Category Archives: Federal Reserve

Philip Pilkington: Taxation, Government Spending, the National Debt and MMT

The other day my friend Rohan Grey — a lawyer and one of the key organisers behind the excellent Modern Money Network (bringing Post-Keynesian economics to Columbia Law School, yes please!) — directed me to an absolutely fascinating piece of writing. It is called ‘Taxes For Revenue Are Obsolete’ and it was written in 1945 by Beardsley Ruml. Ruml was the director of the New York Federal Reserve Bank from 1937-1947 and also worked on issues of taxation at the Treasury during the war.

Does the Central Bank Control Long-Term Interest Rates? A Glance at Operation Twist

Although less prevalently talked about today many economists assume that while the central bank has control over the short-term rate of interest, the long-term rate of interest is set by the market. When Post-Keynesians make the case that when a country issues its own sovereign currency the rate of interest is controlled by the central bank and that the government never faces a financing constraint some economists deny this and point to the long-term rate of interest which they claim is under the control of the market. They say that if market participants decide to put the squeeze on the government they can raise the long-term rate of interest.

Banks Withdrawing from Repo Market

The Wall Street Journal reports that banks have become much less active participants in the repo market, which is a critical source of short-term liquidity for big investors. Is this due to a Fed accident or is it by design?

Rather Than Prosecutions, Fed Pressuring Banks to Pay Miscreants Less

Your humble blogger must confess to being partly wrong about the Fed’s recent realization that banksters had learned the right lesson from the crisis: crime pays. We were incredulous that the central bank had missed the fact that financial firm employees were unrepentant and their executives saw no reason to make real changes (hence all the howling about reform measures that are pretty minor relative to the damage done). From a recent post:

This story would be funny if it weren’t so pathetic.

Wolf Richter: How Fracking Is Blowing Up Balance Sheets of Oil and Gas Companies

The boundless stream of money has been searching for a place to go, and it went to an economic activity – fracking – where money goes to die.

The Forgotten Financial Panic of 1914, and the Eternal Recurrence of Short-Term Thinking

This week marks the 100th anniversary of a nearly forgotten yet critical moment in global finance. As the looming outbreak of World War I appeared more and more imminent when Austria made an ultimatum to Serbia in the last week of July 1914, the resulting fear in global markets set off a massive financial panic. Investors, fearing unpaid debts, pulled out of stocks and bonds in a scramble for cash, which at this point in history meant gold. The London Stock Exchange reacted by closing on July 31 and staying closed for five straight months. The U.S. stock exchange, which witnessed a mass dumping of securities by European investors in exchange for gold to finance the war, would also close on the same day, for about four months. Britain declared war while on a bank holiday. Over 50 countries experienced some form of asset depletion or bank run. Here’s an incredible statistic: “For six weeks during August and early September every stock exchange in the world was closed, with the exception of New Zealand, Tokyo and the Denver Colorado Mining Exchange.”

New York Fed Worried About Gambling in Casablanca, Um, Ethics Problem at Big Banks

This story would be funny if it weren’t so pathetic. Yesterday, the Financial Times reported that the New York Fed woke up out of its usual slumber and realized that the crisis has changed nothing and that banks still ~~are in the business of looting~~ have unaddressed ethics issues.

Fed Hubris: Central Bank Ignores That It is on Thin Political Ice

A shot across the Fed’s bow from Simon Johnson, former IMF chief economist and bank critic, on the surface looks to be a good bit of news. Johnson, in a recent Project Syndicate article, warns that the notoriously cloistered central bank is overly confident about its political position.

Michael Hudson and Leo Panitch on BRICS Development Bank Salvo v. the Dollar

Yves here. I’ve refrained from saying much about the announcement of the plan to establish a $100 billion development bank by the BRICs nations (Brazil, Russia, India, and China) because the hype is ahead of the reality. Yes, it is true that the US has been abusing its role as steward of the reserve currency. QE has been a huge bone of contention in all emerging markets, since hot money has flooded in, while the Fed has, in an insult to the collective intelligence of the leaders of these countries, tried claiming that it has nothing to do with the influx. And they are bracing themselves for the tidal retreat when the Fed starts tightening. The US’ efforts to use sanctions to punish Russia have also focused the minds of these countries.

However, the formation of a development banks falls vastly short of the infrastructure needed for any country’s currency (or a basket of currencies) to displace the dollar.

TBTF Strike Back! SEC Commissioner Calls FSOC “Vast Left Wing Conspiracy”

One of the favored practices of the banking industry in recent years has been to engage in not merely shameless, but truly deranged hyperbole when anyone dares voice so much as an itty bitty threat against their prerogatives. For instance, venture capitalist Tom Perkins had a meltdown in the op-ed section of the Wall Street Journal, conflating criticism of rentier behavior among the 0.1% as an incipient Kristallnacht. Jamie Dimon in March 2009 (yes, you have the date right) had the temerity to complain about the “vilification” of Corporate America over the financial crisis. Even the weak restrictions on executive pay in the TARP produced outcries and desperate efforts to repay the TARP quickly (and the cronyistic Treasury acceded, rather than requiring banks get their capital levels higher first).

We witnessed a new outburst of Banking Industry Persecution Complex yesterday from SEC Commissioner Michael Piwowar, who was speaking before an assembly of fellow inmates at the American Enterprise Institute.

Financial Interconnectedness and Systemic Risk: New Fed Report Flags 7 Behemoths

Yves here. This post addresses a topic near and dear to my heart: the importance of financial interconnectedness, or what Richard Bookstaber called “tight coupling” in his book A Demon of Our Own Design. Tight coupling occurs when the processes in a system are so closely linked that when certain types of activities begin, they propagate through the system and cannot be halted. Or as Bookstaber put it in 2011:

Non-linear systems are complex because a change in one component can propagate through the system to lead to surprising and apparently disproportionate effect elsewhere, e.g. the famous “butterfly effect”….
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Portuguese Bank Jitters Intrude on QE-Induced Euphoria

Despite unimpressive and often mixed economic data, market prices in a wide range of financial assets have continued to grind higher. And the results that cheered pundits are hard to square. For instance, Floyd Norris in the New York Times today scratches his head over how inconsistent recent employment gains are with the first quarter GDP contraction at an annualized 2/9% rate. It’s also hard to reconcile with reports of weak retail sales and falling in-store traffic. Similarly, China has become concerned enough about growth that it’s started pump priming again. Even so, car sales dropped by 3.4% in June. And in Japan, machinery orders plunged by 19% in May. And despite the recent discussion of Eurozone recovery, recent reports have put a dent in cheery forecasts.

France Has Hissy Fit Over BNP Paribas Fine and Dollar Dominance

France appears to have taken its public relations strategy for dealing with $8.9 billion fine against BNP Paribas from an old saying among lawyers: “If you have the facts on your side, pound the facts. If you have the law on your side, pound the law. If you have neither on your side, pound the table.” Here’s the guts of the French compliant, which is that the US is abusing the power of dollar dominance:

Corporate Bond Trading a Casualty of QE and ZIRP

The Financial Times has an article on how corporate bond dealers are going to create a new trading hub to try to preserve their market position while “boosting liquidity” in the market. Narrowly speaking, there’s nothing wrong with the piece as a description of investor unhappiness and planned bank responses. But it curiously missed how Fed policy has helped generate conditions that are reducing corporate bond market liquidity.