would have been 6% higher in the just ended fiscal 2010. The hard
working folks at the Fed have contributed a net of $76 billion to the
general revenue. They are now earning at a rate equal to 1/3 of all
corporate tax revenues. Think of that, just a handful of people are
making one third of what our largest corporations contribute. Talk about
doing some heavy lifting!
I, and a few thousand others, have been bashing the Fed on a nearly
daily basis. But actually we should be dishing out some praise for a job
well done. $76b still goes a pretty long way these days. The even
better news is that in 2011 the Fed will make us even more money than
last. Way to Go Ben B! Here’s how they made the long green:
A graph of the Fed balance sheet as of 9/30. The total balance sheet
comes to a modest $2.2 trillion. The net income generated from all these
holdings is the $76b estimated by the CBO:
The net income number comes to an interest spread on the portfolio of
3.45%. There are some folks in the portfolio management business who
would die for that result. The Fed did it the easy way. They borrowed
money at no cost thanks to ZIRP.
We know the Fed is going to be buying in more paper during 2011. Jon
Hilsenrath at the WSJ tells us that just about every day. If you don’t
believe him just read the Fed minutes. QE-2 is baked in the cake. The
leaks and guesses suggest that we are looking at another Trillion of
POMO buys over the next year. The thinking is that the Fed will acquire a
portfolio with an average maturity of around seven years. The yield on
that maturity today is about 1.8%. Based on that a pro-forma look at the
Fed BS a year out:
This quick calculation overstates income and average yield. The reason
is that a significant amount of high coupon MBS will be prepaid over the
course of the year. Given that a primary objective of QE-2 is to reduce
mortgage costs and therefore encourage refinancing at lower rates I am
going to assume a high prepay rate that will result in $300b of
reduction in the MBS portfolio. The adjusted estimates for the portfolio
as of 10/1/2011:
When I look at this I conclude that the Fed will Not raise
the Funds target to 3% for many years to come. To do so would imply
that they would incur an annual loss. No one wants losses. When you have
losses you are a squeaky wheel. In D.C. they don’t oil squeaks. They
investigate them and put collars on the problem. No one at the Fed would
want that.
Here is a chart of Funds rate up to 2008. It does not include the
madness of ZIRP. I would call this “normal”. We had extreme highs to
fight inflation and we have had several periods where rates where well
below average. But look at this chart and tell me where a 2.75% break
even rate comes into play. For the past 70 years we have been above that
level 90+% of the time.
Mr. Bernanke’s sole objective with monetary policy at this point is to
create inflation. Given that he is hell bent for leather on this I think
we will get want he is engineering. And like every other historical Fed
effort they will overshoot on stimulus and inflation will come back at
some point. But Bernanke will not have the balls to pull the trigger on
Fed policy and tighten as he may have to. To do so would straddle him
with big losses.
The Fed is creating a conflict of interest between its own institutional
best interests and the proper choices for monetary policy. That is the
definition of a systemic risk. Bernanke needs to address this conflict. I
want him on the record acknowledging the risks of what he has done and
is about to double up on:
The Fed
commits to all interested parties that it will act in all future
periods consistent with its mandate for stable prices. Should
circumstances arise that require a rapid tightening of monetary policy
the Fed would act accordingly and ignore the consequences to its own
financial position. Should this occur substantial and sustained losses
would be incurred. The Fed accepts in advance the full consequences of its actions.
Of course we will never hear these words or anything close to it. That
is why most people do not trust QE and believe it will end badly. For
the record, the annual cost to the Fed assuming a Federal Funds rate
rise at some point (keep in mind that we were at 5.5% just three years
ago):
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Enough Ben bashing? There can never be enough of a good thing. Sorry, Leo, but the Greeks were wrong. Not everything in moderation.
Perhaps we should switch from words, however, to bashing with a blunt instrument. Or test that old adage "the pen is mightier than the sword". Let's see. Sword first.
wegotussomemedicalwaste.com
Bruce, give me a break. Your pats on the back of the grand-masters of fraud are deplorable.
Mark to fantasy is still -- fantasy.
We've established nothing except that the Federal reserve only cares about banks, not the law, and certainly not the people. Their bullshit enabled this to happen. The only thing you should care about is motive.
You will see that the same systemic fraud will be exposed running right through the Fed before this is over. Bank on it.
One word:
ENDTHEFED
Think how much MORE Ben could make with another $eleventy trillion of assets on his balance sheet. QE to infinity!
Again, awesome food for thought. Can you imagine telling your grandkids about this stuff years from now before they start college, and they're all like, "Nuh-uh..."?
:D
This is huge, coming from Chris Whalen
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
Why would anyone prepay a fraudulent lender.?
Jingle mail is going viral cept now you get to keep the keys!
Great work, Bruce. You should submit this piece to the FT as an op-ed.
and Obama is worried about the Chamber of Commerce?
The only business left in this country is carry trades. Shades of 1931 when the only business of the greater world was speculating in gold.
Krasting should call his piece Bernanke's Conflict of Self- Interest. He's attempting the impossible and he has to know it.
Yes, he might create a mini- asset bubble or two, a trillion or three can do that, but systemic risks all tilt the table toward deflation. There simply isn't enough productive work out there to support in price increases in the REAL rather than in the FINANCE economy.
Brer Bernanke cannot 'print' value nor will the bankers put any dollars into circulation. What Bernanke accomplishes is yet another tidy little bank bailout. Do they need it? Yes!
As Krasting pointed out yesterday, the Fed cannot shovel enough cash down the rathole fast enough to keep pace with the debt being destroyed in ratholes elsewhere.
At the same time, an asset bubble in crude oil markets kills the economy and brings on another crash. Planet Bernanke is playing with fire. Not only on the fuel front but with unemployment which is set to increase as companies fire staff and hire cheap Fed money, instead.
More unemployment means more pressure on the benefactors of last resort. The outcome here is no net increase in the available money supply and a hell of a lot more risk.
Risk that has no return, not the kind that anyone wants to buy.
bernankrupt has always had a conflict of interest between chosing crime or truth...he is a liar (cf alan blinder), a criminal, and a terrorist.
he is paying back obama for reappointing him to chairman of the den of thieves...more qe = higher stock prices = electoral success....
and obama is not even qualified to be president.
www.obamacrimes.com
Yawn...
That was supposed to say the sheep will be ready for another shearing - so to speak...
i would argue it could be even worse than "no normal." in other words "how do you turn it off if it's wrong?" this is the issue that the Wall Street banks EVEN WITH SECURITIZATION faced once the property bubble burst. "How do we recover what is owed to us"? Needless to say "securization is a market" so "willing buyers and sellers must be there in order for it to exist at all." In short "the government cannot create this." The market has known this for some time, hence "gold, gold, gold." Now however it's "ag, ag, ag" to which I ask "who are you feeding mr government"? because when last i checked "you were issuing food STAMPS" and not actual food.
The most interesting part is that there really is a simple and (relatively) painless way out of this (for those of us willing to work for a living), if we could get past our egos. If the FED et al. want to end this recession/depression it is simple. All they have to do is get the hell out of the way and let nature take its course. Honest ingenuity will create opportunity where there existed none. The sheep will That would, of course prove to the skeptics and communists of the world among us that we can't solve all of the world's problems with fascist intervention.
Can someone explain why will the fed incur loses if they raise the rates?..thx
My uneducated guess would be because it lowers the market value of all of the Treasurys that they paid top dollar for in ZIRPLand.
If you own a bond that pay 2% and the cost of funding the bond is 3% you have an annual cash flow loss of 1%. Simple.
The Fed does not do make to market on its holdings. So you can't judge this book by its cover. You have to look at the annual income line.
There is too much pressure on the side of a significantly weaker dollar at this point.
There is too much debt on every level of society private and public to ever pay back in current dollars.
At the same time, the global imbalance between exporting nations and debtor nations (namely the U.S.) simply can't go on. There is no "normal" to return to where we keep taking on more and more debt in order to buy goods made in countries with cheap currencies. Also, the economy and employment wouldn't recover if we return to that "normal".
The only way out of this at this point is to seriously debase the currency. That or eat all the debt, and cause deflation. Guess which is more politically palatable?
I found this article by economist Tim Duy on the end of the entire Bretton Woods system to be very enlightening and clearly argued:
http://economistsview.typepad.com/timduy/2010/10/the-final-end-of-bretton-woods-2.html
It's very interesting that Silver Bullion is pricing the current "dollar", (it isn't really a dollar, of course), at 5.37 cents, vis a vis for instance the 1934 Peace Dollar, which was a dollar. The time passed from 1934 to 2010 is not "long" historically. Is this a trend ? Does someone profit from it ? What will halt this ongoing process ? Why is it not a good idea to invest 100% in Silver Bullion; vaulted, of course ?
"The only way out of this at this point is to seriously debase the currency. That or eat all the debt, and cause deflation. Guess which is more politically palatable?"
Guess? That is not as apparent to many as it is to you. You forget how many people are being completely destroyed by negative real interest rates right now.
Throw in $8 gasoline, unaffordable heating oil... and I'm not sure which is politically more palatable at all.
The standard of living is going to collapse one way or another -- through deflation or inflation. Neither is 'more palatable'.
Deflation elevates the standard of living (unless you lose your job as a result)
Nice call, Bruce. Let's see now... 76 billion minus the 200 billion plus they are stealing from savers with ZIRP... Oh, there I go again, just another nattering nabob of negativity.
What conflict of interest? They work for the elite and will do whatever it takes to cornhole every last one of us and retire in a gated & armed community.
Where is the conflict?
they work for the government, THAT'S the conflict. Are they an Angel of Mercy? Or an Angel of Death? Not only can Wall Street not possibly know, no one on earth can.
They work for the government? Since when? They were created by the government by Congressional Act. But, Benny makes it very clear that he answers to no higher authority and definately not the courts or that silly congress.
The Fed is, pure and simple, an agent for the banks and the elite.
An agent for the banks and the elite? So is the government. Which means there is little value in discussing alleged diverging/conflicting interests. Different puppets perhaps, but always the same puppetmaster.
Rather than a conflict of interest, I'd say Ben has an interest of conflicts.
"They borrowed money at no cost thanks to ZIRP."
Um, no, they created the money at no cost. They don't need to borrow.
I would be willing to assume the vast majority of the interest earned was on UST's and FNM/FRE mortgage notes. Given FNM/FRE are effectively owned by the US Treasury, this means that the UST pays the Fed interest, and then the Fed pays back it's 'profits' (who knows how this is defined without an audit).
if you've been investing based on your beliefs, Magua you've been focusing on the wrong tribe.
or TBF, but where would the borrow come from, the dealers perhaps?
TBF
I guess I need help understanding how the TBT will end up being a great long term investment, as expoused by some shrewd hedgies when the Fed will own substantially all the debt. Surely they will not make any bonds available to be shorted, and if China still owns them once QE2 and QE3 are finished, can't see them allowing it either.
Wouldn't the TBT just go away? What am I missing?
I agree, there is no way interest rates will rise substantially in the existing monetary system.
a) Govt could not afford interest payments
b) Higher int rates would cause everything to crash
"The Fed is creating a conflict of interest between its own institutional best interests and the proper choices for monetary policy."
Since when was the privately-owned "Federal Reserve" out for America's best interests? It was always a scam to leech the real value created by citizens without ever having to work and produce themselves.
This is all a very clever accounting game with the Fed and the Treasury. If the Fed earns the return suggested, who is paying the interest to them on the carry? This gets added to the National Debt and compounds against the U.S. taxpayer over time.
Maybe the Fed wants to "tell Congress how to spend." Strange how Congress seems to "go along with it." Just hand the gavel to Ben Bernanke? Can be quite ominious if you think about it, especially if you're a Congressman I would think.
"ominious ... if you're a Congressman"
Huh? I don't think any of the current guys care. They seem quite willing to outsource decisions to the Exec Branch, the courts, the Agencies, the Fed,.....
I assume they are only there for the food.
It's not like there is any contribution.
Are they pulling the rope or just about to start pushing on it?
DavidC
They are making a noose.