Ben Benanke's Incompetent

[flow5]

Revision to money numbers wasn't drastic. Look for seasonal top in stocks as of Aug month-end, followed by decline into late Oct.

[flow5]

I'm not comfortable with the sudden contraction in the volume of currency held by the non-bank public. The public determines its holdings of currency based on the needs of trade, and is influenced by several factors: (1) inflation, (2) underground economy, (3) tax avoidance, & (4) increase in economic activity, etc.

As the currency-deposit ratio has suddenly dropped, the stock market should be topping & in the process of a downtrend (i.e., without further stimulus).

[bimetalaupt]

Flow5,
With Bonds and Stocks both overpriced per James Mackintosh of the FT.. Gold is the only bargain.. Well we could buy Stocks in Oct of any year..

Just a thought,
Bi Metal Au Pt
Great Job.. K4U

[Aman A.K.A. Ahamburger]

Oct, just in time for the proceeds from my house.

I liked the info on the BND and how 14 states are looking at the same thing. That was something that was brought up as a solution to imbalances in money distribution.

[lifewasgood]

The stimulus will come after the dept ceiling is raised. Unfortunately it will be just as before and not find its way to main street, but wall street will enjoy the easing.

Thanks Flow and Bimetal

I enjoy your post and commentary.

[flow5]

The Fed Is Tightening! Really!
By Daniel Gross

finance.yahoo.com/blogs/daniel-gross/fed-tightening-really-162741764.html?sec=topStories&pos=4&asset=&ccode=

Don't look now, but the Federal Reserve HAS ALREADY STARTED TO TIGHTEN MONETARY POLICY.

When it's in an expansive mode, the central bank increases the size of its balance sheet, buying or accepting assets in exchange for cash.

When it's in a less expansive mode, it REDUCES THE SIZE OF ITS BALANCE SHEET — sometimes by selling assets, and sometimes by simply not redeploying cash that comes into its coffers. In other words, it can tighten without raising interest rates. And that's precisely what happened last week.

Every Thursday afternoon, the Fed gives us insight into its holdings by publishing a report on "Factors Affecting Reserves." Here's the most recent release, and here is last week's release.

In the release, the first table (table 1) shows the factors affecting reserves — all the different stuff the Fed has on its balance sheet. Table 8 provides the TOTAL ASSETS of the Federal Reserve System. And if you look at Table 8, it clearly shows that the Fed's total assets on Wednesday, July 20, were $2,875,211,000, down $6.793 billion from the July 13 total.

The reason for the decline is that several components of the Fed's balance sheet are in RUN-OFF MODE. In other words, if the Fed simply stands pat on asset purchases, or rolls maturing treasuries into new treasuries, its balance sheet will shrink. Consider the huge pile of mortgage-backed securities (MBS) the Fed purchased as part of its first quantitative easing initiative in 2009 and 2010.

As this data set shows, the Fed's holding's of MBS peaked a year ago at $1.12453 trillion. And they have been STEADILY SHRINKING EVER SINCE, as people pay off mortgages or refinance. In the most recent week, the Fed's holdings of MBS fell $4.67 billion to $904 billion.

In addition, several crisis-era Fed initiatives that had the effect of expanding its balance sheet are tapering off. The TALF (Term Asset-Backed Securities Loan Facility), established to help the asset-backed securities market, shrinks with each passing week. The balance of such loans outstanding stands as $12.422 billion, off $24 billion in the past year. Then there are the Maiden Lane vehicles, which were set up to remove junky assets from the balance sheet of Bear Stearns (Maiden Lane I) and AIG (Maiden Lane II and III). In each instance, the Fed lent money to the vehicle to buy the assets. The loans are paid down as the securities they bought mature or throw off interest income. Last week, Maiden Lane's assets fell by $3.14 billion, as it paid off about $3.2 billion of its loan, while Maiden Lane III's assets fell about $840 million, as it paid off a similar amount of its outstanding loan balance. All three are likely to be moneymakers for the Fed, and hence for Treasury. Taken together, the TALF and three Maiden Lanes represent about $68 billion on the Fed's balance sheet that is melting away.

Of course, a few billion on a balance sheet of $2.9 trillion isn't an awful lot. But it shows that, beyond the rhetoric, and for all its talk of accommodation, the Fed's do-nothing position is now to have its balance sheet shrink.

===================

This is the normal seasonal pattern

[flow5]

The high in the currency-deposit ratio for the last 13 years occured on OCTOBER 1, 2007. The DJIA peaked @ 14,164.53 on Oct 9th one week later that year.

[flow5]

DAILY AVG IN MILLIONS
Two weeks ended % CHANGE IN WEEKLY AVERAGES
7/13/2011 –6/29/2011..……………………………………….…. 13-wk…26-wk…52-wk
Total reserves………………………………………..……….……….….54.5….117.8…….56.4
Non-borrowed reserves……………………………………….……..57.0....129.1.……65.3
Required reserves…………………………..………………….……....12.7…...27.8…....20.5
Excess reserves…………………………………….……….…..….....…56.7….123.8….…58.6
Borrowings from Fed…………………………..…………………….-136.8..-143.3..….-81.1
Free reserves……………………………………………………….……...59.3….136.2….…68.3

DAILY AVG IN MILLIONS
Two weeks ended % CHANGE IN WEEKLY AVERAGES
6/29/2011 –6/15/2011..……………………………………….…. 13-wk…26-wk…52-wk
Total reserves………………………………………..……….……….….57.4….110.3…….50.8
Non-borrowed reserves……………………………………….……..60.1....121.6.……59.6
Required reserves…………………………..………………….……....30.1…...25.4…....21.9
Excess reserves…………………………………….……….…..….....…58.8….116.3….…52.6
Borrowings from Fed…………………………..…………………….-137.7..-142.4..….-81.0
Free reserves……………………………………………………….……...61.8….128.7….…62.2

Two weeks ended % CHANGE IN WEEKLY AVERAGES
5/18/2011 --5/4/2011..……………………………………….…. 13-wk…26-wk…52-wk
Total reserves………………………………………..……….…….….142.0…..105.0……40.8
Non-borrowed reserves…………………………………….……..147.4....116.3.……49.7
Required reserves…………………………..………………….……....18.4…...19.6…....15.4
Excess reserves…………………………………….……….…..…...…150.0….110.9….…42.4
Borrowings from Fed…………………………..…………………….-128.7..-134.1..….-80.0
Free reserves……………………………………………………….…….155.9….123.3….…52.0

==========================

Policy has now turned contractionary.

[flow5]

First Mid-Illinois Bank & Trust to Offer Commercial INTEREST CHECKING ACCOUNT to All Business Customers
MATTOON, Ill., July 25, 2011 /PRNewswire/ -- As the result of recent regulatory changes that took effect July 21, 2011, First Mid-Illinois Bank & Trust, N.A., is rolling out a commercial interest business checking account that provides interest for all its business customers effective August 1.
"While the interest rates starting out are modest," Clay Dean, Senior Vice President of Business Development at First Mid, said, "they will be substantially more than the 0% that other banks are currently paying their commercial depositors." Dean was part of the team that developed the account and served as a member of the Regulation Q Working Group sponsored by the American Bankers Association. The group included many community banks and larger global institutions such as Goldman Sachs, Citigroup and Chase.
Positive News for Business Customers

Up until the recent regulatory change, only sole proprietors and non-profits could be paid interest on deposits. Larger commercial depositors could only receive an "earnings credit" that was based upon the amount of funds on deposit. Now, First Mid offers all businesses the opportunity to earn interest with its commercial interest checking account. They are also bundling this account with other services to add even more value for their customers such as debit cards, online business banking, bill pay, ACH origination and more.

"Part of the original intent of the prohibition against paying interest was to encourage a more stable base of bank deposits and to discourage banks from making risky investments in order to achieve a more competitive rate of return," Dean continued. "We believe the regulatory change will help community businesses in these challenging economic times."

Legal Changes Resulting from the Dodd-Frank Act
As of July 21, Regulation Q was repealed. As a result, there is no longer a prohibition against payment of interest on demand deposits (Regulation Q) as mandated by section 627 of Title VI of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank Act").

Specifically, the Dodd-Frank Act repeals section 19(i) of the Federal Reserve Act, section 18(g) of the Federal Deposit Insurance Act, and part of section 5(b)(1)(B) of the Home Owners' Loan Act.
About First Mid

A subsidiary of First Mid-Illinois Bancshares, First Mid is headquartered in Mattoon, Illinois, and has assets of more than $1.5 billion. First Mid provides comprehensive banking, trust and wealth management services through its operating subsidiaries First Mid-Illinois Bank & Trust, N.A., and First Mid Insurance Group. It operates banking centers and ATMs in over 25 communities in Illinois. More information about First Mid is available at www.firstmid.com.

====================

This will result in a higher cost of loan-funds, lower bank profits, and dis-intermediation among the non-banks.

[lifewasgood]

Ben is not incompetent, he is in charge!

[flow5]

"In monetary economics, the quantity theory of money is the theory that money supply has a direct, proportional relationship with the price level."

"The theory was challenged by Keynesian economics,[1] but updated and reinvigorated by the monetarist school of economics. While mainstream economists agree that the quantity theory holds true in the long run, there is still disagreement about its applicability in the short run. Critics of the theory argue that money velocity is not stable and, in the short-run, prices are sticky, so the direct relationship between money supply and price level does not hold."
WIKIPEDIA
===============

No, MV doesn't equal PQ.

"With the development of national income and product accounts (Keynesian economics), emphasis shifted to national-income or final-product transactions, rather than gross transactions"

[lifewasgood]

The U.S. Federal Reserve gave out $16.1 trillion in emergency loans to U.S. and foreign financial institutions between Dec. 1, 2007 and July 21, 2010, according to figures produced by the government's first-ever audit of the central bank.

Last year, the gross domestic product of the entire U.S. economy was $14.5 trillion.

Of the $16.1 trillion loaned out, $3.08 trillion went to financial institutions in the U.K., Germany, Switzerland, France and Belgium, the Government Accountability Office's (GAO) analysis shows.

Additionally, asset swap arrangements were opened with banks in the U.K., Canada, Brazil, Japan, South Korea, Norway, Mexico, Singapore and Switzerland. Twelve of those arrangements are still ongoing, having been extended through August 2012.

Out of all borrowers, Citigroup received the most financial assistance from the Fed, at $2.5 trillion. Morgan Stanley came in second with $2.04 trillion, followed by Merill Lynch at $1.9 trillion and Bank of America at $1.3 trillion.

The audit also found that the Fed mostly outsourced its lending operations to the very financial institutions which sparked the crisis to begin with, and that they delegated contracts largely on a no-bid basis. The GAO report recommends new policies that would eliminate such conflicts of interest, and suggests that in the future the Fed should keep better records of their emergency decision-making process.

The Fed agreed to "strongly consider" the recommendations, but as it is not a government-run institution it cannot be forced to do so by lawmakers. The seven-member board of governors and the Fed chairman are, however, appointed by the President of the United States and confirmed by the Senate.

www.rawstory.com/rs/2011/07/21/audit-fed-gave-16-trillion-in-emergency-loans/

[flow5]

That figure's grossly distorted. In contrast, Member bank Discount Window borrowings from the District Reserve Banks are reported on the Consolidated Condition Statement (H4.1 release), as the volume outstanding ending any given week.

The article you posted reports the money borrowed each day by foreign institutions and repeatedly adds each day's figure.

So one figure reports the average daily volume in a week while your article's figure totals each day's outstanding balance for several years.

What if the FED added Fed credit (2 trillion +), each & every day for years?

[lifewasgood]

Regardless, it is still 16 Trillion dollars with Conflict of Interest plastered all over it. It makes the President, House and Senate all look foolish for fighting over a 2.4 Trillion increase in the National Debt Ceiling. It also shows that our government is not in control of the country.

As much as I enjoy reading your provided links, articles, and numbers, they are all now suspect knowing 16 Trillion slipped out the back door.

[flow5]

"Consistent with provisions in the Federal Reserve Act, branches and agencies of foreign banks OPERATING IN THE UNITED STATES have the same access as domestic banks to the Fed's discount window, which is used for borrowing short-term funds. Moreover, many foreign-owned institutions operating in the United States experienced funding problems similar to those experienced by domestic institutions."

The numbers you presented are sensationalized.

[lifewasgood]

Sensationalized by the GAO?

Or is it sensationalized only becomes the amount is so mindbogglingly that we cannot grasp the reality of what has occurred?

[flow5]

www.gao.gov/new.items/d11696.pdf

The 16.1 trillion figure does not appear in the GOA's report.

[lifewasgood]

I can't wait for the congressional hearings to see how the 16.1 Trillion is explained and challenged and explained over again. This should provide even more insight as I learn so much when Ben opens his mouth and speaks.

[Driftr]

Man, things have changed. Back when I worked at a bank for most of the 90s the stigma associated with needing to go to the discount window was so great that we'd never even consider it.

[flow5]

Prior to Jan 2003, many banks borrowed at below market rates at the FED's discount window and relent the money for profit. Now the rate is adjusted to a level of 1% above the FFR (a penalty rate).

www.newyorkfed.org/aboutthefed/fedpoint/fed18.html

"The passage of the Dodd-Frank Act in July 2010 requires the disclosure of details of loans made under traditional discount window programs and somewhat limits the Federal Reserve's emergency lending authority"

[flow5]

Money Supply Growth Shows Stimulus Finally Getting Banks To Lend More
Jul. 26 2011 - 1:26 pm
by Robert McTeer

For those of us seeking relief from the hot air in Washington and the rest of the country, it comes in a little noticed BOUNCE IN THE MONEY SUPPLY STATISTICS. The Fed’s latest estimates for M2, in its H.6 release on July 21, shows the growth rate for the past 3 months at 8.2 percent; the past 6 months at 6.8 percent; and the past 12 months at 6.0 percent. These numbers are a welcome increase from the 5 percent level they were all stuck at throughout the recent round of quantitative easing.

The Fed’s bond purchases fed the banks’ appetite for excess reserves, but didn’t give them enough to stimulate sufficient lending and investing to push up the rate of money growth. They were sufficient to produce 5 percent money growth, but not more. That doesn’t mean they did no good since one must presume banks would have held onto their reserves even tighter had the supply not been increased.

Measured by short-term interest rates, Fed policy has been super easy “for a considerable period.” Measured by money growth, however, Fed policy has been overly tight for the circumstances. The recent pick-up in money growth is a welcome sign that banks are finally BEGINNING TO USE THEIR EXCESS RESERVES TO MAKE MONEY-CREATING LOANS & INVESTMENTS. If money growth continues its acceleration for a prolonged period it will finally trigger the beginning of the long awaited exit strategy of withdrawing reserves to offset the growth of the money expansion multiplier. But, meanwhile, let’s enjoy the long overdue stimulus to the economy.

==================

3 MONTHS IS A SHORT TIME BUT ITS IMPACT IS IMMEDIATE

[flow5]

WASHINGTON -(Dow Jones)- The U.S. Federal Reserve received $6.32 billion in competitive bids in a sale that is part of an effort intended to DRAIN EXCESS RESERVES from the financial system.

The Fed on Tuesday announced results of the latest TERM DEPOSIT AUCTION. The Fed held the sale Monday. It awarded a total of $5.00 billion of competitive bids through its term deposit facility.

The auction had a bid-to-cover ratio of 1.26, which acts as an indication of demand.

The interest rate, called the stop-out rate, was 0.280%.

The Fed said 54 bids were submitted.

The bank awarded an additional $87.8 million in noncompetitive bids in the auction of $5.0 billion in 28-day term deposits.

The Fed injected money into the financial system as it fought the recession and financial crisis, and banks accumulated excess reserves. Too much money in the system can excite inflation. With term deposits, banks set up INTEREST-BEARING DEPOSITS AT THE CENTRAL BANK, similar to certificates of deposits that banks offer to retail customers. The facility gives banks an EXTRA INCENTIVE TO KEEP THEIR MONEY AT THE FED instead of lending it to companies and households, making credit harder to get.

==================

Dollar volume implies this is not a drill. FED is actually slowing the current pace of Reserve Bank Credit expansion.

[flow5]

A Bit More on That Fed Rescue Idea
Published: Monday, 25 Jul 2011 John Carney
Senior Editor, CNBC.com

The Federal Reserve can definitely SELL ITS $1.6 TRILLION PORTFOLIO OF TREASURYS & USE THE PROFITS TO FUND THE U.S. GOVERNMENT IF THE DEBT CEILING ISN'T RAISED. This could allow the government to fund its on going obligations without raising taxes or incurring new debt.

I pointed out this possible relief from a debt ceiling debacle this morning but several people have asked for a better explanation of how this would work. Others, including my colleague Eamon Javers, have challenged the idea that the Fed would do this.

So let’s run through the mechanics of this.

The government spends more than it takes in from taxes and other revenue sources. This gap between spending and revenue is often called the budget deficit.

The government borrows the money to pay for the additional spending.

It pays interest on the money it borrows, and this interest becomes another kind of government spending.

Congress has set a limit on the overall amount of debt the government can accumulate. If we reach that limit, the government is not permitted to borrow any more money. No new bonds can be issued.

The reason the debt ceiling is a potential crisis is that we’re running into the debt limit. If we cannot borrow or find a way to either immediately raise revenue or cut spending, we’ll have to stop paying certain kinds of obligations. Not all of them, of course. We’ll still have some income. But the government currently borrows around $125 billion each month—and so we’d need to find a way to take in an additional $125 billion each month or cut $125 billion from our monthly spending.

ONE POTENTIAL SOURCE OF NEW REVENUE IS THE FEDERAL RESERVE WHICH IS REQUIRED BY LAW TO REMIT ITS PROFITS TO THE TREASURY DEPARTMENT. If the Fed sold part of its enormous Treasury holdings, the profits from these sales would be new revenue for the government. That revenue isn’t borrowed—and so it doesn’t count as new debt.

The Fed could sell even more than just its Treasuries. It has acquired a portfolio with lots of other financial assets that could be sold.

All profits would be revenue for the Treasury Department.

Of course, no one knows exactly how much money this would generate.

It’s never been done before. It’s really only a possibility because of the massive expansion of the Fed’s balance sheet in recent years.

I know it sounds a bit mind-boggling to say the Fed could sell the U.S. government debt it bought to prop up the economy and use the profits from those sales to fund the U.S. government. It almost sounds like the government is double dipping, issuing the same debt twice.

In a way, this is right. Welcome to the wonderful world of modern monetary policy.

Javers objected that the Fed selling Treasurys would drive prices down. This is usually what happens when the Fed sells. But I’m not sure it would happen this time around. Think about it. With the Treasury Department not selling any new bonds, there would be a market shortage. The Fed could sell without driving up interest rates or prices down because it would simply be filling the gap left by the Treasury Department’s exit.

Would this be “massively contractionary?" Ordinarily, it might. But in this case the proceeds from the sale would go to fund government spending—which could actually be economically expansionary. Certainly it wouldn’t be any more contractionary than a budget deal that includes massive tax hikes and massive spending cuts.

Will this happen? I’m not so sure. It’s very far afield from the usual actions taken to support monetary policy. Quite a few of the bigwigs at the Fed would likely object to engaging in this kind of creative policy making.

On the other hand, some inflation hawks may view the temporary lack of new bond issuances as an opportunity for the Federal Reserve to shrink its balance sheet without shrinking the economy.

==============

for each asset the Fed owns (assets are posted on it's balance sheet), there is a corresponding liability (also posted on the other side of it's balance sheet)

so, if the FED reduces it's assets, it must also write down its liabilities. i.e., if Treasurys are sold, then reserve balances are written off in the process (i.e., both sides of the balance sheet contract together).

[flow5]

Stanford Professor Not Buying Whining About Bank Equity Requirements
By Matt Levine

Stanford B-school prof Anat Admati has a piece in DealBook arguing that banks should have much higher equity cushions and that you should ignore banks’ complaints that those cushions will lower ROEs.

We love this article only because she says something that should be engraved on the foreheads of anyone who wants to comment on bank equity:

Bankers use confusing language that presents equity, or “capital,” as a pile of money that banks must “hold in reserve” or “set aside” passively. This confuses capital requirements, which concern funding only, with liquidity or reserve requirements, which concern how funds are invested. IT IS YOU, INVESTORS, WHO HOLD BANKS' EQUITY OR CAPITAL, NOT THE BANKS THAT ISSUED IT.

Agreed! Except that we usually see journalists saying that banks will have to “hold capital.” As far as we can tell banks mostly know what capital is.

In general the column is a summary and popularization of a longer paper comprehensively examining and rejecting various arguments against increasing bank equity requirements. Admati makes the basic Modigliani-Miller point that considering return on equity while ignoring capital-structure risk is a mistake:

Since investors must be compensated for bearing risk, HIGHER LEVERAGE INCREASES THE REQUIRED, OR EXPECTED, RETURN ON EQUITY. To judge whether a manager has created value, one cannot simply look at the return on equity; one must ADJUST FOR RISK. A bank manager can attempt to reach a “target return on equity” by taking on more risk and by using more leverage, but this, in and of itself, does not create value. It does, however, increase fragility and systemic risk.

But, of course, equity holders like the increased leverage because it gives them option value, as THEY GET ALL THE UPSIDE WHILE CREDITORS AND/OR THE GOVERNMENT BEAR THE DOWNSIDE. That said, equity holders too might prefer somewhat reduced risk of being written down to zero or almost zero a la Lehman and Bear.

dealbreaker.com/2011/07/stanford-professor-not-buying-whining-about-bank-equity-requirements/

[flow5]

Can Treasury just go overdrawn at the Fed?
Jul 27, 2011 01:04 EDT

John Carney has an intriguing post today: what if, in the short to medium term, the debt ceiling really doesn’t matter at all?

This is nothing to do with the 14th Amendment or with coin seignorage — this is just the simple mechanics of bank accounts. Treasury has an account at the Fed; at last count it was in credit to the tune of roughly $77 billion. Money’s coming in; money’s going out. Come August 2, it’ll be down to zero. But hey, zero’s just a number. We’ve all gone overdrawn at our bank at some time or another: why should Treasury be any exception?

The idea here is that after August 2, Treasury can simply carry on with business as usual. Money will come in to its bank account; money will go out. And the balance will dip below zero: Treasury will have an overdraft at the Fed. You think the Fed’s going to bounce Treasury’s checks?

The question is whether the overdraft counts as national debt for the purposes of calculating the debt ceiling. And Carney thinks there’s a good case to be made that it doesn’t:

The debt ceiling applies to the face amount of obligations issued under Chapter 31 of Title 31 of the U.S. Code—basically, Treasury notes and bills and the other standard kinds of government debt—and the “face amount of obligations whose principal and interest are guaranteed by the United States Government.” But overdrafts on the Federal Reserve wouldn’t be Treasurys and they aren’t explicitly guaranteed by the U.S. government.

There’s no reason why this state of affairs couldn’t continue for months. Treasury would continue to spend money, as instructed by Congress in the budget, and Treasury’s overdraft at the Fed would continue to rise. The Fed, for its part, would have two choices when it came to cashing Treasury’s checks: it could either simply print the money, or else it could sell some of its assets — it owns $1.6 trillion in Treasury bonds — and use those proceeds instead. Either way, any bank presenting a check from Treasury could cash it, no problem.

This seems to me by far the most elegant solution to the debt-ceiling problem, should Congress not get its act together by August 2. Treasury just keeps on spending, and the Fed would of course continue to honor the checks: failure to do so would trigger a massive recession and directly violate its full-employment mandate, for starters. There would be people saying that the Fed overdraft should by rights be included in the total national debt, but they would have no particular standing to try to get that point of view enforced by a court of law.

And of course if Treasury has a back-up overdraft facility at the Fed, that would only serve to shore up — rather than endanger — its precious triple-A credit rating.

So, have at it, people. Why isn’t this the first best solution to the debt-ceiling problem, should we find ourselves in that dreadful situation?

blogs.reuters.com/felix-salmon/2011/07/27/can-treasury-just-go-overdrawn-at-the-fed/

[flow5]

In early April 1933 Congress passed legislation that:

subject to the limitation that the Reserve banks may not hold at any one time more than $3 billion (revised to $5 billion), of securities purchased directly from the Treasury

This is regarded by many, including members of Congress and some Secretaries of the Treasury, as being more in the nature of an "overdraft" privilege. This Treasury borrowing privilege amends Sec. 14 (b) of the Federal Reserve Act.

It has been extended from time to time by Congress. The reasons given for this DIRECT BORROWING AMENDMENT are the convenience of the Treasury, economy in the amount of cash the Treasury would otherwise consider it prudent to hold, the smoothing out of interest rates in the money markets, and an immediate source of funds for temporary financing in the event of a national emergency."

Now the legislation has expired.

[flow5]

Reserve Administration and Account Maintenance

www.chicagofed.org/digital_assets/others/events/2011/central_bank_services/Reserve%20Administration.pdf

Overview of Reserves
-Reserve Requirements
-Clearing Balance Requirements

Management of Reserves
-Account Maintenance
-Interest on Reserves

Recent Developments
-Term Deposit Facility
-Excess Balance Account Program

================

overview on bank reserves from frb-CHICAGO

[flow5]

Federal Reserve can’t rescue debt debacle

www.washingtonpost.com/business/economy/federal-reserve-cant-rescue-debt-debacle/2011/07/26/gIQA3TSmbI_story.html

By Neil Irwin, Published: July 26

COULD THE FEDERAL RESERVE BAIL CONGRESS & THE OBAMA administration OUT OF THEIR STANDOFF OVOER THE DEBT CEILING? No way, no how, according to recent testimony by the Fed chairman and people who study the central bank.

With the government about to run out of cash to pay its bills without an increase in the legal limit on how much debt it can issue, speculation has run rampant in financial and political circles that the Fed and its chairman, Ben S. Bernanke, could use their almost unlimited ability to print money to find a way out.

Fed officials are monitoring the situation, and Bernanke and William C. Dudley, president of the Federal Reserve Bank of New York, met with Treasury Secretary Timothy F. Geithner late last week to discuss options. The Fed acts as the “fiscal agent” for the Treasury, a role akin to being the federal government’s banker.

But despite that role, considerable legal restrictions on what the Fed can do make it hard to imagine the central bank being able to address the immediate crisis. And there is no appetite within the independent-minded Fed to intervene in a fundamentally political dispute, particularly one as polarizing as how much the government should spend and how it should pay for it.

“I want to eliminate any expectation that the Fed through any mechanism could offset the impact of a default on the government debt,” Bernanke said at a congressional hearing this month.

There has been speculation that if a downgrade in the U.S. credit rating scared investors away from Treasury bonds, the Fed could step in and buy them. This approach has many problems.

For one thing, THE FED IS LEGALLY PROHIBITED FROM BUYING DEBT DIRECTLY FROM THE TREASURY. Even if it were to buy debt on the open market, which it is allowed to do, it would not help the fundamental problem of the government lacking the legal capacity to borrow enough money to pay its obligations.

Finally, the Fed’s ability to buy and sell Treasury securities is a tool of monetary policy — the way it increases and shrinks the money supply to affect economic activity and price levels. Central bankers seek to guard their independence and Fed leaders probably would increase their purchase of Treasury bonds only if they expected the unemployment rate to rise or inflation to fall lower than their 2 percent target.

The Fed’s policy committee would resist any step meant only to make up for investors losing their appetite for U.S. bonds. When a central bank “MONETIZES THE DEBT,” or prints money to lend to a government, it often loses its credibility as being politically independent and high inflation frequently follows.

The Fed probably would be poised to fulfill its normal responsibilities of offering emergency loans to banks that need help if disruptions in the Treasury bond market created a cash shortage.

“If it looks like the financial system is freezing up, the Fed has a mandate to maintain financial stability and could step in to keep things from really turning bad, but that’s if the markets really took things very negatively,” said Peter Hooper, chief economist at Deutsche Bank and a former Fed staff member. “They would not want to step in to try to ease the policy impasse on fiscal policy.”

[smackdown]

"COULD THE FEDERAL RESERVE BAIL CONGRESS & THE OBAMA administration OUT OF THEIR STANDOFF OVER THE DEBT CEILING? No way, no how, according to recent testimony by the Fed chairman and people who study the central bank."

Eliminating the "Central Bank" concept would. In our current circumstance-- the Fed can't give banks any new money because it's debts exceed our revenues. That requires the whole financial sector to actually generate REAL PROFIT on all transactions. Currently, every foreclosure is net positive to the book that booked it because the Fed replaced the credit extension with new cash while the expense incurred is now an overhead cost than can appear on the UBPR outside the core bookkeeping. WHEN we default next Tuesday, all these number-shuffling events go away and actual revenues become essential and evident. In short-- the Fed and US government have extended surplus into the economy. Even though we all know it was taken by banksters, financiers and their clients-- it is destined to return into circulation one way or another. The "another" takes out hoarders. Obama is in the Cat-Bird seat. He has told both Boehner and Reid to only knock on his door with a bona fide resolution. When that doesn't happen, he and We the People take over in order to salvage our nation from pariah. That's not a passionate statement, it's academic. The whole financial sector is eliminated when their over-control is validated as a threat to our National Stability. Thank you-- Gramm Leach Bliley Act for being what you were... a license to a group of crooks to run amok so it collectively could be stopped.

[flow5]

"John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C., told Bloomberg Television that he thinks the Treasury and the Federal Reserve COULD CO-OPERATE to avoid default for at least a couple of months.

Some analysts say the Federal Reserve could come to the administration’s aid to avoid default. The U.S. central bank COULD BUY THE GOVERNMENTS' GOLD, giving the Treasury Department enough cash to avoid default for about three months. The Fed could then sell it back to the Treasury when the crisis is over, Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington who worked at both the Fed and the Treasury... Others say the assets the Fed and Treasury absorbed during the financial crisis could be used to raise cash now"