It's too bad the St. Louis Fed system doesn't offer data on Federal Reserve assets prior to 2002, but looking at the data from other sources, the red line (Federal Reserve assets) were always lower. As the recession in 2008 approached, the Federal Reserve had about $800 billion in mostly short term treasuries and $0 in mortgage backed securities (MBS).
When the gigantic fraud of the housing bubble crashed the real economy, it left a gaping hole in GDP and federal tax receipts. It turns out that millions of fired workers don't pay much income tax, but do collect lots of benefits. Annual trillion dollar money holes are hard to fill. That's where the Fed rides to the rescue, purchasing treasuries of all maturities and MBS in 12 and 13-digit quantities every year since then.
While the deficit has bottomed and is improving, it is still a giant hole that, current course and speed, may get back to zero around 2018. That would leave the Fed with an estimated $5 trillion in marketable treasuries and MBS. That sounds like a lot for a bank with $5 billion in capital. Luckily, accounting rules and being insolvent don't matter for the Fed since they pass losses (and gains) back to the US Treasury.
Maybe my vision is blurry, but that chart looks unstable to me. It doesn't look self correcting or like it will get back in balance any time soon. It looks like something where errors are being magnified, instead of damped, causing the errors to grow exponentially. But everyone can rest easy, because these top market strategists shared their top stock picks on CNBC today.
The Fed doesn't have to worry about its balance sheet.
ReplyDeleteThe Fed could write off the asset value of its MBS holdings to zero and keep on truckin'.
Probably already is.
The fiscal deficit is just a symptom of imbalances between the under-taxed rent-seeking haves and the have-nots who actually produce the nation's wealth but have to yield way too much of their incomes to the rent-seekers -- in health care, housing, finance, and higher education.
Top 5% of this country is collecting 1/3 the national income. That's one out of twenty households taking 1 out of 3 dollars.
After-tax corporate profits have doubled over the past 10 years:
http://research.stlouisfed.org/fred2/series/CP/
Note of this is remotely sustainable, but the Fed's actions or inactions aren't the problem here. They're not the solution, either, but that is another argument.
Troy,
ReplyDeleteI don't disagree with any of your assertions. It is an open question about how something not "remotely sustainable" becomes sustainable. Look at how much Greece is suffering under the Euro. How long has that gone on?
I can imagine more desirable and less desirable outcomes to get back to sustainability. I have no idea if any of those outcomes will even happen in my lifetime.
Well most of my above was facts, not assertions per se.
ReplyDeleteGreece's central bank cannot print Euros, which is the primary difference between them and us.
Well,that and the fact that they don't have a massive trade deficit like we do.
Prior to the euro, Greece could print drachma to their hearts content, and they did, which is why the drachma was a sick man of Europe for most of history.
Troy,
ReplyDeleteI have read speculation that Germany may halt the bailouts after Merkel's reelection. That would force a resolution to their sustainable problem. At least the drachma was sustainable, if sick.
Cool!
ReplyDelete