Why the modest inflation?

[TheTexan]

Are you saying the GAO analysis chart in the article showing $16 trillion in loans

It was never $16 trillion at one time. They'd loan a small amount, it would be paid back, then they'd loan some more.

 

[gonegolfin]

There is a difference between the discount window and the "Open Market Operations." The discount window is loaned at a premium, whereas their so-called "open market" operations are loaned at or near 0% and are closed-book. (technically these open market operations aren't necessarily loans, but even the securities purchases accomplish the same thing, from the profit perspective of the bankers)

LOL. Yes, I understand the discount window (aka primary credit) and I understand open market operations in depth. I mentioned the discount window because this is the only mechanism used by the Fed to issue loans to depository institutions (sans the specialized lending facilities I mentioned that were in use during the financial crisis for a period of time and expired three years ago). Open market operations come in two types ... Temporary Open Market Operations (TOMOs) and Permanent Open Market Operations (POMOs). Neither are loans. TOMOs are what the Fed once used (before September 2008) to implement the Federal Funds rate ... and thus monetary policy. TOMOs now play a minor part given the size of the current Fed balance sheet and Interest on Reserves (IOR). TOMOs are very short term methods to either add reserves or drain reserves to/from the banking system. The Fed purchases or sells (not loans) pre-approved assets (treasuries, agency, debt, agency MBSs) for a short duration (typically a day, but as much as 28 days), depending on its needs for reserves in the banking system (it implement its federal funds target rate) for that day. But as I said, the federal funds rate is now obsolete (or impotent if you will).

To be clear here ... "the securities purchases" do not "accomplish the same thing" as loans "from the profit perspective of the bankers". In the case of repurchase agreements, the Fed purchases actual pre-approved securities in exchange for reserves. It is adding liquidity to the system, not loaning funds. The bank meanwhile surrenders securities as it is a sale. This process is also executed as a bidding process (accepted price for the securities) and are very short term in nature.

POMOs are permanent outright asset purchases or sales. Again, not loans.

(I put "open market" in quotes because that "open market" is restricted to Goldman Sachs, Citibank, and a handful of other global mega banks)

No, Fed open market operations are conducted via the Fed primary dealers. Currently there are 21 primary dealers and some of these entities are extensions (arms) of large banks ... but not all of them. Some of them, such as Cantor Fitzgerald, act merely as agents on behalf of the banks in operations.

Brian

 

[gonegolfin]

I've come to pretty much take your word as gospel when it comes to the Fed, but I'm at a bit of a loss here: Are you saying the GAO analysis chart in the article showing $16 trillion in loans is made up entirely, or that it's being misrepresented, or what? Could you elaborate? (Could you also elaborate on what you mean by the pre-September 2008 loans being "sterilized," since I'm unfamiliar with the concept?)

Misrepresented. Whether the Fed was conducting central bank swaps or temporary open market operations, reserves were injected into the system and then removed upon maturity. But the $16 trillion number is arrived at by summing all of these loans, even though there is nowhere near $16 trillion of reserves injected into the banking system at one time. Total reserves in the banking system are currently at about $1.5 trillion with the Fed balance sheet just under $2.9 trillion.

The Fed did not commence permanent outright asset purchases until September 2008. Up until that time, the Fed implemented various lending programs such as the Term Auction Facility or TAF (where reserves were loaned at interest in exchange for eligible collateral and a potential haircut) to provide the banking system with much needed liquidity (actually, they were trying to keep banks solvent). These programs have expired and unwound from the Fed balance sheet, sans a small amount from the Term asset-backed securities loan facility (under $1.7 billion). They were replaced by bigger guns in the form of permanent outright asset purchases (QE). At the time, the Fed did not want to expand its balance sheet (create new reserves), so it sterilized its lending operations by selling treasuries from its portfolio. If the Fed sells an equal amount of securities from its portfolio to the reserves it creates via the purchase or loan, then that operation is said to be reserves neutral or sterilized. What changed was the composition of the Fed balance sheet (lesser quality assets). When the TAF loans matured (which really did not happen until the program was killed as the Fed kept rolling over the loans), the reverse took place.

The Term Securities Lending Facility (TSLF) was self-sterilizing in that the Fed loaned US treasuries in exchange for eligible collateral (according to the agreed upon interest rate and haircut). Thus, the Fed did not create new reserves. Banks participated in this program because they could then use the higher quality treasury securities as collateral for other operations.

Note that while the ECB talks about sterilizing its operations, the ECB is not actually sterilizing. They are expanding their balance sheet. Offering interest to hold reserves on deposit for a week is not sterilizing. It is a very temporary sequestration of reserves. It is not reserves neutral.

Brian

 

[TheTexan]

...

I generally agree with you here, but it's clear you missed my point. However, I'm not going to spend an hour making a post to explain what I meant, when I'm not sure what your point is. Could just go in circles forever.

No, Fed open market operations are conducted via the Fed primary dealers. Currently there are 21 primary dealers and some of these entities are extensions (arms) of large banks ... but not all of them. Some of them, such as Cantor Fitzgerald, act merely as agents on behalf of the banks in operations.

And how is that different from what I said?

 

[gonegolfin]

I generally agree with you here, but it's clear you missed my point. However, I'm not going to spend an hour making a post to explain what I meant, when I'm not sure what your point is. Could just go in circles forever.

I addressed a very specific point. That is, I addressed your statements of the Fed loaning to the banks at or near 0% (in multiple of your posts). I also addressed this myth that is perpetuated in the article that you suggested for reading. You followed my correction by stating ... "whereas their so-called "open market" operations are loaned at or near 0% and are closed-book". This is not correct. They are not loans and there is no interest rate involved ... as I explained in detail. These operations are also limited in scope (and are infrequent these days) ... due to the current monetary environment the Fed has created. This is not a mechanism by which the banks borrow at one interest rate and loan at another, making money on the spread. If you agree with this, then we are good on this subject.

I am merely trying to correct the misunderstanding. Unfortunately, many folks believe this myth because of what is written by internet authors such as the one you linked. I did not want others believing what was in that article because they would be the dumber for it.

And how is that different from what I said?

You said ... "I put "open market" in quotes because that "open market" is restricted to Goldman Sachs, Citibank, and a handful of other global mega banks.".

I explained that the open market is not restricted to these mega banks. The open market operations are facilitated by the 21 primary dealers (only some of which are arms of mega banks ... and some of the others are simply independent agents for these banks or themselves). These open market operations are not restricted to the mega banks as you stated. Any member depository institution can participate (by proxy) ... even certain government sponsored non-depository institutions can participate (such as Fannie Mae, Freddie Mac, Ginnie Mae, etc.) ... as they can also participate in the fed funds market. Additionally, the primary dealers can also buy for their own accounts (or serve as a proxy for a non-depository institution). Thus, non-bank primary dealers not serving as an agent for a bank can participate. It is in this capacity that Fed purchases are injected directly into the economy (money supply) ... but this is not the typical arrangement. The typical arrangement leaves money supply unaffected ... which is why I refer to the term "money printing" as erroneous in most cases (another subject).

Brian

 

[TheTexan]

"whereas their so-called "open market" operations are loaned at or near 0% and are closed-book".

Filling the bank's reserves creates the same result and is essentially the same thing. This is just semantics IMO. You also apparently skipped the part immediately after the quote you quoted where I said "technically these open market operations aren't necessarily loans".

You said ... "I put "open market" in quotes because that "open market" is restricted to Goldman Sachs, Citibank, and a handful of other global mega banks.".

I explained that the open market is not restricted to these mega banks. The open market operations are facilitated by the 21 primary dealers (only some of which are arms of mega banks ... and some of the others are simply independent agents for these banks or themselves).

Most of them are mega banks. The others.. are just agents for mega banks? That's not any different in my book. More semantics.

I'm still really not sure what your point is. My point is that the "open market" is pretty fucking far from an open market.

 

[TheTexan]

The bottom line is that the Fed does indirectly loan at or near 0%. Everything they do, all the money they inject, all the securities they purchase, is to maintain that 0% as that is their current stated goal.

Saying they loan directly is certainly a misunderstanding, but from a practical aspect it does not matter. The net result is the same thing.

 

[TheTexan]

Additionally, some of their open market operations are loans....

In addition to the SOMA portfolio, the Fed’s total portfolio includes a long-term repo book and a short-term repo book. Repos, also called repurchase agreements or RPs, are a form of collateralized loan where the Fed lends money to primary dealers, and the primary dealers give the Fed high-quality securities as general collateral against the loan.

http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html

They are not loans and there is no interest rate involved ... as I explained in detail.

 

[gonegolfin]

Filling the bank's reserves creates the same result and is essentially the same thing. This is just semantics IMO. You also apparently skipped the part immediately after the quote you quoted where I said "technically these open market operations aren't necessarily loans".

As for your last sentence, you backtracked off of your original statement by saying that they technically they are not necessarily loans ... but were still holding onto the banks obtaining loans from the Fed. Hence, I continued to address the misunderstanding.

#1 The Fed is not "filling the banks with reserves" with its temporary open market operations (TOMOs). TOMOs are only used for the Fed to meet its goals of implementing the target federal funds rate in normal monetary conditions. There are many days when the Fed does nothing. These operations are typically rather small (and these days much more rare due to the size of the Fed balance sheet) and are only conducted with the primary dealers ... not the banks themselves. Sometimes these operations are sales of securities from the Fed portfolio, which pulls money from the banking system. Even when the purchaser (primary dealer) is an arm of a depository institution, these purchases/funds do not make its way to the balance sheet of the bank. The banks are not in the business of these types of short term trading operations. This is the role of the primary dealers. The primary dealers sole function is to keep markets liquid (though they certainly have a preferential position). When they do sell securities from their portfolio to the Fed in TOMOs, they are not taking the proceeds and lending it out to make profits. This is not their function. They are market makers.

#2 POMOs are different as they are permanent operations. It is also considerably different due to the scale of the operations. Primary dealers do not have the capitalization required to sell all of the securities the Fed has wanted to purchase in its outright purchase programs of the past several years. Not even close. As such, typically, the primary dealers act as agents of the banks (but not always) in selling these securities to the Fed. This is how the "Fed fills the banks with reserves.".

As such, TOMOs are not a loan mechanism where the banks can obtain funds (at or near 0%) to make profits. They are simply a liquidity mechanism (executed between the Fed and the primary dealers) to control the level of reserves in the banking system (before September 2008). The Fed uses it to both add and drain reserves to/from the banking system. Securities are purchased by the Fed from the primary dealers (not the banks) based on a bid/submission system ... reserves are not loaned out at interest (0% or otherwise). It is also an insignificant liquidity mechanism due to the monetary environment of the past several years. Permanent asset purchases have supplanted it.

Most of them are mega banks. The others.. are just agents for mega banks? That's not any different in my book. More semantics.

Read more closely ...

- Primary dealers can be arms of banking institutions (but are separate entities with separate balance sheets)
- Primary dealers can act as agents on behalf of banking institutions
- Primary dealers that are neither arms of banking institutions nor agents of banks can act for their own accounts or other non-banking institutions

All of the above primary dealers participate in TOMOs. But they do so for their own accounts. The first two categories of primary dealers do act on behalf of the banks in their permanent open market operations. The third category does not.

Brian

 

[gonegolfin]

The bottom line is that the Fed does indirectly loan at or near 0%. Everything they do, all the money they inject, all the securities they purchase, is to maintain that 0% as that is their current stated goal.

The Fed employs reserves management operations to manage the federal funds rate to its target ... at least it did before 2008. It now implements monetary policy by setting the interest rate on reserves (IOR), which is at 0.25%. The federal funds rate is now meaningless. But let's assume for a moment that the fed funds rate was not meaningless (we are in a normal monetary environment) ... even if the federal funds rate had meaning, this rate is a target market rate for federal funds in the federal funds market. The Fed does not loan funds in the federal funds market. In normal monetary conditions, the federal funds market sets the rate for federal funds based on the supply and demand of reserves. The participants in this federal funds market are the member institutions themselves. They play the roles of both lender and borrower, not the Fed.

Now, regarding your statement "Everything they do, all the money they inject, all the securities they purchase, is to maintain that 0% ..." ...

Everything the Fed has done to implement near ZIRP is via permanent open market operations (permanent asset purchases), not open market operations attempting to implement the target rate in the federal funds market (TOMOs). Again, TOMOs are simply a liquidity measure and do not have a lasting effect on the Fed balance sheet. They have an extremely temporary effect (and currently have no effect) and in no way form the foundation for any sort of lending the recipients of these temporary funds (via sales of securities these recipients own) might want to execute (forgetting for the moment that primary dealers do not lend). Asserting that TOMOs are the basis for bank lending is nonsensical.

Saying they loan directly is certainly a misunderstanding, but from a practical aspect it does not matter. The net result is the same thing.

No, it does matter and is not the same thing. I explained the participants in temporary open market operations (TOMOs) in the prior post. These (TOMOs) are liquidity operations and extremely short term in nature (most often a single day). Securities are either purchased or sold by the Fed (depending on whether the Fed wants to add or drain reserves from the banking system). Then a short time later, the reverse occurs (unwind of the position). These operations are conducted strictly to balance the supply of reserves in the banking system such that the Fed's target rate of interest for the federal funds market is achieved (in normal times).

It is permanent open market operations (real Fed balance sheet expansion) that is required to implement near ZIRP policy.

Maybe you would better understand that TOMOs are an extremely temporary liquidity facility and not the basis for any sort of lending where the banks make these supposed grand profits ... if you understood the scale of these operations relative to the rest of the Fed balance sheet.

The latest Fed balance sheet (9/13/12) has total outstanding repurchase agreements at $0. That's right ... total open market operations outstanding on this date (purchased securities from the primary dealers on a very short term basis) ... was zero. Meanwhile, total reverse repurchase agreements was just under $93 billion. Still not a huge number ... but the net is that the Fed has taken reserves from the system in the amount of $93 billion on a short term basis.

Total outstanding repurchase agreements have been $0 since January of 2009!

The Fed has not net injected reserves via temporary open market operations since September 2008! It is not required. The permanent open market operations and IOR implement monetary policy for the Fed.

But even in normal monetary times, these temporary operations are small in scale and most importantly extremely brief (usually one day). August 2006, for example, shows outstanding repurchase agreements at $27.75 billion and reverse repurchase agreements at $28.80 billion ... meaning a net of $1.05 billion actually removed from the banking system.

Are you beginning to understand now?

Brian

 

[Mini-Me]

Thanks, Brian. That cleared some things up for me.

I'm still weak in at least two areas though:

First, let me get this straight: With QE, the Fed has bought assets with newly printed (or electronically created) money to inject reserves into the system...and with IOR, the same banks who sold them these assets can then deposit those same reserves with the Fed for risk-free interest? Granted, the point of IOR is to let the Fed increase the federal funds effective rate when the time comes, so IOR is probably low right now, but would I be overly cynical by describing this new policy as yet another systemic boon for bankers aside from its stated purpose? (BTW, what money is used to pay this interest? Is it paid from the Fed's balance sheet, or is it just printed up?)

Second, on a more fundamental level, the operations you describe - aside from quantitative easing - do not appear to explain how the bulk of our monetary base came into existence in the first place, and I'd really like to concretely understand this once and for all. Did it come from the Fed "printing" money to buy Treasuries on the open market? If not, how did it come about? If so, is M0 therefore closely related to the Fed's current balance sheet, even if fluctuating asset valuations preclude exact equality? I imagine I must be missing something though: If the Fed used to only purchase Treasuries in this way, that would imply that almost the entire monetary base would disappear if the federal government paid back its debt and stopped selling Treasuries, and it would similarly imply that almost no money existed prior to the government going massively in debt, which obviously isn't true. I'm missing something here ("something" probably means "a lot"). Did the Fed ever create new money by purchasing non-Treasury assets outright, even prior to QE? Your posts seem to imply otherwise, so if not, could you point out what I'm missing here? At the very least, I assume I'm missing a lot about the transition from a pre-Fed system to a post-Fed system, if not transitions that occurred under FDR as well, because the Fed presumably never had to "start from scratch."

 

[Brian4Liberty]

At the time, the Fed did not want to expand its balance sheet (create new reserves), so it sterilized its lending operations by selling treasuries from its portfolio. If the Fed sells an equal amount of securities from its portfolio to the reserves it creates via the purchase or loan, then that operation is said to be reserves neutral or sterilized.

To simplify, this was when the Fed purchased Treasuries, and then quickly resold them in the secondary market?

For instance, instead of someone in China purchasing a Treasury debt directly from the US Treasury, the Federal Reserve bought directly from the US Treasury, and then put it on the open market for sale. At that point, a person in China could purchase it. I am guessing that the interest rate at that point is better, and the Fed is taking a slight loss on these sales, otherwise the person in China would still be buying direct from the US Treasury.

 

[gonegolfin]

Thanks, Brian. That cleared some things up for me.

I'm still weak in at least two areas though:

First, let me get this straight: With QE, the Fed has bought assets with newly printed (or electronically created) money to inject reserves into the system...and with IOR, the same banks who sold them these assets can then deposit those same reserves with the Fed for risk-free interest?

You understand the concept and what is happening here, but the terminology/components are not quite correct. The Fed does not buy assets with "newly printed money" to inject reserves into the banking system. The simple act of purchasing those assets injects reserves into the system. When the Fed is engaging in balance sheet expansion and buys treasury securities through a POMO operation, the Fed credits the reserve account of the depository institution that is making the purchase through the primary dealer (if in fact a bank is the buyer). If the primary dealer is not acting as an agent, but for its own account, then the bank account used by the primary dealer is credited (deposit money is created) ... as is the reserves account of that bank at the Fed. Hence, Fed buys securities (asset side of the balance sheet), Fed credits reserves (liability side of the balance sheet). When the Fed creates reserves, it is usually not "printing money" in the sense that people use it. It is always creating base money. But until that base money becomes deposit money, it is not part of money supply.

And regarding your IOR sentence above ... the bank does not deposit those reserves. Those reserves have already been credited by the Fed. And yes, the Fed is paying these banks interest on their reserves. In fact, they do not pay interest for just excess reserves (and just reserves on deposit with the Fed) ... they pay interest on all reserves. This includes required reserves as well as vault reserves.

Granted, the point of IOR is to let the Fed increase the federal funds effective rate when the time comes, so IOR is probably low right now,

The purpose of IOR is to implement monetary policy in this "new normal" of Fed monetary policy. There really is no federal funds rate anymore. The federal funds rate is simply a reflection of the IOR rate. IOR serves as a floor and is at 0.25%. Without IOR, the federal funds rate would be just above zero (and I mean .01% or .001%, etc., not .14%). The reason why the federal funds rate deviates a bit (is a bit below) the IOR rate is because not all institutions with reserves accounts at the Fed are eligible for IOR (only depository institutions are eligible). Think the GSAs (Fannie Mae, Freddie Mac, Ginnie Mae, etc.). These non-depository institutions want to get something for their excess reserves, thus these are the lenders in the now very small federal funds market. They are going to get something for lending out their excess reserves, but probably not 0.25% and certainly not above it (else depository institutions would once again engage in the federal funds market as it would pay more than the IOR rate).

Should the Fed decide to tighten at some point in the future, it would increase the IOR rate. The federal funds rate would simply tag along for the ride and would remain a dinosaur of monetary policy. Think about this ... Excess reserves in the banking system are currently at about $1.5 trillion. If the Fed abandoned IOR, they would have to drain at least $1.2 trillion of those reserves to get any sort of meaningful movement in the federal funds rate. They would probably need to get reserves under $150 billion just to achieve a 1% federal funds rate. And if you recall from my prior articles, even though the Fed has over $1.5 trillion in reserves as a liability, the Fed might not even be able to drain $1.2 trillion in reserves from the banking system. This is because the selling of its assets might not fetch the $ reserves that were originally created when the assets were purchased (due to interest rate risk and asset risk). That is when it would get really interesting.

but would I be overly cynical by describing this new policy as yet another systemic boon for bankers aside from its stated purpose? (BTW, what money is used to pay this interest? Is it paid from the Fed's balance sheet, or is it just printed up?)

Maybe I am not the right person to ask as I have repeatedly written in my Financial Sense articles that I think this is part of the Fed's plan to stealthily recapitalize the banking system. It takes time, but it is time they have. A long, slow, painful process that benefits the banks.

The interest payments are simply additional reserves credits issued by the Fed.

Second, on a more fundamental level, the operations you describe - aside from quantitative easing - do not appear to explain how the bulk of our monetary base came into existence in the first place, and I'd really like to concretely understand this once and for all. Did it come from the Fed "printing" money to buy Treasuries on the open market? If not, how did it come about?

You are really asking what happened on Day 1, right? To get a fiat currency central bank managed monetary system jump-started, you need to buy an initial round of assets. These assets traditionally fall into two categories ... sovereign debt and Gold. This is how the Federal Reserve system got started. The quality of assets are important because these are the securities that back the currency and money supply. This is why I harp on the declining composition of the Fed balance sheet ... both in terms of asset quality and maturity (asset risk and interest rate risk). Meanwhile, the financial media seems to be fixated on only the size of the balance sheet. Both are important. Agency debt and Agency MBSs, unfortunately, have become a core holding of our central bank. Meanwhile, average duration continues to rise and is at unprecedented levels.

Over long periods of time, the Fed engages in asset purchases (at considerably lower levels than that of post September 2008). These asset purchases increase reserves in the banking system (liability side of the balance sheet) and obviously add to the asset side of the balance sheet. Increased reserves means increased monetary base. Over time, some of these reserves become currency in circulation. These types of systems rely on continued inflation (even if it is modest) to survive. This is how it is achieved. From the period of summer 1996 to summer 2006, the monetary base increased from $443 billion to $804 billion. In 1959 it was $40 billion.

If so, is M0 therefore closely related to the Fed's current balance sheet, even if fluctuating asset valuations preclude exact quality?

Certainly. M0 (Monetary Base) is simply bank reserves plus currency in circulation. M0 is currently at about $2.65 trillion.

I imagine I must be missing something though: If the Fed used to only purchase Treasuries in this way, that would imply that almost the entire monetary base would disappear if the federal government paid back its debt and stopped selling Treasuries,

No, you got it.

If all US treasury debt, Agency debt, and Agency MBSs were allowed to either mature or be repaid, the only core assets remaining would be a small amount of Gold. Much money would be destroyed.

Over time, the Fed deals with maturation of its treasury securities by rolling them over with the US treasury. This is a special part of a standard treasury auction where the Fed exchanges maturing securities for new ones (in equal $ principal amounts). This is the only time when the Fed is allowed by law (Federal Reserve Act) to purchase treasuries directly from the US treasury. Though as I pointed out in my 2009 article ... Lending a Helping Hand ... the Fed was really violating the spirit of this rule/law by purchasing "on the run" treasuries (treasuries recently auctioned by the treasury and were two young to establish market price in the secondary market).

and it would similarly imply that almost no money existed prior to the government going massively in debt, which obviously isn't true. I'm missing something here ("something" probably means "a lot").

Hopefully I answered that for you above.

Did the Fed ever create new money by purchasing non-Treasury assets outright, even prior to QE?

Gold.

Your posts seem to imply otherwise, so if not, could you point out what I'm missing here? At the very least, I assume I'm missing a lot about the transition from a pre-Fed system to a post-Fed system, if not transitions that occurred under FDR as well, because the Fed presumably never had to "start from scratch."

All systems start from scratch ... but that does not mean that the government did not already have assets to use as backing for the central bank and currency. It did (Gold). The Fed "purchased" them and as such, hold them as asset and liability entries on its balance sheet. The government also issued debt which the central bank purchased.

Brian

 

[gonegolfin]

To simplify, this was when the Fed purchased Treasuries, and then quickly resold them in the secondary market?

Not quite. The above would not make sense as you stated it. The Fed was purchasing non-treasury assets and offsetting this reserve creation by selling equal amounts of treasuries from its portfolio ... at least until the Fed started running low on US treasuries and needed a Plan B.

What was happening here was simply changes in the composition of the Fed balance sheet. Asset swaps if you will ... though the Fed purchased assets were purchased at a discount (haircut) according to the class of asset. The banks participating in these special programs were able to raise more cash by selling certain assets (again, at a discount) until the process was reversed at maturation of the loan term.

The above describes how the TAF functioned. It was a intermediate term loan program that kept rolling over until they decided to ditch it for outright balance sheet expansion (QE1).

The TSLF was a little different in function, but similar in end result. Here, the Fed swapped treasuries directly for non-treasury assets. That is, the operations were self-sterilizing. Banks could then use the treasuries as high quality collateral for other operations ... or sell them to raise cash. But again, the process was reversed at maturation.

Sterilization is simply reserves neutral operations (net zero new reserves are created). Paying interest on reserves (IOR) as the Fed has been doing or instituting term deposits as the ECB has done is not sterilization. If the ECB and Fed were sterilizing their operations, their balance sheets should not be growing. IOR and term deposits are simply methods used by central banks to sequester reserves. But they do not mind the term sterilization being tossed about as it gives the false impression of inflation neutral.

For instance, instead of someone in China purchasing a Treasury debt directly from the US Treasury, the Federal Reserve bought directly from the US Treasury, and then put it on the open market for sale. At that point, a person in China could purchase it. I am guessing that the interest rate at that point is better, and the Fed is taking a slight loss on these sales, otherwise the person in China would still be buying direct from the US Treasury.

No, scratch all of the above. It is as simple as I described above. Also remember that the Fed cannot buy directly from the treasury. It can have maturing treasuries replaced by the US treasury at treasury auction ... or it can buy from its primary dealers. The gray area is the point I raised in 2009 when the Fed was buying "on the run" treasuries from its primary dealers ...violating the spirit of the rule in the Federal Reserve Act.

The purpose of these sterilized lending programs (TAF, TSLF, etc.) was to aid the banks.

Brian

 

[TheTexan]

Read more closely ...

- Primary dealers can be arms of banking institutions (but are separate entities with separate balance sheets)
- Primary dealers can act as agents on behalf of banking institutions
- Primary dealers that are neither arms of banking institutions nor agents of banks can act for their own accounts or other non-banking institutions

Bank of Nova Scotia, New York Agency - Global mega bank
BMO Capital Markets Corp. - Subsidiary of a global mega bank
BNP Paribas Securities Corp. - Global mega bank
Barclays Capital Inc. - Global mega bank
Cantor Fitzgerald & Co. - Global financial services firm that also does global mega banking
Citigroup Global Markets Inc. - Small mom & pop shop
Credit Suisse Securities (USA) LLC - Global mega bank
Daiwa Capital Markets America Inc. - Investment group who's largest member is a global mega bank
Deutsche Bank Securities Inc. - Global mega bank
Goldman, Sachs & Co. - Global mega bank
HSBC Securities (USA) Inc. - Global mega bank
Jefferies & Company, Inc. - Global mega bank
J.P. Morgan Securities LLC - Subsidiary of a global mega bank
Merrill Lynch, Pierce, Fenner & Smith Incorporated - Wealth management division of a global mega bank
Mizuho Securities USA Inc. - Global mega bank
Morgan Stanley & Co. LLC - Global mega financial services firm that also does global mega banking
Nomura Securities International, Inc. - Global mega bank
RBC Capital Markets, LLC - Global mega bank
RBS Securities Inc. - Subsidiary of a global mega bank
SG Americas Securities, LLC - Subsidiary of a global mega subsidiary of a global mega bank
UBS Securities LLC. - Global mega financial services company that also does global mega banking

I don't know why you object to my generalization that all of the primary dealers are global mega banks. It's a generalization, but it's accurate. Either you're a global mega bank apologist because you work in the industry or (tinfoil) you were planted on this forum to do a job, or you're some kind of grammar nazi Federal Reserve equivalent.

The "open market" operations are restricted to global mega banks. If anyone who's not a global mega bank wants to do business with the Fed, they have to do it through these global mega bank companies. Period.

No idea why that's an issue for you.

 

[gonegolfin]

Cantor Fitzgerald & Co. - Global financial services firm that also does global mega banking

I don't know why you object to my generalization that all of the primary dealers are global mega banks. It's a generalization, but it's accurate.

Then we are using a different definition of "bank". I am referring to commercial banks. IOW, banks that engage in fractional reserve lending in our monetary system and that have the ability to create and destroy money supply. This is the difference between Fed asset purchases resulting in increasing reserves and not money supply ... and Fed asset purchases increasing both reserves and money supply.

As an example, Cantor Fitzgerald is not a commercial bank. They are an investment bank and securities dealer.

Are we on the same page now?

Finally, do you understand what I am saying with respect to TOMOs? This is not a source of funding for bank lending. This is a myth.

Also, if you are going to resort to insults, then I am finished.

Brian

 

[TheTexan]

Then we are using a different definition of "bank". I am referring to commercial banks. IOW, banks that engage in fractional reserve lending in our monetary system and that have the ability to create and destroy money supply. This is the difference between Fed asset purchases resulting in increasing reserves and not money supply ... and Fed asset purchases increasing both reserves and money supply.

As an example, Cantor Fitzgerald is not a commercial bank. They are an investment bank and securities dealer.

Are we on the same page now?

Sure, but by making that "clarification" you took us off on a tangent that was entirely irrelevant to the point. It's just semantics.

Finally, do you understand what I am saying with respect to TOMOs? This is not a source of funding for bank lending. This is a myth.

Myth or not, it doesn't matter. You have a solid grasp of the mechanics of the Fed, but not such a solid grasp of austrian economics.

Without the Fed, banks would have to borrow money at the market rate. But because of the Fed and its actions [for this direct goal], these banks can borrow money at 0%, it really doesn't matter who they are technically borrowing that money from.

The Fed may not be the one making the loan, but the Fed is the one making that loan possible. These banks don't really care where that 0% loan comes from. Neither do I.

A lot of people, including myself, understand that the Fed doesn't make direct loans (or rather it's not a primary mechanic they use... but they do do it, and not just the discount window), but it's much simpler just to keep it simple. Most people don't even know what the Federal Reserve is. You can't get them engaged on the subject if you start talking about TOMO's. Zero % interest is a very easy subject to understand, and this is why a lot of people, including myself, choose to use that terminology even though it's technically inaccurate. For all practical purposes, that's exactly what they do.

If you've got a better, more accurate, way to communicate to people on this subject that doesn't involve complex terminology, then I'm all ears

 

[gonegolfin]

Sure, but by making that "clarification" you took us off on a tangent that was entirely irrelevant to the point. It's just semantics.

No, I was following your provided example earlier stating " ... is restricted to Goldman Sachs, Citibank, and a handful of other global mega banks.". These are commercial banks. You then evidently (in your own mind at least) expanded the discussion later to include investment banks and securities dealers. Well, it is not a far stretch to think that the primary dealers are "investment banks" and securities dealers. Of course they would be. They also must be well capitalized. This only makes sense as the market makers.

Myth or not, it doesn't matter. You have a solid grasp of the mechanics of the Fed, but not such a solid grasp of austrian economics.

Certainly it matters. The banks having the ability to borrow from the Fed at will (even at fed funds rates) would be a whole different can of worms.

You know nothing about my background in Austrian economics. I have a firm grounding here and have been studying it for years. But I also believe that to further the cause, you cannot look ignorant propagating nonsense when discussing the Fed and how it functions in our system. Those folks get discounted and written off by the folks that need persuasion.

Without the Fed, banks would have to borrow money at the market rate. But because of the Fed and its actions [for this direct goal], these banks can borrow money at 0%, it really doesn't matter who they are technically borrowing that money from.

Banks do borrow at the market rate, if they are in the market. Banks are not borrowing money at 0% because they cannot. There is no market at 0%. There is also virtually no market for federal funds (overnight lending) and the ones that do engage are the small banks that need to meet their reserves requirements. Not the big banks. The only lenders here are the GSAs and there is not much to lend. The only play here is for some banks to play a little arbitrage, but only because they Fed is presently paying IOR at a rate just above the trading federal funds market rate. But there are precious little funds available for such a play because there are not many excess reserves that are ineligible for IOR payments. So, in case you have not grasped it yet ... the federal funds market is dead.

Regarding monetary policy where IOR does not exist, borrowing reserves in the federal funds market and then lending those reserves is nonsensical ... from either an interest rate perspective or a maturity perspective. There is no profit to be had here. Meanwhile, the fed funds loan expires daily (overnight lending). Bank investment portfolios cannot be managed in that way.

The Fed may not be the one making the loan, but the Fed is the one making that loan possible. These banks don't really care where that 0% loan comes from. Neither do I.

I will try this one more time. It seems that you did not understand my explanation of Fed open market operations. If it is over your head, just let me know and I will move on. Not a problem.

Now, please tell me where this 0% loan is coming from? Whom is making this magical loan that is the source of funding to banks achieving vast profits via re-lending these funds?

Brian

 

[TheTexan]

No, I was following your provided example earlier stating " ... is restricted to Goldman Sachs, Citibank, and a handful of other global mega banks.". These are commercial banks. You then evidently (in your own mind at least) expanded the discussion later to include investment banks and securities dealers. Well, it is not a far stretch to think that the primary dealers are "investment banks" and securities dealers. Of course they would be. They also must be well capitalized. This only makes sense as the market makers.

The entire point was that it's not an open market, not what kind of bank it is. And you're the one that brought up commercial vs investment - I never specified one way or the other. Commercial bank, investment bank, I get they are two very different things, but they are both banks. How is referring to global mega investment banks as "global mega banks" inaccurate?

You're fucking impossible to deal with man.

If it is over your head, just let me know and I will move on. Not a problem.

That's the only card you know how to play. I've gone through your post history, and you love finding minor details that's entirely irrelevant to their point, and go into depth and use it as a "gotcha!" These people people have legitimate, and accurate, criticisms regarding the fed, and then you swoop in and "correct them." While everything you say is generally factual and correct, it's also very often irrelevant to the point and serves as simply a distraction.

I'm not sure why you do that.

 

[TheTexan]

Now, please tell me where this 0% loan is coming from? Whom is making this magical loan that is the source of funding to banks achieving vast profits via re-lending these funds?

Are you really getting on my ass because I said 0% instead of 0.25%?