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Michael Hudson: QE End Game Over for Our Post-Feudalistic Economy; & Mosler on MMT

EB's picture


The other day, economist Michael Hudson dropped by our New York studio to flip through the usual [non]-CNBC talking points...in other words, everything that is relevant to our economy and that exposes the regulatory and monetary subsidies to the very advertisers on that certain network (the ratings of which are down 60% since 2008...nice job, CNBC!).  

So let's get to Michael Hudson (Mosler appears at the bottom of this article).  At 2:40, we jump right into Uncle Ben's QE and its disastrous and [un?]-intentional effects:


At 3:35, we get to what is perhaps the most important topic related to the end game for the Fed: that would be when the world's largest central bank takes capital losses that do not cover its interest on reserve expenses (IOER), which subsidize US banks (actually, mainly US branches of foreign banks).  This would be the Fed going cash flow negative, (or, similary put, when it's net interest margin goest negative, which Zero Hedge wrote about here), and, as we wrote in our open letter to Congress here, at EconomicPolicyJournal.com in December, 2011:

"Mr. Bernanke touts the fact that the emergency lending facilities are (or are on track to be) repaid. With respect to Maiden Lane, that is indeed thanks to the aggressive trading performed by BlackRock, contrary to the Fed's public disclosures made in early to mid 2008 in your chambers. More importantly, in mentioning that the Fed has never suffered a creditloss, Mr. Bernanke evades a more important point--that it will likely take substantial capitallosses on many of its purchases. That is, the Fed bought many of the securities in its portfolio above prevailing market prices, which itself is a subsidy for its primary dealers, and it will lose money on a substantial number of these purchases when they mature. This is especially so with its more than $1 trillion portfolio of MBS securities, which lose money when mortgage rates fall (as they have done several times over the last year and a half). More on this in a bit."

"Third, the articles make no mention that the emergency loans and other assistance have generated considerable income for the American taxpayers. As reported in the Annual Report of the Board of Governors, alongside the Board's audited financial statements, the emergency lending programs have generated an estimated $20 billion in interest income for the Treasury. Moreover, in 2009 and 2010, the Federal Reserve returned to the taxpayers over $125 billion in excess earnings on its operations, including emergency lending.These amounts have been publicly announced and are reflected in the Office of Management and Budget's financial statements for the government and have been verified by the Federal Reserve's independent outside auditors. The Federal Reserve is on track to return a comparable amount to taxpayers this year as well."

"Because of its massive purchase programs and balance sheet expansion, the Fed has indeed remitted $125 billion over the last two years to the US Treasury from the proceeds of interest on its securities (after payment of the Fed's own, largely non-disclosed expenses). If I can hammer one thing home, Congress, that serves your vital interest, it is the following: large payments by the Fed to the Treasury are a temporal anomaly and will not last. In fact, it is more likely that the member banks of the Fed, disproportionately, the larger banks, will end up with this cash instead. Read on, as to why.
After the Fed massively expanded its balance sheet through the creation of reserves (printing digital money), it has attempted to mitigate price inflation by encouraging banks to keep such reserves parked at the Fed. This program, accelerated by you, Congress, in October, 2008, approved the payment of interest on reserves. As long as short term rates are exceptionally low (and Mr. Bernanke said they would be through mid-2013), this is a minor expense. Meanwhile, the Fed is earning higher interest rates on the $2 trillion+ in securities it bought as part of its so-called QE programs. It is the spread between what it earns and what it must pay that allows the Fed to remit funds to the Treasury, and by extension the taxpayers."

"When (and not if) short term interest rates rise (and the markets might force this in a violent fashion long before Mr. Bernanke would prefer), the Fed could easily go cash flow (or carry) negative. That is when the cost of paying banks interest on reserves (to reign in price inflation) exceeds the Fed's interest income it receives on the securities it holds. Consider that just under three decades ago, short term rates quickly reached nearly 20%."

"In response, the Fed could outright sell assets that it holds, but I urge you to consider what happens when the world's largest holder of Treasury securities switches from being a net buyer to a net seller of Treasurys and what it would do to the United States' long term borrowing rates. Mr. Bernanke believes that he can blissfully guide the Fed to a graceful exit from its $2 trillion+ balance sheet expansion. You might not wish to give him the benefit of the doubt."
"This scenario is not lost on the Fed, which is why in March, 2009, its Board of Governors concocted a fraudulent accounting scheme (implemented retroactively to include the year 2008), which allows it to operate with negative income. It also prevents its member banks from having to pony up the difference, which was the case prior to the accounting change.Instead, in this scenario, the interest that the Treasury pays on securities held by the Fed will go to the banks, instead of back to the Treasury."

"It's beyond the scope of this response to discuss all the details. However, in brief, the Fed allows a line item on the liability side of its balance sheet (specifically, the one that covers remittances to the US Treasury) to go negative. It creates a deferred asset from a hypothetical amount it will be remitting to the Treasury at some non-specified time in the future."

"The heads of anyone with accounting knowledge ought to be spinning right now. For everyone else, it's as though you or I could log into our bank account and increase our balance in any given month in which expenses exceed income, with the promise that we will correspondingly lower our balance the next time we have a surplus. Only, there is no guarantee that you or I would ever again generate a surplus--meaning, we would have printed ourselves money not to be repaid. Similarly, there is not any reason to believe that once the Fed goes cash flow negative that it will ever again generate a surplus."


Back to Michael Hudson (again, here's the link).  At 5:20, we talk about the new phenomenon of speculators buying properties for cash, and venture capital and hedge funds cashing out, prematurely IPO'ing them back to the public.  Then there's our return to 19th century post-feudalism, the 1945-1980 secular trend in bonds (and why that is most relevant to the opposite trend, the end of which we're seeing now), how the Fed and Feds have saved the banks at the expense of mainstreet, the folly and swindle of austerity.  And at 11:27, we even get into some Modern Monetary Theory (MMT)...yes, that oh so controversial topic we once wrote about here.

But, we like to give our guests a fair platform to make their case, so we discussed MMT with one of its founders, Warren Mosler here (2:29) in.


For the opposite side of MMT, please see the Refutation of Mosler Economics series at EPJ: Part IPart IIPart IIIPart IVPart V.

And don't forget to catch Justine Underhill's interview with Sheila Bair at 16:20 in (Click the pic or here for the jump):

That's all for today, kids.  Tomorrow, we go toe to toe with Steve "the Keenenator" Keen.


Bob (EB)

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