Monday, February 28, 2011
Sunday, February 27, 2011
The Fed's new tools (II)
Last week I described the traditional tools of the Fed (open market operations and the discount window) and an old, but less well-known one (repurchase agreements). Then I described the first innovation, the Term Auction Facility, inaugurated in December.
This week I’ll go over the forms of lending introduced in 2008, and then I'll discuss the options that the Fed is rumored to be considering next.
In 2007 the Federal Reserve made an effort to provide liquidity through channels other than open market operations and repos. To that effect, it created the Term Discount Window Program (TDWP) and the Term Auction Facility (TAF), as I explained last week. Both of those facilities, however, are available only to depository institutions.
So far I’ve been using the ambiguous term “banks” to refer to institutions that borrow funds or buy Treasurys from the Fed. There are however two broad classes of “banks”: depository institutions and primary dealers. Depository institutions are allowed to accept deposits. Primary dealers, on the other hand, are investment banks and brokers that trade in Treasurys with the Federal Reserve. Bear Stearns and Lehman Brothers are two examples in the latter group. As of today, there are 20 of them.
One defining characteristic of depository institutions is that they can use a broad range of assets to secure their loans from the Fed. The discount window, the TDWP and the TAF all accept a set of assets known as “discount collateral.” That includes pretty much all paper of investment quality, including performing sub-prime mortgages. Primary dealers, on the other hand, only have access to open-market operations (OMOs) and repos. The latter only can be obtained after posting General Collateral —that is paper issued by the Treasury or US agencies only.
Following problems in the mortgage and real estate markets last summer, primary dealers found it increasingly hard to obtain short-term financing because nobody would take their suspicious assets as collateral —or would do so only at very high prices. The Fed stepped up to the plate by opening the Term Securities Lending Facility (TSLF) to primary dealers, on March 27. Roughly speaking, a TSLF loan is an exchange of risky securities for Treasuries for 28 days between Federal Reserve and primary dealers. The range of acceptable collateral, although not as wide as at the discount window, includes some types of paper issued by non-agency institutions (AAA/Aaa-rated private label RMBS and CMBS).
To be sure, the Fed has had a securities lending program for a number of years. The novelty of the TSLF is that it extends the range of acceptable collateral beyond Treasuries. A second novelty is that the term of the loans increases from overnight to 28 days.
Unlike the other tools I have discussed, the TSLF does not have an effect on reserve balances by design. This allows the Fed to pursue its recent strategy of providing liquidity to the banking system without increasing the monetary base.
This is what these loans would look like on the balance sheet of the Fed:
In March the Fed inaugurated a second form of lending: the Primary Dealer Credit Facility (PDCF). This venue provides overnight cash loans to all primary dealers, at the same interest rate as the discount window does, and by pledging the same type of collateral. With the PDCF the Federal Reserve has de facto opened the discount window to primary dealers.
PDCF loans increase the monetary base (read the FAQ). Because this facility is meant to oil the credit market, not to provide a monetary stimulus, the Fed will continue to offset the increase in reserves using "a number of tools, including, but not necessarily limited to, outright sales of Treasury securities, reverse repurchase agreements, redemptions of Treasury securities, and changes in the sizes of conventional RP transactions." Here's what a PDCF loan looks like, after it has been offset:
The composition of the Fed’s assets has changed substantially over the last nine months. Here’s the balance sheet of the Fed again, in December and March:
Source: Federal Reserve, H.4.1 release.
With its new tools, the Fed has provided liquidity without printing much money. In a way, the Fed has become a pawnbroker.
The future?
Loans to commercial banks and primary dealers, from one facility or another, represent now a much larger fraction of assets (see chart, from the Wall Street Journal). The fraction of Treasurys has declined to 53% from 87%.
This week I’ll go over the forms of lending introduced in 2008, and then I'll discuss the options that the Fed is rumored to be considering next.
* * *
In 2007 the Federal Reserve made an effort to provide liquidity through channels other than open market operations and repos. To that effect, it created the Term Discount Window Program (TDWP) and the Term Auction Facility (TAF), as I explained last week. Both of those facilities, however, are available only to depository institutions.
So far I’ve been using the ambiguous term “banks” to refer to institutions that borrow funds or buy Treasurys from the Fed. There are however two broad classes of “banks”: depository institutions and primary dealers. Depository institutions are allowed to accept deposits. Primary dealers, on the other hand, are investment banks and brokers that trade in Treasurys with the Federal Reserve. Bear Stearns and Lehman Brothers are two examples in the latter group. As of today, there are 20 of them.
One defining characteristic of depository institutions is that they can use a broad range of assets to secure their loans from the Fed. The discount window, the TDWP and the TAF all accept a set of assets known as “discount collateral.” That includes pretty much all paper of investment quality, including performing sub-prime mortgages. Primary dealers, on the other hand, only have access to open-market operations (OMOs) and repos. The latter only can be obtained after posting General Collateral —that is paper issued by the Treasury or US agencies only.
Following problems in the mortgage and real estate markets last summer, primary dealers found it increasingly hard to obtain short-term financing because nobody would take their suspicious assets as collateral —or would do so only at very high prices. The Fed stepped up to the plate by opening the Term Securities Lending Facility (TSLF) to primary dealers, on March 27. Roughly speaking, a TSLF loan is an exchange of risky securities for Treasuries for 28 days between Federal Reserve and primary dealers. The range of acceptable collateral, although not as wide as at the discount window, includes some types of paper issued by non-agency institutions (AAA/Aaa-rated private label RMBS and CMBS).
To be sure, the Fed has had a securities lending program for a number of years. The novelty of the TSLF is that it extends the range of acceptable collateral beyond Treasuries. A second novelty is that the term of the loans increases from overnight to 28 days.
Unlike the other tools I have discussed, the TSLF does not have an effect on reserve balances by design. This allows the Fed to pursue its recent strategy of providing liquidity to the banking system without increasing the monetary base.
This is what these loans would look like on the balance sheet of the Fed:
| Changes in the Fed's balance sheet after a $1,000M TSLF loan | ||
| Assets | US government securities | -1,000 |
| Repurchase agreements | 0 | |
| Reverse repurchase agreements | 0 | |
| Direct loans | 0 | |
| TSLF loan | +1,000 | |
| Other assets | 0 | |
| Liabilities | Currency in circulation | 0 |
| Reserve balances | 0 | |
In March the Fed inaugurated a second form of lending: the Primary Dealer Credit Facility (PDCF). This venue provides overnight cash loans to all primary dealers, at the same interest rate as the discount window does, and by pledging the same type of collateral. With the PDCF the Federal Reserve has de facto opened the discount window to primary dealers.
PDCF loans increase the monetary base (read the FAQ). Because this facility is meant to oil the credit market, not to provide a monetary stimulus, the Fed will continue to offset the increase in reserves using "a number of tools, including, but not necessarily limited to, outright sales of Treasury securities, reverse repurchase agreements, redemptions of Treasury securities, and changes in the sizes of conventional RP transactions." Here's what a PDCF loan looks like, after it has been offset:
| Changes in the Fed's balance sheet after a $1,000M PDCF loan, offset by an open market operation | ||
| Assets | US government securities | -1,000 |
| Repurchase agreements | 0 | |
| Reverse repurchase agreements | 0 | |
| Direct loans | 0 | |
| PDCF loan | +1,000 | |
| TSLF loan | 0 | |
| Other assets | 0 | |
| Liabilities | Currency in circulation | -1,000 + 1,000 |
| Reserve balances | 0 | |
The composition of the Fed’s assets has changed substantially over the last nine months. Here’s the balance sheet of the Fed again, in December and March:
| Federal Reserve's balance sheet, $ millions | |||
| Assets | Aug. 15, 2007 | Mar. 19, 2008 | |
| US government securities | 789,601 | 660,484 | |
| Repurchase agreements | 24,000 | 62,000 | |
| Reverse repurchase agreements | -31,941 | -46,143 | |
| Term Auction Facility loans | 0 | 80,000 | |
| Primary Dealers Credit Facility | 0 | 28,800 | |
| Direct loans | 264 | 125 | |
| Other assets | 37,058 | 36,603 | |
| Liabilities | Currency in circulation | 813,085 | 818,362 |
| Reserve balances | 5,897 | 3,507 | |
With its new tools, the Fed has provided liquidity without printing much money. In a way, the Fed has become a pawnbroker.
The future?
Loans to commercial banks and primary dealers, from one facility or another, represent now a much larger fraction of assets (see chart, from the Wall Street Journal). The fraction of Treasurys has declined to 53% from 87%.
Saturday, February 26, 2011
Risk Factors For A 2008 Recession
Here are the top risk factors for 2008 US Recession:
- Continuing Housing Bust
- High Oil Prices
- Security Issues
- Credit Crunch
- High Consumer Debt
- Large Trade Deficit
- Consumer Spending is slowing (it makes up 70% of the US GDP)
- Commercial Construction decline
Friday, February 25, 2011
More Desperation from the Right
Lou Dobbs, Sean Hannity, Rush, and the right-wing blogosphere seem interested in a talk I gave in September, 2007 to students in a political science class here at Berkeley, in which I played the role of a presidential candidate so politically incorrect and tone-deaf as to pummel every sacred cow in sight -- including the notion that our society could afford and would continue forever to pay whatever amount of money was required to keep everyone alive forever. The whole point of the mock exercise was to show that presidential candidates can't state what everyone knows to be the truth because they'll be taken apart by the Right or the Left. I slew many other sacred cows in that mock exercise, some of which are held dearly by the Left. Nonetheless, two years later the Right has exhumed the lecture and taken my words completely out of context purportedly to show that Obama and the Democrats plan death panels.
If their desperation weren't so pathetic it would be funny. After all, they have proven the whole point of my lecture. UC Berkeley maintains an archive of webcasts and my speech is available there verbatim, should you wish to listen to it in its entirety.
Thursday, February 24, 2011
Wednesday, February 23, 2011
How the Fed took the money out of monetary policy
UPDATE: I wrote an expanded, better version of this post, in two parts: Part I and Part II.
The Federal Reserve used to have only a few tools to do its job —that is, until it got the genie out of the bottle. Sometimes quietly, other times conspicuously, the Fed is surely changing the way it creates liquidity.
(Jim Hamilton has been narrating these changes since the summer. Part of this post is my one-stop account. Jim’s posts, which are much better, are here: September 23, December 14, December 16, March 15.)
The central bank has a balance sheet, just like any other bank. As assets, it holds government securities, loans to depository institutions (banks), and other assets. As liabilities, it has currency (the cash in your pockets) and reserve balances. Reserves are deposits that banks keep at the central bank. When a bank needs currency it withdraws from its deposit, effectively turning it into bills and coins that you and I can use.
Until now, macroeconomics textbooks have been telling us that central banks use three tools to control the amount of currency in circulation. Looking at them from an accounting perspective will help us understand what the Federal Reserve has been up to recently:
1) Open market operation. This is an outright purchase of government securities from banks. When conducting this operation, the central bank increases its assets and credits banks’ reserve balances. Eventually, banks withdraw from their reserves at the central bank and turn them into cash. So an open market operation amounts to withdrawing government securities from the economy and replacing them with cash. The central bank can also reduce the amount of cash in circulation, by doing just the opposite: selling government securities and absorbing cash. By far, an open market operation is the best-know of the central bank’s tools.
This is a simplified version of the U.S. Federal Reserve’s balance sheet on August 15, 2007:
Source: Federal Reserve, H.4.1 release.
(For the moment, regard “repurchase agreements” as government securities.)
Suppose that on August 16, 2007, the Fed pumped $1,000 million in the system through an open market operation. The Fed’s balance sheet would experience the following changes, once banks have withdrawn the new funds from their reserve accounts:
2) Direct loan. This tool is usually referred to as the “discount window.” The central bank simply lends money to a bank. The borrower must pledge collateral with a value that exceeds that of the direct loan. The central bank increases its balance of loans, and simultaneously credits the reserves of the borrowing bank. Then the bank withdraws from its reserves, effectively turning them into currency in circulation. Asking for a direct loan usually means that the bank was not able to obtain liquidity in the inter-bank market. Moreover, borrowers are also subject to scrutiny by the central bank, and watched by other banks. And the interest rate charged for direct loans is higher than the inter-bank rate. For those reasons, the discount window is used rarely and in small amounts.
3) Reserve requirements. Banks are required to keep a certain amount of reserves at the central bank. If the central bank increases that requirement, banks are forced to withdraw currency from the economy and put it in their reserve account. The central bank can also do the opposite, i.e. increase the amount of currency in circulation by lowering the reserve requirement. This tool is the least often used.
Normally banks obtain liquidity for their daily operations in the inter-bank market, where they borrow from and lend to each other at the going interest rate. Last summer some U.S. banks started experiencing losses from their portfolios of mortgages and securitized mortgages. Nobody knew which banks would suffer losses in the future, or how large they could be. So banks starting growing wary of lending to each other, and it became more expensive—or just plain impossible—to raise as much liquidity as needed.
The Fed stepped in to help. Instead of providing liquidity through outright open market operations, it increased the use of an operation that is more frequently used, yet less well known: repurchase agreements. These are short-term loans, usually overnight, extended by the Fed to banks. As collateral, banks transfer high-quality securities to the central bank for the duration of the loan. At expiration, the loan is repaid and the bank takes back its securities.
From an accounting perspective, the repo increases the central bank’s assets and potential currency in circulation, much like an open market operation does. This, for example, is what happened between August 8 and August 15.
Soon after, the Fed decided that it didn’t want to increase the potential amount of liquidity in the system, which affects short-term interest rates and inflation. So it offset the repurchase agreements by selling some of its own government securities (or letting them expire without purchasing more), and thus withdrawing cash from the system. So the repos didn’t have any bottom-line effect on liquidity: they merely changed the composition of the Fed’s assets and provided temporary cash to the borrowing banks. This is why Jim Hamilton writes that the Fed has been doing monetary policy using the asset side of the balance sheet. Another way to see it is that the Fed has been conducting money-less monetary policy, because its actions barely affect the monetary base (reserves plus currency in circulation).
Here’s how a repurchase agreement would change the Fed’s balance sheet, after offsetting it with an open market operation:
After doing this for months, and aware that banks were not getting as much liquidity as they wanted, in December the Fed unveiled the Term Auction Facility (TAF). As its name suggests, this is an auction for a limited amount of Fed’s loans. Just like a repo, loans through the new facility require borrowers to use assets as collateral to the Fed for the duration of the loan. But the TAF represents an improvement with respect to repos in their capacity to provide liquidity. First, it lowers the bar for the type of assets that the Fed accepts, which are the same as those for the discount window. Second, it is more targeted than repos: the bidding system ensures that the limited loans go to the banks that value them most.
By themselves, TAF loans would increase both assets and liabilities of the Fed, just like open market operations and repos. But, once again, the Fed partially offset those loans by selling securities and withdrawing cash from the system. Here’s the simplified balance sheet on December 26 and August 15:
Source: Federal Reserve, H.4.1 release.
The balance of TAF loans grew from $20bn to $60bn between December 26 and March 12.
Still, all these liquidity venues are available only to members of the Federal Reserve system, which I have been calling “banks” and whose proper name is “depository institutions.” There is another set of financial intermediaries and investors, such as Bear Stearns or Lehman Brothers. They have been as affected by the liquidity crisis as much as banks have, but don’t have direct access to neither the discount window nor TAF.
So the Fed has announced two new facilities for those institutions. The first one is the Term Securities Lending Facility (TSLF), to open on March 27. At this new window, all primary dealers -all banks and brokers that trade in government securities with the Fed- are allowed to borrow up to $200bn of government securities for 28 days. The minimum quality of the assets seems to be the same as those for than for the TAF (they include federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS). But in contrast with TAF this new facility lends government securities, not cash. Through the TSLF the Federal Reserve will be temporarily swapping safe government securities for risky assets. This is how these loans would look like on the balance sheet:
The second institution is the Primary Dealer Credit Facility (PDCF), which started operating on March 17. This venue provides overnight cash loans to all primary dealers, at the discount window interest rate, and acceptseven riskier the same type of collateral. they accept all collateral eligible for repos, plus investment-grade corporate securities, municipal securities, MBS and asset-backed securities. With the PDCF, all primary dealers have de facto access to the discount window, from which only depository institutions could borrow before. The loan will increase the monetary base (read the PDCF FAQ). To offset the increase, the Fed will utilize "a number of tools, including, but not necessarily limited to, outright sales of Treasury securities, reverse repurchase agreements, redemptions of Treasury securities, and changes in the sizes of conventional RP transactions." Here's what a PDCF loan looks like, after it has been offset:
In fact, the Federal Reserve has included PDCF as a sub-entry within "Other loans" in the balance sheet, next to the discount window loans, because PDCF and discount window are in fact one and the same facility.
Unlike the TAF, neither TSLF nor PDCF will increase the assets of the Fed. It will temporarily decrease balances of government securities, and increase those of sketchy securities. And because participant institutions don’t have Fed reserves, TSLF loans don’t affect the monetary base. These two venues circumvent the necessity to conduct open market operations so that the monetary base doesn’t change.
Here’s the balance Fed again, in December and after the PDCF opened:
Source: Federal Reserve, H.4.1 release.
With its new tools, the Fed has provided liquidity without printing much money. It has temporarily absorbed risky and illiquid securities, and supplied government securities, which are risk-free. So instead of monetary policy, in the sense we traditionally have thought about it, the Fed has become a risk-absorber (temporarily, we hope). Or, to put it less kindly, a pawnbroker.
Will these new tools make it to the textbooks? It’s hard to tell whether the particular facilities (TAF, TSLF, etc.) will survive. I think that some unified, generalized form of credit to non-depository institutions will stay. But I’ll have to write about that another time.
Addendum:
Somebody asked me how the Fed conducts an "offsetting" open market operation when the Fed extends a TAF loan. This table summarizes it:
The Fed extends the loan, which is an asset for the lender, and credits the bank's reserve account. (In the table I assume that the borrower withdraws the funds from the reserve account, so they're turned into currency in circulation.) The collateral doesn't show up in the balance sheet, because the Fed does not take ownership of it. At the same time, the Fed sells $1,000M worth of government securities, absorbing that same amount of cash from the banking system.
Subscribe to EconWeekly
The Federal Reserve used to have only a few tools to do its job —that is, until it got the genie out of the bottle. Sometimes quietly, other times conspicuously, the Fed is surely changing the way it creates liquidity.
(Jim Hamilton has been narrating these changes since the summer. Part of this post is my one-stop account. Jim’s posts, which are much better, are here: September 23, December 14, December 16, March 15.)
The central bank has a balance sheet, just like any other bank. As assets, it holds government securities, loans to depository institutions (banks), and other assets. As liabilities, it has currency (the cash in your pockets) and reserve balances. Reserves are deposits that banks keep at the central bank. When a bank needs currency it withdraws from its deposit, effectively turning it into bills and coins that you and I can use.
Until now, macroeconomics textbooks have been telling us that central banks use three tools to control the amount of currency in circulation. Looking at them from an accounting perspective will help us understand what the Federal Reserve has been up to recently:
1) Open market operation. This is an outright purchase of government securities from banks. When conducting this operation, the central bank increases its assets and credits banks’ reserve balances. Eventually, banks withdraw from their reserves at the central bank and turn them into cash. So an open market operation amounts to withdrawing government securities from the economy and replacing them with cash. The central bank can also reduce the amount of cash in circulation, by doing just the opposite: selling government securities and absorbing cash. By far, an open market operation is the best-know of the central bank’s tools.
This is a simplified version of the U.S. Federal Reserve’s balance sheet on August 15, 2007:
| Federal Reserve's balance sheet, $ millions (Aug. 15, 2007) | ||
| Assets | US government securities | 789,601 |
| Repurchase agreements | 24,000 | |
| Reverse repurchase agreements | -31,941 | |
| Direct loans | 264 | |
| Other assets | 37,058 | |
| Liabilities | Currency in circulation | 813,085 |
| Reserve balances | 5,897 | |
(For the moment, regard “repurchase agreements” as government securities.)
Suppose that on August 16, 2007, the Fed pumped $1,000 million in the system through an open market operation. The Fed’s balance sheet would experience the following changes, once banks have withdrawn the new funds from their reserve accounts:
| Changes in the Fed's balance sheet after a $1,000M open market operation | ||
| Assets | US government securities | +1,000 |
| Repurchase agreements | 0 | |
| Reverse repurchase agreements | 0 | |
| Direct loans | 0 | |
| Other assets | 0 | |
| Liabilities | Currency in circulation | +1,000 |
| Reserve balances | 0 | |
2) Direct loan. This tool is usually referred to as the “discount window.” The central bank simply lends money to a bank. The borrower must pledge collateral with a value that exceeds that of the direct loan. The central bank increases its balance of loans, and simultaneously credits the reserves of the borrowing bank. Then the bank withdraws from its reserves, effectively turning them into currency in circulation. Asking for a direct loan usually means that the bank was not able to obtain liquidity in the inter-bank market. Moreover, borrowers are also subject to scrutiny by the central bank, and watched by other banks. And the interest rate charged for direct loans is higher than the inter-bank rate. For those reasons, the discount window is used rarely and in small amounts.
3) Reserve requirements. Banks are required to keep a certain amount of reserves at the central bank. If the central bank increases that requirement, banks are forced to withdraw currency from the economy and put it in their reserve account. The central bank can also do the opposite, i.e. increase the amount of currency in circulation by lowering the reserve requirement. This tool is the least often used.
Normally banks obtain liquidity for their daily operations in the inter-bank market, where they borrow from and lend to each other at the going interest rate. Last summer some U.S. banks started experiencing losses from their portfolios of mortgages and securitized mortgages. Nobody knew which banks would suffer losses in the future, or how large they could be. So banks starting growing wary of lending to each other, and it became more expensive—or just plain impossible—to raise as much liquidity as needed.
The Fed stepped in to help. Instead of providing liquidity through outright open market operations, it increased the use of an operation that is more frequently used, yet less well known: repurchase agreements. These are short-term loans, usually overnight, extended by the Fed to banks. As collateral, banks transfer high-quality securities to the central bank for the duration of the loan. At expiration, the loan is repaid and the bank takes back its securities.
From an accounting perspective, the repo increases the central bank’s assets and potential currency in circulation, much like an open market operation does. This, for example, is what happened between August 8 and August 15.
Soon after, the Fed decided that it didn’t want to increase the potential amount of liquidity in the system, which affects short-term interest rates and inflation. So it offset the repurchase agreements by selling some of its own government securities (or letting them expire without purchasing more), and thus withdrawing cash from the system. So the repos didn’t have any bottom-line effect on liquidity: they merely changed the composition of the Fed’s assets and provided temporary cash to the borrowing banks. This is why Jim Hamilton writes that the Fed has been doing monetary policy using the asset side of the balance sheet. Another way to see it is that the Fed has been conducting money-less monetary policy, because its actions barely affect the monetary base (reserves plus currency in circulation).
Here’s how a repurchase agreement would change the Fed’s balance sheet, after offsetting it with an open market operation:
| Changes in the Fed's balance sheet after a $1,000M repurchase agreement, offset by an open market operation | ||
| Assets | US government securities | -1,000 |
| Repurchase agreements | +1,000 | |
| Reverse repurchase agreements | 0 | |
| Direct loans | 0 | |
| Other assets | 0 | |
| Liabilities | Currency in circulation | 0 (-1,000 + 1,000) |
| Reserve balances | 0 | |
After doing this for months, and aware that banks were not getting as much liquidity as they wanted, in December the Fed unveiled the Term Auction Facility (TAF). As its name suggests, this is an auction for a limited amount of Fed’s loans. Just like a repo, loans through the new facility require borrowers to use assets as collateral to the Fed for the duration of the loan. But the TAF represents an improvement with respect to repos in their capacity to provide liquidity. First, it lowers the bar for the type of assets that the Fed accepts, which are the same as those for the discount window. Second, it is more targeted than repos: the bidding system ensures that the limited loans go to the banks that value them most.
By themselves, TAF loans would increase both assets and liabilities of the Fed, just like open market operations and repos. But, once again, the Fed partially offset those loans by selling securities and withdrawing cash from the system. Here’s the simplified balance sheet on December 26 and August 15:
| Federal Reserve's balance sheet, $ millions | |||
| Assets | Aug. 15, 2007 | Dec. 26, 2007 | |
| US government securities | 789,601 | 754,612 | |
| Repurchase agreements | 24,000 | 42,500 | |
| Reverse repurchase agreements | -31,941 | -40,542 | |
| Term Auction Facility loans | 0 | 20,000 | |
| Direct loans | 264 | 4,535 | |
| Other assets | 37,058 | 52,869 | |
| Liabilities | Currency in circulation | 813,085 | 829,193 |
| Reserve balances | 5,897 | 4,781 | |
The balance of TAF loans grew from $20bn to $60bn between December 26 and March 12.
Still, all these liquidity venues are available only to members of the Federal Reserve system, which I have been calling “banks” and whose proper name is “depository institutions.” There is another set of financial intermediaries and investors, such as Bear Stearns or Lehman Brothers. They have been as affected by the liquidity crisis as much as banks have, but don’t have direct access to neither the discount window nor TAF.
So the Fed has announced two new facilities for those institutions. The first one is the Term Securities Lending Facility (TSLF), to open on March 27. At this new window, all primary dealers -all banks and brokers that trade in government securities with the Fed- are allowed to borrow up to $200bn of government securities for 28 days. The minimum quality of the assets seems to be the same as those for than for the TAF (they include federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS). But in contrast with TAF this new facility lends government securities, not cash. Through the TSLF the Federal Reserve will be temporarily swapping safe government securities for risky assets. This is how these loans would look like on the balance sheet:
| Changes in the Fed's balance sheet after a $1,000M TSLF loan | ||
| Assets | US government securities | -1,000 |
| Repurchase agreements | 0 | |
| Reverse repurchase agreements | 0 | |
| Direct loans | 0 | |
| TSLF loan | +1,000 | |
| Other assets | 0 | |
| Liabilities | Currency in circulation | 0 |
| Reserve balances | 0 | |
The second institution is the Primary Dealer Credit Facility (PDCF), which started operating on March 17. This venue provides overnight cash loans to all primary dealers, at the discount window interest rate, and accepts
| Changes in the Fed's balance sheet after a $1,000M PDCF loan, offset by an open market operation | ||
| Assets | US government securities | -1,000 |
| Repurchase agreements | 0 | |
| Reverse repurchase agreements | 0 | |
| Direct loans | 0 | |
| PDCF loan | +1,000 | |
| TSLF loan | 0 | |
| Other assets | 0 | |
| Liabilities | Currency in circulation | -1,000 + 1,000 |
| Reserve balances | 0 | |
In fact, the Federal Reserve has included PDCF as a sub-entry within "Other loans" in the balance sheet, next to the discount window loans, because PDCF and discount window are in fact one and the same facility.
Here’s the balance Fed again, in December and after the PDCF opened:
| Federal Reserve's balance sheet, $ millions | |||
| Assets | Dec. 26, 2007 | Mar. 19, 2008 | |
| US government securities | 754,612 | 660,484 | |
| Repurchase agreements | 42,500 | 62,000 | |
| Reverse repurchase agreements | -40,542 | -46,143 | |
| Term Auction Facility loans | 20,000 | 80,000 | |
| Primary Dealers Credit Facility | 0 | 28,800 | |
| Direct loans | 4,535 | 125 | |
| Other assets | 52,869 | 36,603 | |
| Liabilities | Currency in circulation | 829,193 | 818,362 |
| Reserve balances | 4,781 | 3,507 | |
With its new tools, the Fed has provided liquidity without printing much money. It has temporarily absorbed risky and illiquid securities, and supplied government securities, which are risk-free. So instead of monetary policy, in the sense we traditionally have thought about it, the Fed has become a risk-absorber (temporarily, we hope). Or, to put it less kindly, a pawnbroker.
Will these new tools make it to the textbooks? It’s hard to tell whether the particular facilities (TAF, TSLF, etc.) will survive. I think that some unified, generalized form of credit to non-depository institutions will stay. But I’ll have to write about that another time.
Addendum:
Somebody asked me how the Fed conducts an "offsetting" open market operation when the Fed extends a TAF loan. This table summarizes it:
| Changes in the Fed's balance sheet after a $1,000M TAF loan with an offsetting open market operation | ||
| Assets | US government securities | -1,000 |
| Repurchase agreements | 0 | |
| Reverse repurchase agreements | 0 | |
| Teerm Auction Facility loans | +1,000 | |
| Direct loans | 0 | |
| Other assets | 0 | |
| Liabilities | Currency in circulation | (-1,000 + 1,000) |
| Reserve balances | 0 | |
The Fed extends the loan, which is an asset for the lender, and credits the bank's reserve account. (In the table I assume that the borrower withdraws the funds from the reserve account, so they're turned into currency in circulation.) The collateral doesn't show up in the balance sheet, because the Fed does not take ownership of it. At the same time, the Fed sells $1,000M worth of government securities, absorbing that same amount of cash from the banking system.
Subscribe to EconWeekly
Tuesday, February 22, 2011
Recession Fears Grow
Reuters reports that "Unsold goods are piling up in warehouses as the housing meltdown and soaring oil prices strain consumers, raising fears that already glum fourth-quarter growth prospects may tip toward recession."
"The sluggishness is apparent in the retail sector, where 70 percent of chain stores posted weaker-than-expected October sales results, according to research firm Retail Metrics.
"The sluggishness is apparent in the retail sector, where 70 percent of chain stores posted weaker-than-expected October sales results, according to research firm Retail Metrics.
"We expect the challenging retail environment to continue for the foreseeable future," Mike Ullman, chairman and chief executive officer of department store chain J.C. Penney (JCP.N: Quote, Profile, Research), said last week. He added that the company would keep inventory levels tight through 2008."
Respected economist Nouriel Roubini writes "Any recession call for the U.S. is clearly dependent on US consumption faltering. Since residential investment is only 5% of even a worsening housing recession cannot – by itself – trigger an economy-wide recession. Rather, since private consumption is over 70% of aggregate demand a sharp and persistent slowdown in consumption growth – below 1% or even negative - is necessary to trigger a full blown recessionMonday, February 21, 2011
Why Obama Should Not Have Received the Peace Prize -- Yet
President Obama's only real diplomatic accomplishment so far has been to change the direction and tone of American foreign policy from unilateral bullying to multilateral listening and cooperating. That's important, to be sure, but not nearly enough. The Prize is really more of Booby Prize for Obama's predecessor. Had the world not suffered eight years of George W. Bush, Obama would not be receiving the Prize. He's prizeworthy and praiseworthy only by comparison.
I'd rather Obama had won it after Congress agreed to substantial cuts in greenhouse gases comparable to what Europe is proposing, after he brought Palestinians and Israelis together to accept a two-state solution, after he got the United States out of Afghanistan and reduced the nuclear arm's threat between Pakistan and India, or after he was well on the way to eliminating the world's stockpile of nuclear weapons. Any one of these would have been worthy of global praise. Perhaps the Nobel committee can give him half the prize now and withhold the other half until he accomplishes one or more of these crucial missions.
Giving the Peace Prize to the President before any of these goals has been attained only underscores the paradox of Obama at this early stage of his presidency. He has demonstrated mastery in both delivering powerful rhetoric and providing the nation and the world with fresh and important ways of understanding current challenges. But he has not yet delivered. To the contrary, he often seems to hold back from the fight -- temporizing, delaying, or compromising so much that the rhetoric and insight he offers seem strangely disconnected from what he actually does. Yet there's time. He may yet prove to be one of the best presidents this nation has ever had -- worthy not only of the Peace Prize but of every global accolade he could possibly summon. Just not yet.
I'd rather Obama had won it after Congress agreed to substantial cuts in greenhouse gases comparable to what Europe is proposing, after he brought Palestinians and Israelis together to accept a two-state solution, after he got the United States out of Afghanistan and reduced the nuclear arm's threat between Pakistan and India, or after he was well on the way to eliminating the world's stockpile of nuclear weapons. Any one of these would have been worthy of global praise. Perhaps the Nobel committee can give him half the prize now and withhold the other half until he accomplishes one or more of these crucial missions.
Giving the Peace Prize to the President before any of these goals has been attained only underscores the paradox of Obama at this early stage of his presidency. He has demonstrated mastery in both delivering powerful rhetoric and providing the nation and the world with fresh and important ways of understanding current challenges. But he has not yet delivered. To the contrary, he often seems to hold back from the fight -- temporizing, delaying, or compromising so much that the rhetoric and insight he offers seem strangely disconnected from what he actually does. Yet there's time. He may yet prove to be one of the best presidents this nation has ever had -- worthy not only of the Peace Prize but of every global accolade he could possibly summon. Just not yet.
Sunday, February 20, 2011
Saturday, February 19, 2011
The odds of getting an H-1B visa
I just read about this. US Citizenship and Immigration Services (USCIS) received 163,000 applications for H1-B visas by April 7. Since that number exceeds the visa cap, the government will not consider any more applications this year (Source: USCIS, via the H1B data blog). 31,200 of the applications were from individuals with an advanced degree. The government quotas are: 20,000 for applicants with an advanced degree and 65,000 for the rest. (I wrote about the H1-B visa system a couple of weeks ago.)
The USCIS will hold two lotteries this week. The first one is for applicants with an advanced degree from a US institution (MA or higher). Applicants who are not selected in that first lottery will be pooled with the rest of the applications in the second lottery.
Unless my math is failing me, the probability of getting a work visa is then 80.4% for advanced-degree holders, and 45.5% for the rest of the applicants.
UPDATE: I'm really behind on this. USCIS already conducted the lottery (they did it on April 14, two days ago). Lucky applicants should get a notification by early June. I really recommend reading H1B data if you want timely information.
The USCIS will hold two lotteries this week. The first one is for applicants with an advanced degree from a US institution (MA or higher). Applicants who are not selected in that first lottery will be pooled with the rest of the applications in the second lottery.
Unless my math is failing me, the probability of getting a work visa is then 80.4% for advanced-degree holders, and 45.5% for the rest of the applicants.
UPDATE: I'm really behind on this. USCIS already conducted the lottery (they did it on April 14, two days ago). Lucky applicants should get a notification by early June. I really recommend reading H1B data if you want timely information.
Friday, February 18, 2011
Housing Bubble Sites
National Sites
Regional Sites
- The Housing Bubble
- The House Bubble
- Housing Panic
- Paper Economy a US Real Estate Bubble Blog
- Housing Doom Housing Bubble
- Doctor Housing Bubble
- Bubble Markets Inventory Tracking
- Priced Out Fovever
- HousingTracker
- Matrix
- The Real Estate Bloggers
- The Mortgage Lender Implode-O-Meter
- Housing Bubble Casualty
- Housing Bubble Bust
- Bubble Pictures
- Bubble News Network
- Lawrence Yun Watch
- Is There a Housing Bubble
- Real Estate Comments
Regional Sites
- DC Home Prices
- Greater Northern VA Housing Bubble Fallout
- Frankly Realty (Virginia)
- Baltimore Metro Area Housing Blog
- Baltimore Housing Bubble
- Chicago Bubble Blog
- Irvine Housing Bubble
- The Jersey Shore RE Bubble
- New Jersey Real Estate Report
- Socket Site (San Francisco)
- Patrick.net (San Francisco)
- Bay Area Real Estate Blog
- Burbed (San Francisco)
- Marin Real Estate Bubble
- Sonoma Housing Bubble
- Seattle Bubble
- Calgary Contrarian
- Vancouver Housing Market Blog
- SoCal Real Estate Bubble Blog
- Flippers in Trouble (Sacramento)
- Portland Housing
- Proffesor Piggington (San Deigo)
- Pacific Beach Bubble
- Boston Bubble
- California Housing Forecast
- Massachusetts Housing Market
- Vancouver Condo Info
- New York City Housing Bubble
Thursday, February 17, 2011
So Much Happening in Washington and So Little To Show for It, So Far
The Senate Finance Committee is set to vote Tuesday on a healthcare bill that just got a seal of approval from the Congressional Budget Office and is very likely to garner the vote of Republican Senator Olympia Snowe -- a twofer that gives the bill preeminence over four other healthcare bills that have emerged from House and Senate committees over these long months. Unlike those bills, though, the Senate Finance bill won't it have a public insurance option to compete with private insurers. Nor does it allow Medicare to use its bargaining power to negotiate lower drug prices, or adequately subsidize millions of middle-class families who will be required to buy health insurance that will be hard for them to afford. In short, it's a great deal for private insurers and Big Pharma but not such a great deal for middle-class Americans.
Meanwhile, the House Banking Committee is quietly circulating a draft set of reforms of financial markets likely to become the basis for whatever legislation emerges to fix the Street. Barney Frank, who heads the Committee, is a thoughtful progressive. But the draft has gaping loopholes that will let most financial firms escape -- such as one that exempts corporations that deal in financial derivatives from any requirements for capital, business conduct, record-keeping, and reporting if they use derivatives for the purpose of "risk management," which is the very thing they all claim they're doing. Neither the draft bill, nor the Committee, nor anyone on the Hill having anything to do with financial regulation, is raising what I consider to be the two key reforms necessary for avoiding another financial meltdown -- resurrecting the Glass-Steagall Act that once separated commercial from investment banking, and applying antitrust laws to the remaining five biggest Wall Street banks so none is "too big to fail."
At the same time, environmental legislation is now slinking its way through Congress. The Waxman-Markey climate bill was passed by the House in June; John Kerry and Barbara Boxer have now released a Senate version. All four legislators claim to be progressives concerned about the environment, but the bills are, frankly, far short of what's needed. Waxman-Markey gives away 85 percent of pollution permits to the nation's biggest polluters, and the "cap" it proposes on overall carbon emissions would cut greenhouse gas emissions only by an estimated 2 to 4 percent by 2020 compared to the UN reference year of 1990. (If America was to play its appropriate role in a global climate deal, the reduction would be more like 40 percent, and the U.S. would also provide financing and technology so developing countries could reduce their emissions by a comparable amount.) The Kerry-Boxer bill has a stronger cap on emissions but it's still far short of what's necessary -- and it leaves out the hardest part, which is the actual cap-and-trade mechanism. Kerry and Boxer are leaving that to the Senate Finance Committee, of all places.
And what's happening on the job's front? Nothing except a blip of interest in tax credits to small businesses that create new jobs. That's not a bad move (I suggested it myself), but it's rather like bailing out the ocean with a teacup. If that's all there is, we're headed toward two years of double-digit unemployment. No one on the Hill or in the Administration is yet willing to say openly and clearly that the stimulus plan must be larger, and continued through 2010 and 2011.
My friends in the Administration and on the Hill repeatedly tell me "don't make the perfect the enemy of the better," or words to that effect. Politics is the art of the possible, blah blah blah. True. But in each of these areas -- healthcare, financial regulation, environment, and jobs -- the "better" is really not that much better. Forget perfect; anything that offered real reform would suffice for now. But in every case, what should be the centerpieces of reform are being left out.
Why? Congress is overwhelmed with corporate and Wall Street lobbyists (far too many of whom are former Democratic office holders). The White House is trying best it can to push and prod in the right direction but there's too much going on, too many arenas where private interests are framing the debate and stifling major reform, and too many friends of friends and relations of relations who are making tons of money working for the other side. The public doesn't know what's going on because the national media would rather report on the sexual escapades of famous people or social trends or high finance (a recent Pew study of economic reporting shows the vast majority of stories about the Great Recession have focused on Wall Street rather than Main Street). And progressives -- that is, progressive organizations in our nation's capital -- have been remarkably and consistently outgunned, outmaneuvered, or just plain ineffectual. This is largely due to the fact that they're sitting in Washington rather than organizing and mobilizing the rest of the country.
And I haven't even brought up Afghanistan.
Meanwhile, the House Banking Committee is quietly circulating a draft set of reforms of financial markets likely to become the basis for whatever legislation emerges to fix the Street. Barney Frank, who heads the Committee, is a thoughtful progressive. But the draft has gaping loopholes that will let most financial firms escape -- such as one that exempts corporations that deal in financial derivatives from any requirements for capital, business conduct, record-keeping, and reporting if they use derivatives for the purpose of "risk management," which is the very thing they all claim they're doing. Neither the draft bill, nor the Committee, nor anyone on the Hill having anything to do with financial regulation, is raising what I consider to be the two key reforms necessary for avoiding another financial meltdown -- resurrecting the Glass-Steagall Act that once separated commercial from investment banking, and applying antitrust laws to the remaining five biggest Wall Street banks so none is "too big to fail."
At the same time, environmental legislation is now slinking its way through Congress. The Waxman-Markey climate bill was passed by the House in June; John Kerry and Barbara Boxer have now released a Senate version. All four legislators claim to be progressives concerned about the environment, but the bills are, frankly, far short of what's needed. Waxman-Markey gives away 85 percent of pollution permits to the nation's biggest polluters, and the "cap" it proposes on overall carbon emissions would cut greenhouse gas emissions only by an estimated 2 to 4 percent by 2020 compared to the UN reference year of 1990. (If America was to play its appropriate role in a global climate deal, the reduction would be more like 40 percent, and the U.S. would also provide financing and technology so developing countries could reduce their emissions by a comparable amount.) The Kerry-Boxer bill has a stronger cap on emissions but it's still far short of what's necessary -- and it leaves out the hardest part, which is the actual cap-and-trade mechanism. Kerry and Boxer are leaving that to the Senate Finance Committee, of all places.
And what's happening on the job's front? Nothing except a blip of interest in tax credits to small businesses that create new jobs. That's not a bad move (I suggested it myself), but it's rather like bailing out the ocean with a teacup. If that's all there is, we're headed toward two years of double-digit unemployment. No one on the Hill or in the Administration is yet willing to say openly and clearly that the stimulus plan must be larger, and continued through 2010 and 2011.
My friends in the Administration and on the Hill repeatedly tell me "don't make the perfect the enemy of the better," or words to that effect. Politics is the art of the possible, blah blah blah. True. But in each of these areas -- healthcare, financial regulation, environment, and jobs -- the "better" is really not that much better. Forget perfect; anything that offered real reform would suffice for now. But in every case, what should be the centerpieces of reform are being left out.
Why? Congress is overwhelmed with corporate and Wall Street lobbyists (far too many of whom are former Democratic office holders). The White House is trying best it can to push and prod in the right direction but there's too much going on, too many arenas where private interests are framing the debate and stifling major reform, and too many friends of friends and relations of relations who are making tons of money working for the other side. The public doesn't know what's going on because the national media would rather report on the sexual escapades of famous people or social trends or high finance (a recent Pew study of economic reporting shows the vast majority of stories about the Great Recession have focused on Wall Street rather than Main Street). And progressives -- that is, progressive organizations in our nation's capital -- have been remarkably and consistently outgunned, outmaneuvered, or just plain ineffectual. This is largely due to the fact that they're sitting in Washington rather than organizing and mobilizing the rest of the country.
And I haven't even brought up Afghanistan.
Wednesday, February 16, 2011
There Was a Reason They Called It... The Casino Economy
by Thomas Croft
02 Jul 03
In the last three years, a 'perfect storm' of rising energy costs, record consumer and corporate debt and massive trade and current account deficits joined with unsustainable investment practices, and resulted in an economic collapse. The first recession since 1929 to be primarily caused by over-investment, these 'collateral damage' investing schemes-in overseas boondoggles and sweatshops, extreme mergers, absurd dot-coms and derivative scams-all came home to roost. Enron used all of these investment tricks and more. The corruption scandals of 2001-2 completed the melt-down. Now, the world is probably in a double-dip recession, thanks partly to the scandal and continuing international disruptions.
The problem with casino bets and Russian Roulette is that somebody always loses. [CounterPunch]
Tuesday, February 15, 2011
Recession buzz: March update
Recession buzz remained stable from February at a moderate to elevated level. The Washington Post and the New York Times printed an average of 4.8 stories per day containing the word “recession,” 0.2 more than in February. And among the set of eight major US newspapers that I track every month, each one published 2.2 stories per day, about the same as in February (see Chart 1).
Chart 1 (click to enlarge)
Chart 1 (click to enlarge)
Monday, February 14, 2011
More Americans Expecting Recession in The Next Year
More Americans are expecting a recession in the next year. Consumers are waking up to the reality that the economy has a significant chance of recession next year.
Recession times are increasingly being expected. The coming holiday spending season will likely provide important clues to where consumer spending is headed. Consumer spending is about 70% of the US's GDP. Consumer spending is a key factor in a forecasting a recession.
The economic mood took a sharp turn for the worse over the past month, with 40 percent of Americans expecting a recession in the next year, according to a Reuters / Zogby poll released Wednesday.
That was a big rise from a month earlier, when 31 percent of the likely voters polled predicted a recession. The darker mood came as mounting concerns about housing and credit markets pounded Wall Street, and oil prices approached $100 per barrel.
That was a big rise from a month earlier, when 31 percent of the likely voters polled predicted a recession. The darker mood came as mounting concerns about housing and credit markets pounded Wall Street, and oil prices approached $100 per barrel. (CNBC 1/21/07)
Recession times are increasingly being expected. The coming holiday spending season will likely provide important clues to where consumer spending is headed. Consumer spending is about 70% of the US's GDP. Consumer spending is a key factor in a forecasting a recession.
Sunday, February 13, 2011
Why the Dow Broke 10,000, and Why You Should Still Watch Your Wallet
How did the Dow break 10,000 when the rest of the economy is in the toilet?
1. Corporate earnings are up -- mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies' costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don't have jobs or are afraid of losing them, they won't buy, and company profits will disappear.
2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can't keep up forever, though.
3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That's good news for the Street because it means money stays cheap -- and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street's earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.
4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you're one of the last in.
In other words, this is all temporary fluff, folks. Anyone who hasn't learned by now that there's almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.
1. Corporate earnings are up -- mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies' costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don't have jobs or are afraid of losing them, they won't buy, and company profits will disappear.
2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can't keep up forever, though.
3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That's good news for the Street because it means money stays cheap -- and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street's earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.
4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you're one of the last in.
In other words, this is all temporary fluff, folks. Anyone who hasn't learned by now that there's almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.
Saturday, February 12, 2011
Who's Paying For Your Fix?
by Kate Duncan
May/Jun 2003 Issue
Unless your morning latte was a fair trade blend, it probably cost more than what the farmer who picked the beans earns in a day.
Conventional coffee prices are at their lowest in a century, even below the cost of production. Farmers have been leaving the fruit to rot on the tree, pulling the kids out of school, abandoning the family land and pouring into the cities to find non-existent work. That’s why, as the most heavily traded commodity after oil, and the most common beverage after water, coffee is a major focus of the fair trade movement.
If your morning latte was a fair trade brew, it means the person who farmed the beans is earning enough to support his family. This is all well and good, but the way fair trade is usually explained - with prices, numbers and statistics - ignores it’s lasting benefits. The true point of fair trade is the cultural, communal, and environmental stability it bolsters.
A farmer who sells through fair trade is a member of a cooperative that is a vehicle for community empowerment. And not just a neighborhood watch: The people typically organized via fair trade are those whom the free market has filtered to the lowest economic stratum. Rather than maneuvering them into a position where they’re forced to take what they can get, fair trade recognizes farmers as equal partners, a platform from which they can command more control over their business and lives.
'Fair trade is a different kind of business relationship between the producer and buyer, which has been an inspiration to help these communities pull together instead of caving to the pressure of all the things trying to blow them apart,' says Monika Firl. Monika heads up producer relations for Cooperative Coffees, and as such, led half a dozen coffee roasters and me (as a grateful representative of Idyll Development Foundation, one of Cooperative Coffee’s funders) on a buying trip to farmers’ co-ops in Nicaragua, Guatemala, and Mexico in February, where we were able to see the effect for ourselves. [Clamor]
Friday, February 11, 2011
The Fed's new tools (I)
By popular demand, I improved and expanded the notes I published a couple of weeks ago about the new tools of the Federal Reserve. I have added instruments that are not in place yet but the Fed considers using. I have ended up with a very long post, so I have broken it down into two parts. The second part will come out next week.
(I thought somebody would like to use these posts as a refresher, a summary, or even class notes. Jim Hamilton has a few great posts on the subject: September 23, December 14, December 16, March 15. The New York Federal Reserve made its own pocket version. And Greg Ip wrote a rather educational piece. Enjoy.)
UPDATE (4/13/2008): The link to the New York Fed's pocket version does not work any more. But you can find that document here now. Sorry about that.
(For the moment, regard “repurchase agreements” as loans to banks.)
The sum of currency in circulation and reserve balances is the monetary base (M0). The Federal Reserve’s target, however, is not M0 but the federal funds rate.
Banks keep deposits at the Fed to meet reserve minimums required by the Fed and to clear financial transactions. Institutions with balances in excess of reserve requirements lend reserves to institutions that don't have enough. The interest rate on those loans, typically overnight, is called the federal funds rate. That’s a market rate, determined by the supply and demand of such funds. The more reserves, the lower the fed funds rate, and vice versa.
Source: Federal Reserve Bank of New York
(I thought somebody would like to use these posts as a refresher, a summary, or even class notes. Jim Hamilton has a few great posts on the subject: September 23, December 14, December 16, March 15. The New York Federal Reserve made its own pocket version. And Greg Ip wrote a rather educational piece. Enjoy.)
UPDATE (4/13/2008): The link to the New York Fed's pocket version does not work any more. But you can find that document here now. Sorry about that.
* * *
Source: Federal Reserve, H.4.1 release.
The central bank has a balance sheet, as any other bank. As assets, it holds primarily securities issued by the government and loans to banks. As liabilities, it has currency (the cash in your pockets) and reserve balances. Reserves are deposits that regular banks keep at the central bank. When a bank needs currency it withdraws from its deposit, effectively turning it into notes and coins that you and I can use. As you will see in a minute, reserves are a key element in monetary policy.
This was the balance sheet of the Federal Reserve on
| Federal Reserve's balance sheet, $ millions (Aug. 15, 2007) | ||
| Assets | US government securities | 789,601 |
| Repurchase agreements | 24,000 | |
| Reverse repurchase agreements | -31,941 | |
| Direct loans | 264 | |
| Other assets | 37,058 | |
| Liabilities | Currency in circulation | 813,085 |
| Reserve balances | 5,897 | |
(For the moment, regard “repurchase agreements” as loans to banks.)
The sum of currency in circulation and reserve balances is the monetary base (M0). The Federal Reserve’s target, however, is not M0 but the federal funds rate.
Banks keep deposits at the Fed to meet reserve minimums required by the Fed and to clear financial transactions. Institutions with balances in excess of reserve requirements lend reserves to institutions that don't have enough. The interest rate on those loans, typically overnight, is called the federal funds rate. That’s a market rate, determined by the supply and demand of such funds. The more reserves, the lower the fed funds rate, and vice versa.
Source: Federal Reserve Bank of New York
