It’s good to be the Fed

Before the recession, the Fed typically earned a profit of about $30 billion per year. After the Great Recession, their profits rose to the $70 to $80 billion range, as their balance sheet expanded.

There was a time where the Fed actually was reluctant to engage in monetary stimulus out of fear that they would take on excessive risk.  I thought those fears were completely nuts, for several reasons.  They weren’t likely to absorb particularly large losses, and even if they did they didn’t really need enough bonds to back up the monetary base, only the share held as bank reserves.  And most importantly, the Fed is essentially part of the Federal government, so when the Fed sees its assets fall due to a decline in T-bond prices, the Treasury gains a precisely equal reduction in their liabilities.  It’s a wash.

Don’t believe me that the Fed is part of the Federal government?  Where do you think all those profits go?

Here’s the latest profit report, and it’s a blockbuster:

According to figures released Friday, the Fed reported net income of $101.3 billion. That’s an increase of nearly 30% from 2013.

But the Fed sends nearly all of its profits to the Treasury. Last year, that amounted to $96.9 billion. The Fed said this was a record.

Commenter “Negation of Ideology,” who sent me this article, added this information:

Also, out of a balance sheet of $4.5 Trillion, $800 Billion will be maturing in the next two years.  Sounds to me that those who are worried about the Fed being unable to unwind and being forced to sell bonds at a loss are worried about nothing.

And $1.35 trillion of the Fed’s “liabilities” are zero interest cash.  I can’t believe people were seriously worried about the Fed’s balance sheet, and that this might have even inhibited monetary stimulus.  The Fed had similar fears in the 1930s, which were far more justified, but even those fears are widely ridiculed by modern economic historians.  Imagine what future monetary historians will think when they pour over the FOMC minutes for 2010, 2011 and 2012.

Everyone should pray each night that interest rates soon soar up to levels that put the Fed balance sheet under stress.  That would imply we get back to the sort of healthy economy that we had in the 1990s.  Unfortunately, that’s just a pipe dream.

By the way, does anyone know why the Fed has decided to raise rates before unwinding the balance sheet.  Logically you’d expect last in, first out.  They cut rates, then did QE; so why not unwind the QE, then raise rates?

Tim Worstall is just as confused as I am.



64 Responses to “It’s good to be the Fed”

  1. Gravatar of Joseph S Joseph S
    20. March 2015 at 18:01

    It’s interesting too that the Fed believes that the current stock of assets is depressing ten year term premia by 110 basis points and the effect will continue into the next decade, which is a rather large effect to allow to hang around while raising over night rates. I pulled that figure from Vice Chair Fischer’s speech at the end of February on policy normalization, and the accompanying figure, both of which I linked to below.

  2. Gravatar of foosion foosion
    20. March 2015 at 18:37

    Why should an entity which can create an unlimited amount of money be worried about its balance sheet?

  3. Gravatar of Kevin Erdmann Kevin Erdmann
    20. March 2015 at 19:03

    It seems to me that they are keeping the excess reserves because they want to adjust monetary policy with the IOR rate instead of the Fed Funds rate. I really don’t understand that. At least, when they were using the FFR target, they had direct control over the quantity of purchases that were required to get there, and they could tactically miss their rate target if it would mean creating too much change in the asset base. But, now, they will change the IOR rate, and it will be up to the banks to decide how to react to that, in terms of the quantity of reserves they move to. So, it seems to me that this adds one more level of uncertainty between the Fed and the actual money supply.

    Am I wrong about this?

  4. Gravatar of Britonomist Britonomist
    20. March 2015 at 19:08

    Kevin, I think an IOR rate hike would still have the same effect as a fed funds rate hike: why would banks lend to each other at a rate lower than they can get on their reserves at the central bank?

  5. Gravatar of Marcus Nunes Marcus Nunes
    20. March 2015 at 20:30

    Tim Worstal: “And that’s where I’m horribly confused. QE reduced long term interest rates. Reducing the Fed Funds rate reduced long term interest rates. So, we wish to raise them. So, why is reversing QE not being talked about in the same manner that increasing the Fed Funds rate is?”

    But QE never reduced long term rates. It raised them. When the QEs stopped or were wound down LT rates fell. So reversing QE (reducing the BS) would reduce LT rates even further. Another large recession would be in the offing!

  6. Gravatar of Kevin Erdmann Kevin Erdmann
    20. March 2015 at 21:16

    Britonomist, I may be wrong about this. But, the Fed changes the actual fed funds rate by buying and selling treasuries to target the rate. But, they wouldn’t be engaging in OMO to adjust the ior. They would just raise it, and the banks would react. Right? Or do I have the process wrong.

  7. Gravatar of Ray Lopez Ray Lopez
    20. March 2015 at 22:19

    Sumner “…just as confused as I am”. Indeed, true words. Sumner apparently would not care if the Fed’s reserves, which already are over 40% junk toxic mortgages, would go closer to 100%. After all, those reserves need not ever be sold back to the public, right? Unreal that this person has any credibility. Pied Piper of Hamelin pipes on…

  8. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. March 2015 at 00:00

    The Federal Reserve remittances to Treasury over the past several years have had the result of understating our fiscal deficits. President Obama has been truly lucky: not only has he been able to book TARP repayments as revenues (reversing the liability incurred by his predecessor), but also the several hundred billion the Federal Reserve has remitted to Treasury have reduced deficits under his watch.

    Whether the Fed lets its holdings roll off its balance sheet or sells them, these remittances will cease, probably by the end of Obama’s term. This reversal will be accelerated and exacerbated if the Fed raises IOR, thereby increasing its interest expense. It is likely the Fed will incur some losses, in which case these will not be booked as negative income to Treasury, but will be booked by the Fed as “deferred assets”, which means the Fed will not again remit profits to the Treasury until they are recovered. Pundits should keep this in mind when evaluating the fiscal records of Obama, his predecessor and his successor(s).

    The Fed has a nice paper explaining the implications of this on the balance sheet and the budget:

    That is a paper I think John Cochrane should read:

  9. Gravatar of Vaidas Urba Vaidas Urba
    21. March 2015 at 00:48

    Per Friedman’s Rule, should you ever unwind QE?
    QE is profitable, why should the Fed rush to exit this profitable business?

  10. Gravatar of BC BC
    21. March 2015 at 01:34

    Maybe, the Fed wants to raise rates instead of unwinding QE because it’s preferred instrument is interest rates. The Fed resorted to QE because it was at the ZRB. The ZRB does not affect its ability to raise rates. The Fed may think that they understand the impact of a 25 bps rise in IOR more than they understand the impact of $X of asset sales.

    Scott, switching topics a bit, NGDP growth has seemed to stabilize around 4% over the last few years. Suppose that the “optimal” NGDP target at this point going forward is 4%. Suppose also that the Fed wishes to achieve this target by using interest rates (and QE at the ZRB) as intermediate targets. Then, as long as expected NGDP growth seems to remain at about 4%, what would be the “optimal” interest rate path? Presumably, the Fed funds futures markets express the market’s expectation of interest rates that is consistent with the market’s expectation of NGDP growth. So, does that mean that *if* the Fed believes expected NGDP growth is stable, then it should raise rates along the path predicted by Fed funds futures? Conversely, if the Fed believes that expected NGDP is above (below) target, then it should signal that its expected interest rate path is above (below) that implied in the Fed funds futures markets? Finally, is there any reason to believe right now that NGDP growth expectations are not stable?

  11. Gravatar of Major.Freedom Major.Freedom
    21. March 2015 at 05:15

    “By the way, does anyone know why the Fed has decided to raise rates before unwinding the balance sheet. Logically you’d expect last in, first out. They cut rates, then did QE; so why not unwind the QE, then raise rates?”

    QE is treasury buying on a pace that is historically higher the before. QE is not a change in quality, it is a change in quantity.

    Think of a crack dealer. It’s all he sells, and he sells them in different sized packets. Then one day his customers start displaying signs of bad health. Some of them plead with the dealer to fix their problems. So the dealer develops a “new and improved” solution. He calls it QE. What is it? Is it something other than selling crack? Oh no siree. It is a change in how he does business. He now sells it in larger packets than before. That is his solution. Then maybe at some point later wean the customers off. Maybe.

    Back treasury buying. Now interest rates. The Fed does not set the Fed funds rate by their own decree. They do not give orders to the banks to set a particular rate. The Fed only buys fewer or more treasuries from the member banks, and then the member banks decide what the Fed funds rate will be given the changed quantity of reserves they have. If the Fed “wants” to lower the rate, they will create more reserves until the rate declines. If they want the rate to rise, then they will create fewer reserves until the rate declines. Think of a crack dealer who “targets” the pace of nervous tics in his customer’s faces and hands per hour. If they want fewer tics, they’ll sell more crack, and if the more, then less.

    To ask then whether QE, which is treasury buying, I.e. inflation of the money supply, “should” come to an end before rate changes, or whether rate changes should come before an end to QE, is asking whether the Fed should target a different Fed Funds rate, OR a different rate of treasury buys. The question itself is incoherent. They do one by affecting the other.

  12. Gravatar of Brian Donohue Brian Donohue
    21. March 2015 at 05:56


    The goal of Operation Twist was to lower long-term rates by purchasing more long-term assets. As far as I can tell, it did precisely that, flattening the yield curve.

  13. Gravatar of dlr dlr
    21. March 2015 at 06:36

    Kevin, you are right about the process, but wrong that the Fed would previously materially affect the monetary base by “tactically missing” its FF target. The FF target generally controlled the monetary base, with trivial deviations.

    I think the Fed is choosing to bypass LIFO for the same reason the ZLB has been so difficult for it overall. It fears its ignorance about what unwinding will communicate to the market relative to the more familiar rate hikes. Let’s say the Fed thinks that the drop in unemployment requires that they unwind the entire balance sheet rather quickly and shortly thereafter start raising rates. I think the Fed is worried that the prospect or actual process of selling trillions of securities back to the market fairly rapidly might create unexpected volatility in markets. If this concern were strong enough to then depress nominal expectations, the Fed might actually have to back off its plan. This would violated the Fed’s unwritten third mandate to not look like flip floppers or to get blamed for causing a bunch of volatility.

    If anyone is still reading, I have a question about the reaction to latest Fed move. Inflation expectations increased modestly. The stock market went up. The FF curve fell. All consistent with a standard policy loosening plus a liquidity effect in the FF curve. But real rates out to thirty years also fell significantly. This continues the taper tantrum type trend of longer term real rates acting less like equilibrium prices responding to the Fisher effect and more like prices that the Fed is somehow manipulating. This was easier to swallow with QE where you could think about portfolio balance effects. But here, with just a dovish change in the expected FF curve, what is the mechanism causing the longer term real rate decline? Call it the reverse conundrum question.

  14. Gravatar of Marcus Nunes Marcus Nunes
    21. March 2015 at 07:09

    @ Brian
    OT was not very effective. But the QEs raised rates for sure

  15. Gravatar of Britonomist Britonomist
    21. March 2015 at 07:22


    “over 40% junk toxic mortgages”

    Again, demonstrating your propensity to make garbage posts. You can’t just claim that 40% of the assets are ‘toxic mortgages’ without backing that up with a (reliable) source, and no some angsty edgy-opinions austrian blogger who might say the same thing is not a reliable source.

  16. Gravatar of benjamin cole benjamin cole
    21. March 2015 at 07:27

    The Fed should never unwind its position. Why should it? Suck $4 trillion in cash out of the economy? That’s about $12,500 per U.S. resident.
    Talk about unforeseeable potentially catastrophic consequences….

  17. Gravatar of ssumner ssumner
    21. March 2015 at 07:38

    Joseph, Interesting, but 110 basis points seems implausibly large.

    Foosion, The argument is that the Fed targets inflation, and hence can’t create unlimited money.

    Kevin, Perhaps, but I’m not sure they care all that much about the money supply.

    Britonomist, You asked:

    “why would banks lend to each other at a rate lower than they can get on their reserves at the central bank?”

    Good question, but they do so right now.

    Marcus, Good point.

    Ray, Actually they are 0% toxic junk mortgages. You seem like someone who learned economics by reading crackpot theories on the internet.

    Vivian, Good point.

    Vaidas, I see that as a separate issue. But if they follow your advice, what would they replace QE with in the future, next time rates hit zero?

    BC, If they prefer using interest rates, I’d think they’d want to unwind QE first, which would mean using QE as little as possible,

    On the NGDP question, if you target NGDP growth at 4% then you set rates wherever the market thinks is consistent with 4% NGDP growth. You’d need a futures market to determine that, however.

    Also, it would be insane for the Fed to adopt a policy expected to lead to the zero bound again in the next recession. Absolutely insane. So I hope they don’t follow the path you seem to think they will follow.

    dlr, Good question, I’ve never been able to figure out long term rates. Sometimes they rise on Fed easing and sometimes they fall. Your guess is as good as mine.

  18. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. March 2015 at 08:15

    “why would banks lend to each other at a rate lower than they can get on their reserves at the central bank?”

    I think James Hamilton covered that one already:

    Short answer: A ‘normal’ bank wouldn’t, but a foreign bank or a GSE such as the FHLB most likely would.

    See, also, here:

  19. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    21. March 2015 at 08:29

    Good point about fiscal implications. It looks to me that by buying a lot of low yielding bonds, if they raise rates they pay on the liability side, remittances to treasury will be significantly reduced over a long period of time. This is fiscal policy disguised by monetary policy, and this is another reason the FED has more discretionary power than most people believe.

    Anothar John Cochrane comment on why not just sell off the bonds on the balance sheet …

  20. Gravatar of Britonomist Britonomist
    21. March 2015 at 08:40

    Thanks for the informative links Vivian.

  21. Gravatar of Vaidas Urba Vaidas Urba
    21. March 2015 at 08:40

    Scott: “But if they follow your advice, what would they replace QE with in the future, next time rates hit zero?”

    Let me simplify things a little bit. If you agree with the “stock” view, then the good news with following my advice is that you arrive to the zero bound with QE already in force. Cut to zero has more power if you do it when you have large balance sheet, and it has less power if you do it when you have a small balance sheet.

    Here are my views in more detail. I think the Fed should follow Friedman Rule at all times by paying IOR, and the ratio of base to GDP should be always adjusted depending on the risk-adjusted profits you expect. Enormous profit that the Fed has earned is a powerful evidence that the size of Fed’s balance sheet was much too small.

    If you arrive at the zero lower bound while following Friedman Rule at all times, there are two scenarios:

    1. The shock that brought you to the ZLB did not change the optimal size of the base. In this scenario, any further QE would be unprofitable, but on the other hand under these circumstances forward guidance should work very well as the asset markets are exactly where the central bank wants them to be.

    2. It could be that the same shock has both reduced the optimal rates to zero and has increased the optimal size of the monetary base. In this case, you do QE while it is profitable, and this helps you to improve the credibility of forward guidance.

  22. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. March 2015 at 09:14


    “This is fiscal policy disguised by monetary policy…”

    The preposition “by” rather than “as” is important here. For this reason, progressives should be, and should have been, quite happy with the QE program. Interesting question: should this Fed contribution count *against* any claim of fiscal austerity or the extent thereof?

  23. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    21. March 2015 at 09:34

    Sorry, I’m not an english native speaker. I meant “disguised as”. I think people neglect that unorthodox monetary policy (QE) has fiscal implications. It all depend on future path of interest rates. If the FED bought low yielding bonds and rates fell further and remained there for an extended period of time (e.g. duration of bond portfolio) than this could be viewed as fiscal austerity. If the FED bought bonds and yields rose sharply after and stayed there, then this woube viewed as fiscal spending. QE changes tax flows over time (more/less now, less/more in the future), and in quality (a certain group of market participants are affected now, but a different group of tax payers is affected in the future).

  24. Gravatar of Kevin Erdmann Kevin Erdmann
    21. March 2015 at 09:41


    I don’t know if this is in play regarding this week’s movements, but I have been thinking about the shape of expectations, and how the zero lower bound can distort forward rates. For instance, if expectations become less positively skewed or more tightly distributed around the mean, then rates could fall when rates would have risen without the ZLB distortion.

  25. Gravatar of TravisV TravisV
    21. March 2015 at 09:56

    Is Noah Smith an MMTer?

  26. Gravatar of Matt Waters Matt Waters
    21. March 2015 at 09:59

    The Fed themselves may say it’s better to just let the Treasuries and other securities mature than selling them. They would say there are practical reasons for not trying to move a large amount of securities.

    I’m not sure of the argument myself, but most of their securities are either Agency MBS or off-the-run Treasuries. Selling the bonds are not like selling stock in GE.

    Also, in response to foosion, the Fed can’t be “insolvent” per se. But if liabilities became far more than assets, the Fed’s ability to fight inflation becomes limited. If the Fed wrote a check to every American in new money, ie liabilities, the money could only be taken back out of the monetary base through taxes.

  27. Gravatar of Vivian Darkbloom Vivian Darkbloom
    21. March 2015 at 10:01


    I think that “fiscal policy disguised as monetary policy” is too strong, but I also think you got it exactly right with “people neglect that unorthodox monetary policy (QE) has fiscal implications”.

    Your english is excellent–no need for any apologies. The nuance here, for me at least, is that “as” would perhaps suggest the Fed is taking an active role in the “disguising” (with intent to do so). whereas with “by” the effect is acknowledged but more as a neutral by-product, I think. “As” would suggest to me that perhaps it is something more than a by-product. That is why I said the distinction was important.

    Prepositions seem to be the most difficult in just about any language with the possible exception of German. Aus, bei, mit, nach, zeit, von, zu—zum beispiel. Complicated, but logical. On the other hand, I’ve always liked that Twain quip that he’d rather decline three drinks than a German adjective.

    I’m still trying to figure out what austerity means.

  28. Gravatar of TravisV TravisV
    21. March 2015 at 10:24

    “Goodbye, math and history: Finland wants to abandon teaching subjects at school”

  29. Gravatar of Max Max
    21. March 2015 at 10:32

    Note that the Fed’s profit is coming from interest rate risk. Not credit risk (almost everything the Fed owns is guaranteed by the treasury or government agencies). If you associate the yield curve since 2008 with the Fed’s failure to promote a boom, then the Fed has been unwittingly betting on its own failure. And winning.

  30. Gravatar of collin collin
    21. March 2015 at 10:42

    It does seem the Fed should look for the least amount of tightening as possible. Considering how much the market (over?)-reacted to the Tamper Tantrum, only God knows how much foreign money would flow to the US if rates were increased to even.5%. Why not sell $10B in bonds on the market to absorb any market shocks. In all reality $10B or $20B in monthly sales, should not have much effect but I am guessing the market would over-react to this sale.

  31. Gravatar of Jim Glass Jim Glass
    21. March 2015 at 11:08

    “Don’t believe me that the Fed is part of the Federal government?”

    You MMTer, you! 🙂

  32. Gravatar of Brian Donohue Brian Donohue
    21. March 2015 at 11:34

    @Marcus, I wouldn’t dismiss Operation Twist so quickly. To me, it’s a rare example of the Fed being clear about the policy it was pursuing and the hoped-for impact, executivng the policy, and achieving the desired impact. Long-term rates fell a lot in the first half of 2012:

  33. Gravatar of Ron M Ron M
    21. March 2015 at 11:46

    The Fed wants to separate money from monetary policy.

  34. Gravatar of W. Peden W. Peden
    21. March 2015 at 12:22


    At the 16/17 year old level, that may be a good idea, provided the students already have a grasp of some abstract subjects like maths, grammar, foreign languages etc. In fact, between giving them a grounding in abstract principles and specialising in further education may be the optimal time to do the “X studies” approach.

  35. Gravatar of W. Peden W. Peden
    21. March 2015 at 12:24

    (In the 1950s/1960s in Scotland, IIRC, students in their final year of high school didn’t do exams or traditional subjects, and focused on developing a wide general knowledge before going to university. Those not planning on going to university didn’t sit the final year of high school and went straight into employment.)

  36. Gravatar of Blue Eyes Blue Eyes
    21. March 2015 at 12:59

    Mark Carney says that bank rate should rise first, so that if anything goes wrong while QE is being unwound, there is scope to cut rates back down again.

    I don’t follow that argument.

  37. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    21. March 2015 at 15:44

    My math may be wrong, but if it is right, other people smarter than me can do it as well. Fiscal consequences are certainly an important byproduct, not the focus, yes, but, then, these issues should be clearly addressed and discussed, something that does not happen. That is why I like Sumner’s views so much: he is right on saying that the Fed has too much discretion and zero accountability. Sumner’s last post over at econlog is superb, congrats Mr. Sumner.

  38. Gravatar of Bob Murphy Bob Murphy
    21. March 2015 at 17:57

    Scott, are you saying that if the Fed just lets $800 billion of its balance sheet mature into reserves (which it then sucks out of the system) that it won’t be contractionary or push down bond prices, the way it would if the Fed sold off $800 billion of bonds?

  39. Gravatar of Jim Glass Jim Glass
    21. March 2015 at 20:43

    It may be good to be the Fed, but how much good has been done by the Fed recently?

    “The Macroeconomic Effects of the Federal Reserve’s Unconventional Monetary Policies”

    Findings: Modest, with “the peak inflation effect — adding 1/2 percentage point to the inflation rate — not anticipated until early 2016.”

  40. Gravatar of Ray Lopez Ray Lopez
    21. March 2015 at 21:27

    @Britonomist, @ ssumner – Brit: see any source “mortgage-backed securities and housing-agency debt” is over 40% of the Fed Reserve balance sheet since massive purchases since 2008. You can call these mortgages “toxic”. @ssumner – Brit does not know the above, but you do. Yet you deliberately misinform about there being “zero” toxic mortgages. How do you know that? Have you audited the Fed? To ‘win’ on your blog vs an anonymous nobody like me, you resort to misinformation. Let the record show that.

  41. Gravatar of ssumner ssumner
    22. March 2015 at 06:09

    Vaidas, I do understand the argument for a larger base, but the big profits earned recently might well be due to luck.

    Part of my objection is aesthetic, by adding IOR you make monetary policy more complicated, leading to stupid theories like “endogenous money.”

    But I’m not strongly opposed to your plan, it would certainly work OK.

    Travis, Noah’s too smart for that nonsense.

    Ron, The article was from September 2008. How’s that non-monetary approach working out so far?

    Bob, No, I think selling bonds would be contractionary. I’m not sure what the rest of the comment meant, but any reduction in the balance sheet is contractionary, albeit there’s not all that strong an effect at the zero bound.

    Jim, Compare to Europe.

    Ray, It’s close to zero. Zero. Zero.

  42. Gravatar of Britonomist Britonomist
    22. March 2015 at 08:27

    Ray, absolutely nobody ever denied that the fed buys agency MBS – but a mortgage backed security is not necessarily toxic, and the Fed can only legally buy the safest grade of these assets, which are backed by the treasury (which means zero risk for the Fed).

  43. Gravatar of Ray Lopez Ray Lopez
    22. March 2015 at 09:09

    @Britonomist – thanks, Sumner also concedes this later, in another post. I agree. But Sumner claims, in circular fashion, that since the Treasury is backing these MBS they are not toxic and not risky. Sort of like the fallacious logic that says since a country can print its own currency, any debt it holds is not risky. Balderdash.

  44. Gravatar of Jim Glass Jim Glass
    22. March 2015 at 09:13

    Jim, Compare to Europe.

    That was the first thing that occurred to me when I read this, and it sent me off to pondering various possibilities — the first being that the study is wrong in underestimating the described effects, of course, but others as well…

  45. Gravatar of Carl Carl
    22. March 2015 at 14:02


    I’m not so worried about the Fed’s balance sheet for the health of the Fed as I am about the effect the Fed’s purchasing has on the size of government. This article shows how much the Fed is simply a branch of the federal government. Then when I consider that one branch of the Federal government is able to buy $2.5 trillion in assets from another branch of the Federal government, I conclude that the system is missing accountability.

  46. Gravatar of Derivs Derivs
    22. March 2015 at 15:01

    “in circular fashion, that since the Treasury is backing these MBS they are not toxic and not risky”

    Ask the banks if they found them to be risk free assets. Whose hands they were better off in, and the power the Fed could throw behind neutralizing that risk is a different story.

  47. Gravatar of Kevin Erdmann Kevin Erdmann
    22. March 2015 at 15:36

    You know, I’m tired of watching this country get soft with the assumption that harvests will be plentiful every year. I think we should expand the Fed’s mandate to ensure a stable wheat supply. But, once we do give them that mandate, we should make sure that every decade or so they send out troops to burn the fields and salt the lands. To do anything less would be a bailout for eaters, and we will inevitably start living as if food will always be available after every harvest. It will also reduce the terrible weight inequality problem we have.

  48. Gravatar of Negation of Ideology Negation of Ideology
    23. March 2015 at 03:13

    Great post!

  49. Gravatar of ssumner ssumner
    23. March 2015 at 05:25

    Ray, You’ve reached a new height in idiocy. The Treasury bonds themselves are only safe if the Treasury pays them off. The Fed’s MBSs are no different. You are simply incapable of admitting that you are wrong every single time.

    Carl, All this would be solved with NGDPLT.

  50. Gravatar of Charlie Jamieson Charlie Jamieson
    23. March 2015 at 08:15

    MBS were selling at 50 cents on the dollar — *if* they could be sold at all, so clearly they were risky and toxic.
    After the fact, the Fed guaranteed them and bought them, but at a cost we are only being to understand.

  51. Gravatar of Anthony McNease Anthony McNease
    23. March 2015 at 09:28


    I seem to recall you writing that the mechanism for the Fed raising/lowering short term rates was by selling/buying debt instruments. Maybe I misunderstood, but if I’m right then won’t the Fed need to sell assets on the open market to raise short term rates?

  52. Gravatar of Anthony McNease Anthony McNease
    23. March 2015 at 09:32


    “Ask the banks if they found them to be risk free assets.”

    They weren’t “risk free” but they weren’t nearly as risky as they seemed during the crisis. The market for them, and anything really, disappeared as cash just froze up. The banks had to mark to market where there was no market making them functionally bankrupt despite the fact that the expected discounted cash flows from those securities demanded far greater valuations than they had at the time.

  53. Gravatar of Carl Carl
    23. March 2015 at 10:05


    Thanks. If the government decides to spend a trillion extra every year, this would, if I understand the NGDPLT theory right, drive the inflation factor of NGDP, cause a decrease in the Fed’s asset purchasing activity, and, as a side effect, probably drive up the cost of Treasury debt and act as a brake on government spending.
    But, that presumes that the same entity that won’t play by the government’s budgetary rules will honor the NGDPLT rule when it causes political pain. What enforces this accountability when those giving the pain are same ones receiving it?

  54. Gravatar of Charlie Jamieson Charlie Jamieson
    23. March 2015 at 10:06

    This blithe talk of ‘risk-free’ is alarming and speaks to a mindset that believes the Fed’s printing press is a magical thing.
    There are two risks that I see.
    First, the public and the market generally believe that bonds are priced in large part on our assurances that the issueing country has the tax base to return the principal. What happens when the market realizes that public spending is in fact going to be monetized by the central bank?
    Second, if the central bank begins to monetize spending, then there will be enormous public pressure from various groups to get their hands on that printing press. Right now the banks can pressure the Fed to buy their MBS, but what happens if a more labor-friendly government decides to use the printing press to pay unemployed workers?

  55. Gravatar of Charlie Jamieson Charlie Jamieson
    23. March 2015 at 11:22

    Re: Net income of $101b.
    How would explain to a lay person …
    a) where is that income coming from, and
    b) what economic benefit is the Fed creating.
    After all, if Apple or Caterpillar or the local lemonade stand reports income, it is because it has created a valuable economic good that people are willing to buy.
    But what has the Fed creating? And who are its customers that are paying for this service?
    Or is this just more financial chicanery in which financial asset holders get richer.

  56. Gravatar of Anthony McNease Anthony McNease
    23. March 2015 at 11:56


    “But what has the Fed creating? And who are its customers that are paying for this service?”

    I don’t think you understand the role banks play in an economy. They don’t “create” anything. Banks do not make cars or toasters. They supply the economy with liquidity and act as brokers between investors (depositors) and businesses looking for liquidity and in some cases capital (I banking).

    “Or is this just more financial chicanery in which financial asset holders get richer.”

    Someone once quipped that liberalism is best described as “The fear that someone, somewhere might make a buck.” The marginal returns on financial assets these days are, and have been for a while, in the toilet. The Fed’s own returns are $100B/$4.5T = 2.2%. A 2.2% return on assets is nothing to write home about.

  57. Gravatar of Charlie Jamieson Charlie Jamieson
    23. March 2015 at 12:28

    But banks do create economic activity. Banks create loans and generate economic activity. Or banks bring customers together. Or banks make business transactions easier. I have no problem with a bank making money performing such functions.
    But what is the Fed doing to generate its income?
    Second, I don’t have ‘fear that someone, somewhere might make a buck.’ We should expect that if someone is making a buck that they are performing some useful service.

  58. Gravatar of Anthony McNease Anthony McNease
    23. March 2015 at 13:11


    I believe the valuable service the Fed is providing is supplying the economy with the dollar liquidity that it demands. Recently it should be argued that they aren’t providing enough. To provide this liquidity they are trading cash to Treasury and to financial institutions for bonds and ABS’.

  59. Gravatar of Derivs Derivs
    23. March 2015 at 15:12

    “the expected discounted cash flows from those securities demanded far greater valuations than they had at the time.”

    Anthony, I am in agreement with you as to whose hands those assets had to go into, and as to why. BUT not so sure I agree with the above, that was a scary moment for equities and housing valuations. For a moment in time, it was like looking into an abyss.

  60. Gravatar of ssumner ssumner
    23. March 2015 at 16:15

    Charlie, You said:

    “After the fact, the Fed guaranteed them and bought them, but at a cost we are only being to understand.”

    Please don’t start imitating Ray. Everything he says is wrong.

    Anthony, That’s the usual mechanism, but they can also use IOR.

    Carl, NGDPLT is a policy, not a theory. And I don’t understand your question, which says spending soars and also falls. How is that possible?

  61. Gravatar of Carl Carl
    24. March 2015 at 09:22

    That was a bit of a word salad on my part. Sorry. Regarding theory vs. policy, I suppose I should have said “the theory behind your statement that ‘all this would be solved with NGDPLT’.”

    The soaring government spending I was referring to was simply a hypothetical burst in federal spending for the sake of exploring the feedback dynamics between fiscal and monetary institutions when the institution setting monetary policy is following what is a policy neutral to the size of government yet is itself a branch of the Federal government. Will they adhere to the policy when doing so means taking away the punch bowl? In writing it, however, I realize that we have recent evidence of central banks taking away the punch bowl (and the party snacks) in Europe and Japan.

    I just can’t shake the feeling that we’re cheating when one government entity buys securities issued by another one. And I fear the cost of our cheating is that we contribute to the further fattening of our flabby government.

  62. Gravatar of Anthony McNease Anthony McNease
    24. March 2015 at 11:19


    “Anthony, That’s the usual mechanism, but they can also use IOR.”

    Ok, so if it’s the former that means they will have to reduce at least some of their balance sheet to raise rates. Alternatively they increase the IOR. Mechanically how would the latter option work? The Fed raises IOR, the banks park money at the Fed, but then why do interest rates necessarily rise? The banks currently have excess liquidity. They have more deposits than loans. Much more. Most of this excess is parked at the Fed already. How would increasing the interest payments to banks on these reserves raise interest rates? Small increases in IOR wouldn’t seem to impact the supply and demand for debt too much. I wonder how high IOR would have to increase to affect rates meaningfully.

  63. Gravatar of ssumner ssumner
    25. March 2015 at 05:09

    Carl, You said:

    “I just can’t shake the feeling”

    99% of the time when this occurs in economics you should shake the feeling.

    Econ is extremely counterintuitive. Nothing wrong with the Fed buying debt.

    Anthony, The increase in the IOR will raise the fed funds rate, because banks would not want to lend to each other for less than they lend to the Fed. (It’s a bit more complicated, as some reserve holders like the GSEs do not earn interest on reserves.) So the IOR should always be pretty close to the fed funds rate.

  64. Gravatar of Anthony McNease Anthony McNease
    25. March 2015 at 06:23


    “Anthony, The increase in the IOR will raise the fed funds rate, because banks would not want to lend to each other for less than they lend to the Fed.”

    Ok I get that. But what about the IOR change’s effects on the debt markets? What I’m trying to grasp is how an increase in IOR would affect the supply and demand for credit and subsequent effects on yields. I’m trying to follow your “NRFAPC” advice.

    If this is too complex to explain I apologize. I know you don’t have time to teach a class of one in the comments section.

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