warren mosler

http://www.moslereconomics.com
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    • Wed Mar 12th 22:20 PM | Rating: 0 0
      Commented on:
      Fed's Actions: Less Than Meets the Eye
      mostly agree with flow 5

      with today's non convertible currency fed action is about 'price' (interest rates) and not 'quantity.'

      nothing they do alters net financial assets.

      unfortunately even the fed doesn't quite get it, or, for example, they wouldn't set quantities for the taf or have an auction. they would just announce a target rate and clear all takers at that rate.

      and, as above, net system wide reserves would not change.

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    • Sun Mar 9th 22:10 PM | Rating: 0 0
      Commented on:
      Repurchase Agreements and Covert Nationalization

      First, you need to get out of the gold standard (fixed fx/convertible currency) and into the current non convertible currency/floating fx $US regime.

      "In James Hamilton's wonderful coinage, the Fed is conducting monetary policy on the asset side of the balance sheet. This is an innovation of the Bernanke Fed. Conventionally, monetary policy is about managing the quantity of the central bank's core liability, currency outstanding.

      THAT'S FROM THE GOLD STANDARD DAYS, OR, IN TODAY'S WORLD, THE FEW CURRENCIES THAT STILL HAVE VARIOUS FIXED FX POLICIES FOR CB CONVERTIBILITY.

      When the Fed wants to loosen, it expands its liabilities by issuing cash in exchange for securities. When it wants to tighten, it redeems cash for securities, reducing Fed liabilities.

      THIS ISN'T HOW IT WORKS WITH TODAY'S NON CONVERTIBLE CURRENCY/FLOATING EXCHANGE RATE REGIME.

      OPEN MARKET OPERATIONS ONLY 'OFFSET OPERATING FACTORS' AND FED ACTIONS ONLY SERVE TO ALTER THE MIX OF PRIVATE SECTOR HOLDINGS OF CURRENCY, SECURITIES, AND FED BALANCES (RESERVES). THE ONLY FURTHER PURPOSE OF ALTERING THIS MIX IS SETTING AN INTEREST RATE.

      IT IS ALL ABOUT PRICE, AND NOT QUANTITY, WITH TODAY'S FLOATING FX REGIME. THERE IS NO OTHER CHOICE AS A POINT OF LOGIC.

      The asset side is conventionally an afterthought, "government securities". "

      THE NEXT POINT IS THAT THE LIABILITY SIDE OF BANKING IS NOT THE PLACE FOR 'MARKET DISCIPLINE' AS A PRACTICAL MATTER, HENCE GOVT. INSURED DEPOSITS. INSTEAD, REGULATION IS ON THE ASSET SIDE- BANKS ARE HIGHLY REGULATED VIA CAPITAL REQUIREMENTS (HOW MUCH LEVERAGE SHAREHOLDERS ARE ALLOWED TO HAVE) ALONG WITH A RESTRICTED LIST OF 'LEGAL ASSETS' AND DEFINED RISKS FOR 'GAP', DIVERSITY, AND THE LIKE.

      THIS MEANS THAT ANYTHING THE BANK ALREADY OWNS HAS BEEN 'APPROVED' BY THE BANK REGULATORS, AND BANKS ARE ALLOWED TO FUND THESE ASSETS WITH GOVT INSURED DEPOSITS, WHICH HAPPEN TO BE APPROX EQUAL TO BANK LOANS AND OTHER ASSETS, AS 'LOANS CREATE DEPOSITS.' (THE GOLD STANDARD, FOR EXAMPLE AND IN CONTRAST, IS A LOANABLE FUNDS WORLD, ISLM, ALL THAT). YES, BANKS LENDING TO EACH OTHER PUTS A LAYER OR TWO BETWEEN THE DEPOSITS AND LOANS QUITE OFTEN, BUT THAT'S A DIFFERENT MATTER.

      SO FOR ALL PRACTICAL PURPOSES THE RISK TO THE GOVT DOESN'T CHANGE WHEN THE FED FUNDS ANY LEGAL BANK ASSET VIA THE TAF OR ANY OTHER FORM OF FINANCE FROM THE FED. WHAT DOES CHANGE IS THE RATE BANKS PAY FOR FUNDS, IF/WHEN THAT RATE HAS CLIMBED ABOVE THE FED'S TARGET RATE DUE TO WILLINGNESS OF BANKS LENDING TO EACH OTHERE.

      AGAIN, AS IT HAS BEEN NOTED, LOANS CREATED DEPOSITS, AND DEPOSITS FOR ALL PRACTICAL PURPOSES FUND ALL THE LOANS AND OTHER BANK ASSETS AS A MATTER OF ACCOUNTING. THE TAF AND OTHER FED OPERATIONS DOESN'T ADD ANY NET FINANCIAL ASSETS TO THE BANKING SYSTEM, AND IN FACT VERY LITTLE NET FUNDING IS EVER OBSERVED FROM A CB TO THE BANKING SYSTEM, AS EXPLAINED ABOVE.

      MONETARY OPERATIONS ARE NOT COMPLEX- SIMPLE DEBITS AND CREDITS. CLEARLY THE FOMC HAS LESS THAN A WORKING KNOWLEDGE OF RESERVE ACCOUNTING AS DOES MUCH OF THE STEET AND ACADEMIA. A LITTLE EDUCATION FROM THOSE IN THE FED WHO HAVE A KEEN AWARENESS OF WHAT'S GOING ON WOULD GO A LONG WAY TOWARDS MOVING ON FROM NON ISSUES TO THE REAL ISSUES FACED BY THIS ECONOMY.
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    • Sun Mar 9th 19:16 PM | Rating: 0 0
      Commented on:
      Commodities' Surging Price: The Fed Connection
      With floating fx/non convertible currency the govt of issue can set the nominal rate at any level it wants to. There are no market forces that come to bear on the nominal interest rate. The Fed votes on the rate and that's where it goes.

      see 'Soft Currency Economics' at moslereconomics.com
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    • Sun Mar 9th 08:16 AM | Rating: 0 0
      Commented on:
      Why the Fed's Interventions Aren't Working
      the govt already let's the banks fund with insured deposits, and in our 'loans create deposits' world for all practical purposes, directly or indirectly, most bank funding winds up to be from these insured deposits. (the indirect path is via interbank lending, and yes, many depositors elect to hold deposits larger than the 100,000 insured max)

      The TAF is just another insured deposit.

      Also note that funds received via the taf are credits to bank reserve accounts at the fed, which means the fed immediately has to offer 'interest bearing alternatives' to these non interest bearing reserve accounts or the ff rate falls towards 0 very quickly. this is called 'offsetting operating factors' by the NY fed, and all they do is let repo run off or do actually matched sales, which allows banks to move non interest bearing reserve balances at the fed to interest bearing accounts at the fed (tsy secs are functionally interest bearing accounts at the fed) and the ff rate stays at the target rate.

      bottom line, the fed lends to the banks via the taf and borrows from the banks via open market operations at the same time. as a matter of accounting logic it has no choice.

      see 'soft currency ecnomics' at moslereconomics.com under 'mandatory readings'

      it was written in 1993 and very little has changed since then.
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    • Sun Mar 9th 07:58 AM | Rating: 0 0
      Commented on:
      Flow of Funds Report: Maybe Bernanke Is Onto Something
      the 'tougher' bankruptcy laws of a few years ago have also contributed to a weaker consumer.

      Before the new laws you could declare bankruptcy and start over. Today the courts are more likely to hack off some of your future income to pay your old debts.


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    • Sat Mar 8th 22:49 PM | Rating: 0 0
      Commented on:
      Here's Why the Fed Has No Credibility
      The Fed's action might be signalling they are now responding other than with a rate cut, due to concerns about inflation. Not too many weeks ago the credit issues seen last week along with the equity market weakness would have meant a rate cut.

      Also note that the fed still doesn't full grasp monetary operations, or they would simply be setting the 'price' (interest rate) for the TAF and letting the quantity float. The quantity of TAF funding or any other open market operations functionally has nothing to do with 'money supply' in any economic sense.

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    • Sat Mar 8th 22:41 PM | Rating: 0 0
      Commented on:
      March Market-to-Market Madness
      Couldn't agree more. The US banking system was not meant to be a mark to market business model for public purpose, and trying to force it into that mold does not serve public purpose.

      The banking model is individual underwriting of loans, internal credit analysis, and then lending based on a myriad of variables that go into determining 'credit worthiness' and ability to make the required loan payments.

      Additionally, bank regulators regularly examine all the bank's loans for compliance, reveiw credit statements from borrowers to make sure their credit worthiness hasn't deteriorated, etc. If there are any problem loans found, they are classified as such and the bank takes a capital hit, which will increase as the loan quality deteriorates.

      All this is to 'protect' the govt who insures bank liabilities. The liability side is not the place for market discipline. The asset side and capital requirements (shareholder risk), legal lending requirements, etc. provide the market disicpline.

      This sytem is far from perfect, of course. Regulators make errors, incentives are sometimes put in the wrong places, etc. But it does work reasonably well over time, and the regulators constantly adjust to changing times, however late and slowly.

      To try to suddenly apply market to market requirements on this system is at best inapplicable, and at worst a major contributor to the current financial crisis.

      Nor is there any good reason, regarding public purpose, to impose mark to market on a system based on individual credit analysis. it comes from a lack of fundamental understanding of the US banking model.

      That said, it also makes no sense to let banks get into businesses that are based on mark to market models. That was the regulatory mistake, and that's what should be reversed.

      Let the banks fund their own sivs by taking them back on their balance sheets with capital charges based on risk determined by underwriting, but then take sivs and related vehicles off the list of approved bank activities. That way they all get funded at the ff rate and eventually mature their way away.




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    • Sat Mar 8th 22:26 PM | Rating: 0 0
      Commented on:
      The Misleading Jobless Rate
      The jobless recovery has turned into the full employment recession.

      Whatever the actual reason, the Fed points to studies showing the labor force participation rate should be trending down over time, and accepts this as highly probable. That means they probably take the side that demographics are causing an expected drop in the labor force.

      They have said in speeches late last year that the unemployment rate was therefore more important than the new jobs created.

      In fact, the .3 jump in unemployment in Dec. alarmed them and drove subsequent rate cuts.

      Now we get to see if it's a symetric or assymetric influence on the Fed.

      They believe that 4.75% is the 'full employment' rate and anything below that inflationary, so for all practical purposes we are already there.

      Cutting rates into what they see as full employment during what has the appearance of an accelerating inflation- with most inflation expectation indicators flashing red- will likely alienate the remaining mainstream support they have for current policy.
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    • Sat Mar 8th 22:13 PM | Rating: 0 0
      Commented on:
      Bernanke and the Beast: Beware the MNOG
      Good points.

      First, housing is low enough where it is unlikely to increase it's subtraction from gdp, and exports booming enough where they are likely to keep supporting gdp at 'muddle through' levels, before the tax rebates hit.

      Second, nominal incomes are holding up reasonably well, so negative gdp will be a function of a higher deflator, which is bad news/bad news for the Fed- weakness due to high inflation.

      Yes, 'regulatory over reach' is a risk, but so far Mishkin has reported 'small banks' are not altering their lending standards sufficiently to cut into volume.

      In general, 'tightening lending standards' such as higher down payments, income verification, etc. don't necessarily reduce lending. For the most part borrowers simply comply with the additional requirements.

      As you state the largest risk is political- a tax hike now would immediatly reduce demand, for example. That's what happened in Japan in the 'lost decade'- they kept hiking taxes of all kinds to address the growing deficit. When they finally let the govt. deficit get to about 7% (adding that much in net financial assets and income to the private sector) and remain there the economy finally turned around.



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    • Sat Mar 8th 22:10 PM | Rating: 0 0
      Commented on:
      Two Explanations for Surging Oil Prices
      How about the obvious- the Saudis are acting as swing producer, posting price (aka setting price) and letting quantity pumped adjust.

      It's a simple case of a monopolist (at the margin) setting price. They did this in the 70's and it didn't stop until opec production was cut by 15 million bdp in the early 80's in an attempt to support the price. But net supply was larger than that and the Saudis were forced to 'hit bids' rather than get their 'offer lifted.'

      Today they are back in the driver's seat, getting their offer lifted at any price they wish to post. Operationally, they post prices with their refiners. They don't sell in the spot market.

      Yes, they deny they are setting price, but as a point of logic they have no choice.

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