money. The banks are getting the money at zero interest rate, making loans, bundling those loans into securities, and selling the securities to the fed.

It is a win-win situation for wall street and the fed. The fed gets to buy a large percentage of homes on the market through banks, banks get free money buy lending and then selling the securities.

When Ben mentioned ending the QE, the markets went into a nose dive. Can we imagine the horror of no more free money.

Working class people however are the big losers. Home prices have been kept high and will probably remain high as long as the fed is buying large chunks of mortgage backed securities.

Now that the fed owns over 3 trillion of property, what is supposed to happen next? Auction those securities off to the highest bidder? How man more years of QE until the fed is the largest property owner in the US? What are they goign to do with all of those mortgages?

The truth is, QE has been a massive bailout for the banks.

 

[Attic]

Well said.

I would like to add that wall street has become addicted to free fed money. The banks are getting the money at zero interest rate, making loans, bundling those loans into securities, and selling the securities to the fed.

It is a win-win situation for wall street and the fed. The fed gets to buy a large percentage of homes on the market through banks, banks get free money buy lending and then selling the securities.

When Ben mentioned ending the QE, the markets went into a nose dive. Can we imagine the horror of no more free money.

Working class people however are the big losers. Home prices have been kept high and will probably remain high as long as the fed is buying large chunks of mortgage backed securities.

Now that the fed owns over 3 trillion of property, what is supposed to happen next? Auction those securities off to the highest bidder? How man more years of QE until the fed is the largest property owner in the US? What are they goign to do with all of those mortgages?

The truth is, QE has been a massive bailout for the banks.

The thinking was the alternative to the outcome you've laid out here, would have been worse. I'm not sure that many people even bought such bullocks, but that was the grease used to push this contraption on everybody.

Deflation scares people,.... even after massive bubbles in the economy that are quickly forgotten when the natural and expected deflation comes. God forbid there is a deflationary period after a massive bubble. Truth is the bubble was desired which is why the proganda about deflation is thrown around. We need the bubbles without the natural deflationary side effects after bubbles pop.

Most of the game beign played is speeding up.

This covers the basics of why things turn out the way they do. It's generally as simple a concept as rolling a ball down a hill once you see what's involved. The clever theft can't be stopped without breaking the whole monetary system. The reason it's defended so fervently is that it benefits governments and the ultra rich, those who have the most power over others.

 

[Tango]

Something has to give.

For the past 30+ years inflation has been outpacing wages. Families had more buying power in the 1950s than right now.

Wages are not going up, so what do you suggest?

The only real answer is deflation in certain markets, such as housing.

What the fed is doing is helping corner the housing market. Prices are artificially high and not reflective of a free market.

You need to understand that monetary policy has a very narrow scope: maintaining price stability is the primary, and a secondary one is keeping the economy close to potential output, always conditioned on the primary one.

What the fed is doing is keeping the economy on its target inflation rate, which given the recent economic developments translates into preventing deflation. This is exactly what central banks are created for.

Your concerns are legitimate, but should be addressed in a different direction, and primarily to the organisms that regulate economic (not monetary) policy, as well as the economic actors that constitute the private sector.

That's being awfully generous. QE has been Fed driven trickle down. And just as with Reagan's trickle down, none of it has done anything but pad balance sheets.

It is very simple: if you have a certain monetary policy and the result is on target, any other monetary policy would have been wrong. Anybody asking ex-post for less QE is stating that they would have preferred deflation, which is a suicidal proposal.

Of course at some point mopping up of liquidity will be required to prevent sliding into an inflationary environment, but until now the situation has not yet matured. When it will we'll see if the central bank will act fast enough and with the required strength, but it is another discussion altogether.

 

[Texashiker]

You need to understand that monetary policy has a very narrow scope: maintaining price stability is the primary, and a secondary one is keeping the economy close to potential output, always conditioned on the primary one.

What the fed is doing is keeping the economy on its target inflation rate, which given the recent economic developments translates into preventing deflation. This is exactly what central banks are created for.

Was the fed created to keep home prices artificially inflated?

For the past 20 years home prices have out paced wages and inflation. Rather than allowing the housing bubble to continue deflating so everyday working people can afford to buy, the fed has kept home prices high.

I understand the fed wanting to protect investments made by banks in real estate, but working class people need to afford to buy a home.

The fed is creating a retirement nightmare for millions of people. People can not afford to pay rent with their social security check. But nor can they afford to buy a home. So what are they supposed to do? Live on the streets?

 

[Tango]

Was the fed created to keep home prices artificially inflated?

For the past 20 years home prices have out paced wages and inflation. Rather than allowing the housing bubble to continue deflating so everyday working people can afford to buy, the fed has kept home prices high.

I understand the fed wanting to protect investments made by banks in real estate, but working class people need to afford to buy a home.

The fed is creating a retirement nightmare for millions of people. People can not afford to pay rent with their social security check. But nor can they afford to buy a home. So what are they supposed to do? Live on the streets?

No, the FED was created and evolved with the single purpose of maintaining price stability. In time, as we acquired more refined understanding of monetary economics and a lot more computing power, a secondary mandate to keep the economy close to potential output was added, always conditional to the first one. Some central banks still basically only have the primary mandate.

Allowing deflation would not lead to anybody being able to buy anything better than today. It would lead only to horrendous economic destruction. If you want examples of what deflation looks like you have The Great Depression and the Japanese Lost Decades to have a look at.

Again, your questions are legitimate, but you have the wrong interlocutor int he Fed. They are not monetary policy questions, but economic policy questions.

 

[Victorian Gray]

Well said.

I would like to add that wall street has become addicted to free fed money. The banks are getting the money at zero interest rate, making loans, bundling those loans into securities, and selling the securities to the fed.

It is a win-win situation for wall street and the fed. The fed gets to buy a large percentage of homes on the market through banks, banks get free money buy lending and then selling the securities.

When Ben mentioned ending the QE, the markets went into a nose dive. Can we imagine the horror of no more free money.

Working class people however are the big losers. Home prices have been kept high and will probably remain high as long as the fed is buying large chunks of mortgage backed securities.

Now that the fed owns over 3 trillion of property, what is supposed to happen next? Auction those securities off to the highest bidder? How man more years of QE until the fed is the largest property owner in the US? What are they goign to do with all of those mortgages?

The truth is, QE has been a massive bailout for the banks.

And this happened under a commie president? Weird....

 

[Jhhnn]

You need to understand that monetary policy has a very narrow scope: maintaining price stability is the primary, and a secondary one is keeping the economy close to potential output, always conditioned on the primary one.

What the fed is doing is keeping the economy on its target inflation rate, which given the recent economic developments translates into preventing deflation. This is exactly what central banks are created for.

Your concerns are legitimate, but should be addressed in a different direction, and primarily to the organisms that regulate economic (not monetary) policy, as well as the economic actors that constitute the private sector.



It is very simple: if you have a certain monetary policy and the result is on target, any other monetary policy would have been wrong. Anybody asking ex-post for less QE is stating that they would have preferred deflation, which is a suicidal proposal.

Of course at some point mopping up of liquidity will be required to prevent sliding into an inflationary environment, but until now the situation has not yet matured. When it will we'll see if the central bank will act fast enough and with the required strength, but it is another discussion altogether.

No, the FED was created and evolved with the single purpose of maintaining price stability. In time, as we acquired more refined understanding of monetary economics and a lot more computing power, a secondary mandate to keep the economy close to potential output was added, always conditional to the first one. Some central banks still basically only have the primary mandate.

Allowing deflation would not lead to anybody being able to buy anything better than today. It would lead only to horrendous economic destruction. If you want examples of what deflation looks like you have The Great Depression and the Japanese Lost Decades to have a look at.

Again, your questions are legitimate, but you have the wrong interlocutor int he Fed. They are not monetary policy questions, but economic policy questions.

Well said. I think it needs to be admitted, however, that the Fed didn't do a good job wrt price stability of real estate during the Bush years. I don't think they even paid attention until it was too late. Rates should not have been nearly so low nor held low for as long a period of time.

There were certainly other factors in play as well.

 

[Throckmorton]

I don't think you're understanding the difference between the Federal Reserve and the US Government...

Isn't it the federal reserve that sells bonds??

 

[Tango]

Well said. I think it needs to be admitted, however, that the Fed didn't do a good job wrt price stability of real estate during the Bush years. I don't think they even paid attention until it was too late. Rates should not have been nearly so low nor held low for as long a period of time.

There were certainly other factors in play as well.

Central bankers have an incredibly hard job to do. If they do it perfectly, nobody notices. If they make a mistake, the damage is potentially huge and the whole world goes to their throats. Additionally, there still is open academic debate on the best way to approach it, the risks of experimenting are astronomical, and their work is dependent on the quality of data collected.

But I agree, Greenspan was a much, much worse fed chairman compared to Bernanke, who I believe did an outstanding job. Also, in the last decade we did get significant breakthroughs in monetary policy theory, and it is a field where theoretical advancements are applied with extreme care.

 

[Tango]

Isn't it the federal reserve that sells bonds??

If you mean isn't it he federal reserve that issues bonds then no, it is not.

 

[Texashiker]

No, the FED was created and evolved with the single purpose of maintaining price stability.

Would you like to know what that "price stability" did?

It cost an unknown number of families their home.


The great depression was one of the largest land grabs in US history. Millions of people unable to pay property taxes and mortgage were kicked off their land and out of their homes.

My family lost 400 acres here in southeast Texas during the depression because they could not afford to pay the property taxes.

Why dont you tell me how the fed buying 3 trillion in property helped working class people? Tthe people need deflation to bring prices back inline with wages.

 

[Jhhnn]

Would you like to know what that "price stability" did?

It cost an unknown number of families their home.


The great depression was one of the largest land grabs in US history. Millions of people unable to pay property taxes and mortgage were kicked off their land and out of their homes.

My family lost 400 acres here in southeast Texas during the depression because they could not afford to pay the property taxes.

Why dont you tell me how the fed buying 3 trillion in property helped working class people? Tthe people need deflation to bring prices back inline with wages.

Please. Prices are back in line with their historical relationship to rents-

Maybe you need to look at it the other way, that wages & employment need to come up.

Not to mention that deflation affects employment & wages just as much as it affects prices. Deflation is a horror story for debtors (most Americans are debtors) because every time you make a payment, the money is more dear. Translate that into 30 year mortgages held by millions who bought in at the wrong time for massive abandonment & foreclosure, just like the Depression.

 

[Tango]

Would you like to know what that "price stability" did?

It cost an unknown number of families their home.


The great depression was one of the largest land grabs in US history. Millions of people unable to pay property taxes and mortgage were kicked off their land and out of their homes.

My family lost 400 acres here in southeast Texas during the depression because they could not afford to pay the property taxes.

Why dont you tell me how the fed buying 3 trillion in property helped working class people? Tthe people need deflation to bring prices back inline with wages.

I am sorry, but what you write does not make sense. You ask for deflation, and then you talk about the misery of the Great Depression, which is the greatest deflationary phenomenon of recent history. Deflation makes mortgages harder to support (any debt in fact). If that was your primary concern you would want a slightly more inflationary environment than we have (which is a view some economists share, moving inflation target to 4%).

The fed however can not and must not have any concern outside of its dual mandate (in fact some think a dual mandate is already too wide). That's why it is so important that central banks be independent.

If you want to understand how central banks operate I can suggest a couple of books, although they will not be easy readings (it just is a complicated subject).

 

[Texashiker]

Deflation makes mortgages harder to support (any debt in fact). If that was your primary concern you would want a slightly more inflationary environment than we have (which is a view some economists share, moving inflation target to 4%).

For working class people to be able to afford to buy a home we need the housing bubble to continue to deflate.

The fed pumping 3+ trillion dollars into the housing market is keeping prices artificially high. This means we will be looking at another housing bubble when the fed stops the QE.

 

[LegendKiller]

I find this a bit stunning to champion fed profits if we consider how the fed makes a profit.

Do we not know what the sole driver of the massive increased profits the fed remitted to the treasury was?

The fed increased profits by printing a book from 800billion to over 4 trillion. Of course profits increase when you print money to buy performing debt assets. Helps to when what you are buying with printed money is bid up by your continued printing and buying spree. The fed may deserve accolades for it's choices, but not for it's profits FFS. The fed has a unique and very precarious option to print money to achieve it's dual mandate, their profit is related to their printing efforts. After they pay a 6% dividend to private owners the Fed remits the rest to the treasury as a bit of a check against it printing itself out of control. This is more a slight of hand though as the Fed's printing efforts obviously benefit the gov so there is incentive to print as far as treasury is concerned.

QE1 was undertaken at the time with the important consideration that the book purchases would not only be wound down but sold back. So not only would the fed balance sheet stop increasing as it has continued to do since 800billion, but it would move back down to 800billion. 5 years later we are at 4.1trillion and growing. This was the main concern, a required growing book once the initial effort was undertaken. Let's see if the taper gets to a point where the balance sheet actually stops growing. Winding down the balance sheet is another ballgame. The fed will have to let it's book mature. It can't sell unless it does so at a loss and this would beget larger losses. This was not the stated goal or intent when QE was initially undertaken. When you buy up a bunch of debt with cheap coupons and then rates start to climb up what happens? The fed is currently at nearly 500billion of LOSES if it sold it's book today, not considering that added downward pressure on it's book if it started selling instead of accumulating debt assets. I doubt we'll see the fed balance sheet ever go under 4 trillion again, mainly due fiscal issues presiding in the economy that are not going away, but important independent of that as well as it has ushered in a new era of central banking.

Beyond that, the results during the period of QE are clear. The wealthy got a lot more wealthy, everybody else got more poor. Using the "it could of have been worse" to rationalize such an outcome is the common method of those who were primary beneficiaries of the Feds printing spree.

The GFC was a stunning option for a change from the status quo. We got, the same old same old. Crony capitalists were bailed out at everybody else's expense and it means a consolidation of power in large corporations will continue despite Obama's or those who share his vision of an empowered middle class best intentions..

What you don't see is that QE has resulted in spreads across *ALL* bonds are massively lower due to QE. Of course that is good and bad since it has resulted in greatly reduced risk spreads. However, companies have largely passed along these savings to borrowers.

 

[Texashiker]

Please. Prices are back in line with their historical relationship to rents-

Show me a chart with home prices in relation to inflation.

 

[Tango]

For working class people to be able to afford to buy a home we need the housing bubble to continue to deflate.

The fed pumping 3+ trillion dollars into the housing market is keeping prices artificially high. This means we will be looking at another housing bubble when the fed stops the QE.

You are very confused about what and how a central bank does, although you are certainly not the only one. It's one of the most misunderstood topics in economics possibly due to the way it is discussed in the generalist media.

House prices are subject to and result off its specific market forces. This is not concern of the fed unless some result in the real estate market (which is for many reasons a very important market) determines macro effects that require monetary intervention (i.e. year 2008-09).

The fed is not pumping anything in the real estate market. The fed is implementing monetary policy consistent with the objectives of its mandate, which given the present economic environment includes expanding the money supply. It was doing it in 2009 when real estate prices were collapsing, and it's doing it now that real estate prices are recovering and have completely recovered in some areas. This is because the real estate market is not directly a concern of monetary policy, nor it is within the central bank's direct control to determine where the expanded money supply ends up.

 

[Texashiker]

The fed is not pumping anything in the real estate market.

http://www.usatoday.com/story/money/business/2013/12/18/fed-meeting-december/4078769/

The Fed will purchase $40 billion in Treasury bonds, down from $45 billion previously, and $35 billion in mortgage-backed securities, down from $40 billion.

Bank makes loan, bundles loans into mortgage-backed securities, sells securities to fed.

Every month for what the past 2 years the fed has been pumping 40 billion a month into the real estate market through mortgage-backed securities.

 

[Tango]

http://www.usatoday.com/story/money/business/2013/12/18/fed-meeting-december/4078769/

Bank makes loan, bundles loans into mortgage-backed securities, sells securities to fed.

Ever month for what the past 2 years the fed has been pumping 40 billion a month into the real estate market through mortgage-backed securities.

That is not pumping money in real estate.

To implement quantitative easing has to buy some asset releasing at the same time liquidity. You can do it on any asset: short-term sovereign bonds, asset backed securities, longer term fixed income instruments, or anything else you might think of.

The immediate monetary effect of the operation does not change, as long as the amount of liquidity is the same.

However, since you get to pick, it makes very much sense to use the operation to retire risk from specific portions of the market, and/or manage the shape of the yield curve using operations on different maturities of sovereigns, etc.

Buying MBSs was a (very much needed) way to retire risk from the market by taking it to the fed balance sheet in a moment when that section of the markets was perceived as particularly shaky, as well as putting a floor on MBSs prices with the additional benefit of supporting institutions whose balance sheets were very heavy on those instruments.

The liquidity released in the counterpart of the operation did not go into the real estate market, as it is not a direct decision of the fed (or anybody else really) where money supply ends up.

P.s. In fact if you had a look at the data chances are you would be surprised to see where quite a lot of it ended up, sometime quite far from where you would expect...

 

[Texashiker]

That is not pumping money in real estate.

Really?

Fed prints money out of thin air.

Fed loans money to banks at zero percent interest.

Banks loan money for mortgages.

Banks bundle mortgages and sell to fed.

How is that "not" pumping 40 billion a month into real estate?

 

[LegendKiller]

Really?

Fed prints money out of thin air.

Fed loans money to banks at zero percent interest.

Banks loan money for mortgages.

Banks bundle mortgages and sell to fed.

How is that "not" pumping 40 billion a month into real estate?

Ohh for fucks sake.

1. The Fed doesn't "loan" money to the banks. The banks are depositing shit-tons of money at the Fed.

2. The Banks are holding what mortgages they can, otherwise they sell the rest of the Fed.

3. The Banks aren't bundling the loans, Fannie and Freddie are.


Furthermore, there is no private mortgage market and the amount of MBS being created by the GSEs is a shadow of its former self. The mortgage market is barely limping along and only very high credit quality borrowers are able to qualify for Conforming Mortgages. I know because I had my own proctologist visit a year ago.

If you're going to talk about this stuff at least speak intelligently.

 

[Texashiker]

1. The Fed doesn't "loan" money to the banks.

http://www.huffingtonpost.com/2011/04/26/fed-lending-helped-wall-street_n_853884.html

banks profited off the Federal Reserve's financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates.

The same thing is going on in the housing market.

 

[Zorkorist]

Fake money.

-John

 

[LegendKiller]

http://www.huffingtonpost.com/2011/04/26/fed-lending-helped-wall-street_n_853884.html



The same thing is going on in the housing market.

So let me get this straight. The banks pledged assets they couldn't easily finance in the market, potentially ABCP multi-seller conduits, and then used that money to buy assets they could easily pledge to the Fed as collateral to shore up their funding if they needed to?

And you think this is a horrible thing?

OMFG, they borrowed $20bn and bought $20bn, earning a whole 1.6% net spread for 3 months! A whole $80mm, in a time when the entire market was collapsing.

Say it ain't so chuckles. This isn't even counting the complexities behind different operations in a bank that might cause them to buy or sell on different desks at different times.

Then you keep parroting this shit like it is currently happening, but it isn't.