James Hamilton is critical of the measurement of how much banks have been credited with that I linked to last week:
If you take the position that each new loan should be added as a running contribution to some total, then you are led to maintain that when the Fed loans $1 B to Bank A in the form of a 30-day loan, and loans $1 B to Bank B in the form of an overnight loan that is repaid and renewed each day, then the Fed has 30 times the exposure to Bank B as it does to Bank A. You are further led to infer that the Fed could have lost $1 B in lending to Bank A but somehow could have lost $30 B lending to Bank B. And you are led to infer that it is 30 times safer to make a 1-month loan than it is to make a series of overnight loans in the same amount. Good luck managing your or anybody else’s finances, if that’s your way of thinking.
But Professor Wray goes on to speak admirably about an analysis by his student James Felkerson that does exactly that, and concludes that the Fed lent not $7.77 trillion but instead $29 trillion. For example, Felkerson takes the gross new lending under the Term Auction Facility each week from 2007 to 2010 and adds these numbers together to arrive at a cumulative total that comes to $3.8 trillion. To make the number sound big, of course you want to count only the money going out and pay no attention to the rate at which it is coming back in. If instead you were to take the net new lending under the TAF each week over this period– that is, subtract each week’s loan repayment from that week’s new loan issue– and add those net loan amounts together across all weeks, you would arrive at a cumulative total that equals exactly zero. The number is zero because every loan was repaid, and there are no loans currently outstanding under this program.
But zero isn’t quite as fun a number with which to try to rouse the rabble.
I think that Dr. Hamilton is correct if what you’re trying to do is measure what for lack of a better word I’ll call “exposure” but there are other and, I think, legitimate reasons other than rabble rousing to consider other measurements. For example, Dr.Wray’s figure might be looked at as a measurement of opportunities for shrinkage. I appear to be in the minority but that concerns me more than exposure.
Hamilton’s piece is a smokescreen. He know he can’t debunk the astonomical figure from Wray’s students, so he obfuscates by asserting that repayment rates somehow travel backwars through time and prevent the loans from ever existing in the first place. He may throw out terms like “exposure” to make it all sound good, but that’s pure spin.
Ben’s correct, Hamilton’s piece is smokescreen. The big point is that no effort has been spared to keep the well-connected financial types from having to suffer losses. Some of the rest of us get thrown bones in terms of food stamps and UE benefits that will be cut for the purposes of “austerity”. It’s been all “Eat the poor” from the previous two Administrations, and the last three Congresses. (And the same set of financial types and K Street types.) And no doubt it will be more “Eat the poor” if the current Administration gets replaced after the next election, and from the next Congress whatever its composition.
Is shrinkage what happens with Bernanke goes for a swim in the pool when the heater is busted?
I’ve never heard that term prior to this post, it really screams for an explanation.
And I don’t know Ben, Dave, Ice , explain away this part,
Seems to be the actual number add up to considerably less than the maximums allowed.
I’m not saying that these kinds of loans aren’t bad, but the idea that it is $7.77 when it seems far less was in fact loaned seems like an important fact to keep in mind.
Okay maybe we should be more concerned about a bank that borrows a billion every day vs. one that borrows a billion for a month. But if Bank B, the one borrowing everyday, pays back its loan everyday…it does seem silly to say the Fed loaned bank B $30 billion over the course of a month. Yeah, and was paid back $30 billion as well. Maybe we need to be worried about bank B, but you need to explain why other than simply noting they borrowed a billion everyday, but paid it back everyday as well.
Steve, the problem is that the government has picked the winners and losers. It has decided that the bankers win no matter what, and that no expense will be spared to insure that they win. Everyone else gets poked in the eye with a pointy stick.
Maybe we need to be worried about bank B, but you need to explain why other than simply noting they borrowed a billion everyday, but paid it back everyday as well.
Is the bank claiming it is well-capitalized because of that $1,000,000,000 it keeps borrwing and returning? That would be a problem to investors who are buying stocks and bonds from said bank – the bank is operating in a fraudulent manner.
Is the bank able to use that money to secure some small rate of return on that money? If so, then it is just a free money-pump that the bank gets to use that NO ONE ELSE HAS ACCESS TO. I would LOVE for the government to make massive low- and no- interest rate loans to me so that I could buy short term treasuries. Free money for me! I don’t get that privilege, and I don’t see why those bastards should either, other than that they have bought the man in the White House, all his aides, and every man and woman in Congress.
I have been told that the greatest tragedy that ever occurred in this great Republic is that I got extended unemployment benefits. I got $275 a week, these bastards are getting billions A DAY. So yeah, I’d like to see a little more fucking outrage over this kind of bullshit.
And one more thing: Given what we saw happen in 2008, when multi-billion dollar investment banks could disappear over-night (and still can), and that trillions in worth can disappear in days, how risky is it that the Federal Reserve take on all these additional risks? Especially given that they’re most likely giving all these loans to zombie banks that ought to be dismembered before they eat the rest of us anyway?
“Shrinkage” is a term used in retail. It refers to the difference between what your inventory says you should have and actual stock in hand. Basically, it’s a polite word for theft.
I don’t recall where I first heard this description of the financial sector. It was at least 30 years ago. Most recently I read it in one of Brad DeLong’s posts. The financial sector is like a room full of money. Not stacks of money; money blowing around like in one of those crazy carnival games. The people who work in the financial sector, particularly top management, are covered with glue.
In this particular context what I mean by “shrinkage” is whatever has stuck since the beginning of the financial crisis.
While I’m on the subject, I’d like to make a distinction since not everyone in the financial sector is created equal. Let’s take our friend, Drew, for example.
Drew received no bailouts. He is risk-bearing. By my standards that makes him an entrepeneur.
As I understand it Drew takes companies (mostly small to medium manufacturing companies) and makes them run better. IMO he’s performing a valuable service and deserves what he makes.
Contrariwise managers who work for institutions that received bailouts or other forms of support did receive a helping hand from the Fed or the Treasury, they bear no risk, are not entrepeneurs, and, if they take bonuses or commissions based on pre-existing contracts, IMO are looting. There’s simply no comparison.
Contrariwise managers who work for institutions that received bailouts or other forms of support did receive a helping hand from the Fed or the Treasury, they bear no risk, are not entrepeneurs, and, if they take bonuses or commissions based on pre-existing contracts, IMO are looting. There’s simply no comparison.
Returning to an earlier point, if any bonuses were dependent on how well capitalized a bank were, for example, then Dave’s description of looting becomes even more salient.
And I can’t believe you’ve never heard of shrinkage before, Steve. Haven’t you or someone you know ever worked for a convenience store? Inventory control (by which I mean padding) is a key feature of such businesses.
@Steve Verdon
“But the fact is that the maximum quantity of loans ever outstanding under this program only came to $351 B. The $7.77 trillion also includes $900 B for the Term Asset-Backed Securities Loan Facility, whose maximum outstanding balance was only $49 B, and includes $540 B for the Money Market Investor Funding Facility which never lent so much as a single dime. ”
Loans outstanding at any given point doesn’t mean there weren’t large sums loaned over time. Ironic that Hamilton would write that when Wray’s piece was specifically an attack on that sort of accounting by the Fed. $540 billion in loans were still disbursed to the MMI facility whether anyone actually borrowed it or not.
@Dave Schuler
I have a lot of resepct for venture capitalists like Drew because they actually fulfill the role the greater financial industry stopped doing decades ago: allocating capital toward productive investment.
I’m on the road all week doing th NY,Boston, CT circuit so I won’t be around here so much this week other than to observe. But appreciate the words and the understanding of the differential. It is hard to escape the moniker “financial industry” when you invest money. But it’s really just the start. There is value in simply providing capital, especially in risk averse companies with untapped potential where an owner just doesnt want to put it on the line.
However the real action is in org /product/channel development acquisitions, greenfield site startups etc. in two words: growth and maximizing potential.
And no, no bailouts. Lastly, a point (intentionally) in my opinion overlooked by the Paul krugman’s of the world- we put significant amounts of our own money in the transactions and at risk. As in “honey I’m writing another big check and don’t expect to see a return for 6-10 years. Is that ok.”
Have a good week.
Ice,
Part of the Fed’s job is to lend as a lender of last resort. Now I haven’t studied all the nitty gritty of what that means and the particulars for this case, but it is an important function. It is so important the failure to do it is one of the significant contributing factors to the Great Depression.
I don’t know…is that happening? Hard to say from the data that has been presented so far. Right now it is a hypothetical. Some actual examples where this is leading to inaccurate information would be very helpful. In that case, then yeah that kind of lending might be an issue.
It is a loan, so presumably they are paying it back with interest. Although with interest rates at or near zero it might be like “free money”. Still, if the bank you could borrow from had a zero interest rate loan wouldn’t that be free money to you, provided you are credit worthy?
Dave,
I don’t disagree, but I think it is an important distinction that often gets glossed over. Another is the libertarian/Republican canard that supposedly smart people (hi steve, yeah I’m call y0u dumb, at least on this point) make repeatedly. Even more ironic when Michael makes it out like I’m some sort of foie gras eating snob…when the reality is he his far far richer than I am.
As for the looting aspect, yeah I’ve been noting that too. Bailing out failed financial firms is pretty much looting. Letting people have all the upside, and sticking the public/taxpayer with the downside. I’ve been opposed to that kind of thing longer than I can recall. Yet, I’m over looking this kind of thing…well according to the mental midgets like steve.
Yeah steve, I’m going to be insulting you for a long time on this one, get used to it. Jerk.
Ben,
Okay, but that still doesn’t explain why this is bad.
Still, if the bank you could borrow from had a zero interest rate loan wouldn’t that be free money to you, provided you are credit worthy?
First, no bank would ever give me a zero percent interest rate on a loan greater than zero dollars. They wouldn’t give one to ANYONE.
Second, are you sure BoA and C (to name two) are credit worthy?
Okay, but that still doesn’t explain why this is bad.
Because there are no consequences for failure for the institutions getting the money, and especially there are no consequences for the individuals RUNNING those institutions. Hello, moral hazard!
Sorry, failed to complete a thought above:
First, no bank would ever give me a zero percent interest rate on a loan greater than zero dollars. They wouldn’t give such a loan to ANYONE. This is an opportunity that they AND ONLY they have. No one else will ever be given this opportunity, and THEY are only getting this opportunity because of massive failure on their part. Who else gets that kind of deal? If it’s that necessary to prop up the banks, at the very least the executives at those banks ought to be stripped of every dollar they ever earned, and their asses ought ot be living on the streets, if not in prison. Massive derilection of duty voupled with massive bailouts by the central bank shouldn’t mean more bonuses for the people that fucked up, but that’s what we’ve gotten.
Ice,
There are some zero percent loans out there–e.g. some car loans. Granted they are often only for customers with the best credit rating, but they do exist.
I don’t have much complaint here Ice. One of the things that annoys me is that people often talk about punishment but fail to realize that bankruptcy is also a type of punishment. If you remove all the downside to running certain businesses don’t be surprised if you end up with a lot of people in those businesses and we are way over invested on top of it…..
Wait, isn’t that a usual refrain around here? Funny that. I don’t imagine too many here are in favor of letting these ginormous financial entities dying…even if they need too. So we’ll keep propping them up. I’d suggest you let it go though as there isn’t anything you can do. Go “vote the bastards out” if it makes you happy (hint: the guys who come into replace them are the exact same kind of bastards), but really there is nothing any of us here can do.
If you understand money laundering and other organized crime activities, most of this begins to make sense, and it is far less confusing. As far as I know, it is legal, but the process is the same. The problem is that a lot of these activities are legitimate and necessary, and the extracurricular activities piggyback on them. Therefore, the entire financial industry should not be indited.
It is hard to work out the numbers because there multiple money streams. In addition, most of what is being discussed does not include the back door (off the books) transactions. I am not sure if they are including the known cutout transactions, but there is central bank to central bank activities that are not included.
The actual dollar transfers was probably around $7 trillion, but not all of this was pissed away. Some of it is the trash that was exchanged for Treasury Bonds, Bills, Notes, etc., and the trash is being counted at face value. Some of this was for the revolving loans, and it can be disputed how it is counted. If the loans are viewed as daily bets, how does one calculate the weeks total bets?
The remaining money is from the guarantees made. The public number is probably around $16 trillion, but getting closer to the actual number would require much more research. This would require figuring out all the cutouts. A lot of the European trash eventually makes its way back to the US, and it is not easy to work it out.
Professor Hamilton’s conclusion implies that the number should be closer to zero. Unbelievable.
“For the Snark was a Boojum, you see.”
@Steve Verdon
I’m not saying the Fed acting as lender is bad. I’m saying the utter lack of transparency and the indiscriminate manner in which the loans were handed out were unacceptable, particularly given that Fed “independence” is entirely fictional anyway. Look closely at its activities and you’ll see Fed and Treasury tightly coordinate.
@Steve Verdon
… I don’t imagine too many here are in favor of letting these ginormous financial entities dying…even if they need too. …
If possible, I would try to protect the pension funds, 401(k), and other personal accounts. Let the rest of it collapse, and let the venture capitalists loose. As the Outlaw Josey Wales observed, “Buzzards gotta eat, same as worms.” For the amount of money pissed away, we could have done something for the peasants.
… (hint: the guys who come into replace them are the exact same kind of bastards) …
Amen brother.
…but really there is nothing any of us here can do.
I would like to think you are wrong, but I have been at the party waiting for everybody else to arrive. After 15 – 20 years, it is nice to see people beginning to arrive, but it is depressing that there are not more.
The first step is to get others to see that the two sides are being played against each other, or at least, allow that it is possible. This realization leads to an examination of one’s beliefs, but the biggest problem is getting beyond one’s beliefs.
“For the Snark was a Boojum, you see.”
Go “vote the bastards out†if it makes you happy (hint: the guys who come into replace them are the exact same kind of bastards), but really there is nothing any of us here can do.
You talking to me? I’m way ahead of anyone else on this board about the uselessness of voting. There’s no one to vote for, and no point in voting against anyone. We’re long past the point of the vote meaning a goddamned thing in this country.
With respect to Steve’s lament the there is nothing we can do about it, Milton Friedman used to quip that the only solution was to set a cap on spending. Funny, eh? An economist advocating economizing.
However every pol and certainly every lib has a pet program or expenditure (and sadly most repubs) And if you dare say we can’t afford it you will be castigated as a nihilist, Rayndian fantasizer, baby killer………or even worse, a Republican.
Exactly this.
Does the CEO or Goldman Sachs really care if it is a Democrat or Republican in the White House or sitting on various oversight committees? I think not. What they care about is how much influence they have with these venal cretins.
In fact, the Republican/Democrat divide is a useful tool…it keeps many people from really looking at the issue. Seriously how different is a Republican from a Democrat on the issues affecting the economy? Not all that much different, IMO. Would a President McCain have let GM sink? Would he have told BofA, sorry you guys made some bad calls, we are going to limit the damage, but you guys are pretty much dead? I think not. When you get right down to it every President will do what is good for his corporate masters. Sure there will be huge pissing contests over a 35% vs. a 39% top marginal rate or whatever, but in the end it isn’t that big a deal. Not when we have other serious fiscal imbalances.
Okay, now that I agree with. Part of why we are in this mess is information…or more specifically hidden information, asymmetric information, incomplete information. Lack of transparency when you get right down to it.
However every pol and certainly every lib has a pet program or expenditure (and sadly most repubs).
Pretty much all Repubs, except Ron Paul and perhaps his son. Look at all the bitching and moaning about Defense cuts, to pick just the most obvious target. Surely SOMEWHERE in the massive Defense budget are things that can be cut without even having an adverse effect on our current defense posture. If we reduce out current posture lots can be cut. Get the fuck out of Afghanistan and Iraq (especially Afghanistan) and we can reduce our defense spend by a lot without even reducing our world standing at all (save in Afghanistan and Iraq, of course).
But but but but…Icepick if you close that base we no longer need, why it will adversely impact my district and chances of getting re-elected. So no, please find some other fat to cut, we are too busy living off of it over here in my district.
Like I said, Steve, voting no longer has any hope of accomplishing positive change.