Thursday, January 29, 2009

Taxpayers are making money. But are they?



Please read the brilliant post from Warren Mosler's website, then see my comments that follow.

"With the Fed balance sheet at just over $2 trillion and an average coupon of maybe 3% that means they are removing about $60 billion a year of interest income from the non government sectors.

So while I do think lower long term rates serves public purpose, I also recognize the need to cut taxes and/or increase other government spending to reverse the restrictive nature of that policy.

This applies to all Fed rate cuts that remove income from the non government sectors."


The record expansion of the Fed's balance, which was driven by the buying of assets, will result in a windfall profit. Warren Mosler estimates that it could be in the neighborhood of $60 billion, which would be about two or three times what the Fed ordinarily earns in one year.

So, isn't this a huge profit for the taxpayers? After all, the Fed is required by law to turn over all of its profits to the U.S. Treasury (with the exception of what it needs to operate).

All the genius media commentators, lawmakers and economists who complained for so long that the Fed's balance sheet expansion represented a huge "risk to taxpayers" are clueless that the Fed is about to make more money than it ever has.

In other words, taxpayers are getting a huge payday. Right?

Wrong!

Here is where the real irony is. By definition, if the Treasury is receiving this money, it is money that would have been paid out to the public. So the $60 billion profit that the Fed made actually represents a net drain of $60 billion in income that would have gone to the public!

Looking out for taxpayer money, in the end, means that taxpayers really lose.

Don't expect anyone but a very small group of economists to understand this.

5 comments:

googleheim said...

our economy is pegged on a fixed Yuan which allows us to buy cheap things from china.

our economy is also inversely pegged to oil prices while the Quid Sterling Pound is directly pegged to oil prices.

The Argentine crisis was supposed to have been a result of the pegging of 1 Arg peso to 1 USD. This was done in the first place to stop inflation and deflation spirals.

If the Yuan rises, then we would have problems.

Obama's Geithner dude is either ironic or just diverting attention.

Taxpayer money is being sucked up by the Fed, so we can bully China into loaning us more money so that we can go in circles more ????

Matt Franko said...

Mike,
Here is a link to an article at cnbc that sounds like the author is in paradigm. He refers to the fact that the Fed is charging interest on amounts that it takes in on its CPFF (3%), and it can take in virtually unlimited amounts if it wants to. I believe that you may have critiqued this author before for some misconceptions, perhaps you are starting to get thru to some.

http://www.cnbc.com/id/28912224
Resp,

Mike Norman said...

Hi Matt. Yes I have critiqued Crescenzi before. He's spoken about "massive supply" not understanding that reserves are already in the banking system. Odd, considering he is often thought as one of the leading bond market specialists and very knowledgeable when it comes to the Fed.

Yesterday I had Barry Ritholtz on my show. Another guy who gets mega media attention and hob nobs with the stars of mainstream economics. When I asked him how the Fed makes money, he couldn't answer. Even said they "lose" money.

About par for the course.

cuOnTheOtherSide said...

Your Show Jan 29 talked about the FED making a profit. On another show you mention that the FED balance sheet fell by 200B.

How can the public know that this reduction was not due to the assets on the books?

Mike Norman said...

The only assets marked to market are the Maiden Lane portfolio and the Fed's forex position. (Insofar as the latter is concerned, the Fed will get back the entire dollar amount lent in accordance with the terms of those swaps, so there will be no loss.)

The decline in the balance sheet is due to a diminution in reserve bank credit and the factors affecting this appear to be commercial credit and repos, primarily, where the Fed has chosen not to roll over some of the stuff that is maturing. This is probably because institutions are not asking for it to be rolled over. In other words, it could be a small sign of improving conditions.