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An accounting ploy

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  • Michael Hudson
    What do you think of this Fed accounting ploy? This from CNBC, http://www.cnbc.com/id/41198789/ Accounting Tweak Could Save Fed From Losses Published: Friday,
    Message 1 of 12 , Jan 23, 2011
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      An accounting ploy What do you think of this Fed accounting ploy?
      This from CNBC, http://www.cnbc.com/id/41198789/
      Accounting Tweak Could Save Fed From Losses
      Published: Friday, 21 Jan 2011 | 4:58 PM ET
      Reuters
       Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent>  much less likely.
      The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.
      But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.
       
      "Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."
       
      The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.
       
      This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.
       
      "Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
       
      "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.
        
    • Ercouncil@aol.com
      . In neffect the Fed is asaying that iuts shareholder is the US Treasury. In a message dated 23/01/2011 13:45:00 GMT Standard Time,
      Message 2 of 12 , Jan 23, 2011
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        .
         
        In neffect the Fed is asaying that iuts shareholder is the US Treasury.
         
        In a message dated 23/01/2011 13:45:00 GMT Standard Time, michael.hudson@... writes:
         

        What do you think of this Fed accounting ploy?
        This from CNBC, http://www.cnbc.com/id/41198789/
        Accounting Tweak Could Save Fed From Losses
        Published: Friday, 21 Jan 2011 | 4:58 PM ET
        Reuters
         Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent>  much less likely.
        The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.
        But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.
         
        "Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."
         
        The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.
         
        This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.
         
        "Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
         
        "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a researchnote.
          

      • Ercouncil@aol.com
        . In effect, Mike it seems the Fed is saying that the regional Feds are now the financial responsibility, and thus the property, of the US Treasury. So the
        Message 3 of 12 , Jan 23, 2011
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          .
           
          In effect, Mike it seems the Fed is saying that the regional Feds are now the financial responsibility,  and thus the property,  of the US Treasury. So the Fed has put itself into liquidation (to avoid insolvency) and handed over some of it assets to the US government, in a voluntary act of nationalisation! 
           
          Chris
           
          --oo0oo--
           
          In a message dated 23/01/2011 13:45:00 GMT Standard Time, michael.hudson@... writes:
           

          What do you think of this Fed accounting ploy?
          This from CNBC, http://www.cnbc.com/id/41198789/
          Accounting Tweak Could Save Fed From Losses
          Published: Friday, 21 Jan 2011 | 4:58 PM ET
          Reuters
           Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent>  much less likely.
          The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.
          But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.
           
          "Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."
           
          The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.
           
          This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.
           
          "Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
           
          "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.
            

        • Michael Hudson
          OK. So where do we go from here? Is it all a pretense? Does it mean anything in practice (political as well as economic practice). Or is it just playing with
          Message 4 of 12 , Jan 23, 2011
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            Re: [gang8] An accounting ploy OK. So where do we go from here? Is it all a pretense? Does it mean anything in practice (political as well as economic practice). Or is it just playing with numbers?
                Michael


            On 1/23/11 10:02 AM, "Ercouncil@..." <Ercouncil@...> wrote:


             
             
               

            .

            In effect, Mike it seems the Fed is saying that the regional Feds are now the financial responsibility,  and thus the property,  of the US Treasury. So the Fed has put itself into liquidation (to avoid insolvency) and handed over some of it assets to the US government, in a voluntary act of nationalisation!
             
            Chris
             
            --oo0oo--
             
            In a message dated 23/01/2011 13:45:00 GMT Standard Time, michael.hudson@... writes:
              
             

            What do you  think of this Fed accounting ploy?
            This from CNBC, http://www.cnbc.com/id/41198789/
            Accounting  Tweak Could Save Fed From Losses
            Published: Friday, 21 Jan 2011 | 4:58 PM  ET
            Reuters
             Concerns that the Federal Reserve could suffer losses  on its massive bond holdings may have driven the central bank to adopt a  little-noticed accounting change with huge implications: it makes insolvency  <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent>   much less likely.
            The significant shift was tucked quietly into the  Fed's weekly report on its balance sheet and phrased in such technical terms  that it was not even reported by financial media when originally announced on  Jan. 6.
            But the new rules have slowly begun to catch the attention of  market analysts. Many are at once surprised that the Fed can set its own  guidelines, and also relieved that the remote but dangerous possibility that  the world's most powerful central bank might need to ask the U.S. Treasury or  its member banks for money is now more likely to be  averted.
             
            "Could the Fed go broke? The answer to this question was  'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone &  McCarthy in Princeton, New Jersey. "An accounting methodology change at the  central bank will allow the Fed to incur losses, even substantial losses,  without eroding its capital."
             
            The change essentially allows the  Fed to denote losses by the various regional reserve banks that make up the  Fed system as a liability to the Treasury rather than a hit to its capital. It  would then simply direct future profits from Fed operations toward that  liability.
             
            This enhances transparency by providing clearer, more  frequent, snapshots of the central bank's finances, analysts say. The bonus:  the number can now turn negative without affecting the central bank's  underlying financial condition.
             
            "Any future losses the Fed may  incur will now show up as a negative liability as opposed to a reduction in  Fed capital, thereby making a negative capital situation technically  impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill  Lynch and a former New York Fed staffer.
             
            "The timing of the  change is not coincidental, as politicians and market participants alike have  expressed concerns since the announcement (of a second round of asset buys)  about the possibility of Fed 'insolvency' in a scenario where interest rates  rise significantly," Smedley and his colleague Priya Misra wrote in a research  note.
               


              


          • Wray, Randall
            just a change of operations, no significant impact. treasury was on the hook, anyway. and treasury cannot go insolvent; as a creature of congress neither can
            Message 5 of 12 , Jan 23, 2011
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              just a change of operations, no significant impact.
              treasury was on the hook, anyway. and treasury cannot go insolvent; as a creature of congress neither can the fed. the sovereign's balance sheet does of course balance but it does not constrain.
              ________________________________________
              From: Michael Hudson [michael.hudson@...]
              Sent: Sunday, January 23, 2011 7:44 AM
              To: GANG8
              Cc: Wray, Randall; Eric Janszen
              Subject: An accounting ploy

              What do you think of this Fed accounting ploy?
              This from CNBC, http://www.cnbc.com/id/41198789/
              Accounting Tweak Could Save Fed From Losses
              Published: Friday, 21 Jan 2011 | 4:58 PM ET
              Reuters
              Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent><http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent> much less likely.
              The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.
              But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

              "Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

              The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

              This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.

              "Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

              "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.
            • Dr. Richard Werner
              Michael, Randy, Gang, I think it has meaning, and we must assume it is designed to further suit the Fed s purposes. Remember, it was the Fed that created the
              Message 6 of 12 , Jan 23, 2011
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                Michael, Randy, Gang,

                 

                I think it has meaning, and we must assume it is designed to further suit the Fed’s purposes.

                 

                Remember, it was the Fed that created the asset bubble that bust the banking system.

                It was the Fed that made key bail-out decisions, without direct primary involvement of the Treasury.

                But the Fed did not just use its power to create money to bail out specific financial institutions, as would have been most efficient. No, for many of its actions (though not all) it sent the bill to the Treasury, which signed it off afterwards (e.g. AIG bail-out, etc.). Thus the Fed’s actions were designed to further increase US national debt.

                 

                The latest accounting changes are fully consistent with this strategy: they raise the prospect of further rises in national debt, when in terms of the economics there was no reason to render such non-performing assets a government liability: the Fed banks are privately-owned, and their losses are the result of the Fed’s policies. Most of all, the Fed could just keep book losses on its book and not mark them to market, thereby ensuring that they are never realised, and thus there is no cost attached to them.

                 

                If the Fed wanted to avoid an eventually much bigger financial crisis, involving default of the major sovereigns, it would have acted quite differently.

                 

                According to the principle of revealed preference, what the Fed does is what it wants. Over the long run, its revealed preference has not been to create stable growth and stable markets. As I warned in 2002/3: since we have given more and more powers to less and less accountable central banks we must expect more and bigger cycles and financial crises. Nothing has changed in this analysis.

                 

                Regards,

                Richard

                 


                From: gang8@yahoogroups.com [mailto: gang8@yahoogroups.com ] On Behalf Of Michael Hudson
                Sent: 23 January 2011 14:45
                To: GANG8
                Cc: randall wray; Eric Janszen
                Subject: [gang8] An accounting ploy

                 

                 

                What do you think of this Fed accounting ploy?
                This from CNBC, http://www.cnbc.com/id/41198789/
                Accounting Tweak Could Save Fed From Losses
                Published: Friday, 21 Jan 2011 | 4:58 PM ET
                Reuters
                 Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent>  much less likely.
                The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.
                But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.
                 
                "Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton , New Jersey . "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."
                 
                The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.
                 
                This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.
                 
                "Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
                 
                "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.
                  

              • Wray, Randall
                I do not agree. Fed has apparently made commitments of perhaps $20trillion. These are govt commitments, Fed is creature of Congress. It is not just the bad
                Message 7 of 12 , Jan 23, 2011
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                  I do not agree. Fed has apparently made commitments of perhaps $20trillion. These are govt commitments, Fed is creature of Congress. It is not just the bad assets they bought. When all heck breaks loose (again) the commitments will come out in the open. A promise by govt is a debt--contingent, of course, but many of those contingencies will bind.
                  So yes I agree Fed made commitments w/o approval of Congress (Treas is irrelevant). There must be and will be changes to Fed's procedures after all this plays out.
                  Private "ownership" of the Fed is also irrelevant. OK, so what if the bank's equity is wiped out--they are already massively insolvent, anyway. And any accounting would find the Fed massively insolvent too based on its commitments relative to equity, on any reasonable assessment of probability of losses.
                  But, again, govt accounting is never constraining for sovereign govt.
                  ________________________________________
                  From: Dr. Richard Werner [werner@...]
                  Sent: Sunday, January 23, 2011 1:31 PM
                  To: gang8@yahoogroups.com
                  Cc: Wray, Randall; 'Eric Janszen'
                  Subject: RE: [gang8] An accounting ploy

                  Michael, Randy, Gang,

                  I think it has meaning, and we must assume it is designed to further suit the Fed’s purposes.

                  Remember, it was the Fed that created the asset bubble that bust the banking system.
                  It was the Fed that made key bail-out decisions, without direct primary involvement of the Treasury.
                  But the Fed did not just use its power to create money to bail out specific financial institutions, as would have been most efficient. No, for many of its actions (though not all) it sent the bill to the Treasury, which signed it off afterwards (e.g. AIG bail-out, etc.). Thus the Fed’s actions were designed to further increase US national debt.

                  The latest accounting changes are fully consistent with this strategy: they raise the prospect of further rises in national debt, when in terms of the economics there was no reason to render such non-performing assets a government liability: the Fed banks are privately-owned, and their losses are the result of the Fed’s policies. Most of all, the Fed could just keep book losses on its book and not mark them to market, thereby ensuring that they are never realised, and thus there is no cost attached to them.

                  If the Fed wanted to avoid an eventually much bigger financial crisis, involving default of the major sovereigns, it would have acted quite differently.

                  According to the principle of revealed preference, what the Fed does is what it wants. Over the long run, its revealed preference has not been to create stable growth and stable markets. As I warned in 2002/3: since we have given more and more powers to less and less accountable central banks we must expect more and bigger cycles and financial crises. Nothing has changed in this analysis.

                  Regards,
                  Richard

                  ________________________________
                  From: gang8@yahoogroups.com [mailto:gang8@yahoogroups.com] On Behalf Of Michael Hudson
                  Sent: 23 January 2011 14:45
                  To: GANG8
                  Cc: randall wray; Eric Janszen
                  Subject: [gang8] An accounting ploy



                  What do you think of this Fed accounting ploy?
                  This from CNBC, http://www.cnbc.com/id/41198789/
                  Accounting Tweak Could Save Fed From Losses
                  Published: Friday, 21 Jan 2011 | 4:58 PM ET
                  Reuters
                  Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent><http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent> much less likely.
                  The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.
                  But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

                  "Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

                  The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

                  This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.

                  "Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

                  "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.
                • Wray, Randall
                  Sorry that sounds like rogoff and reinhart, who have been completely unable to identify a single forced default by a sovereign gov t with its own floating
                  Message 8 of 12 , Jan 23, 2011
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                    Sorry that sounds like rogoff and reinhart, who have been completely unable to identify a single forced default by a sovereign gov't with its own floating currency (that is, like the usa or turkey). the only thing that comes close is the russian default, which was designed to screw americans and was thus not forced at all but rather a political decision.

                    this statement is fantasy economics. belongs in fantasy video games, not in a serious discussion.
                    ________________________________________
                    From: eric@... [eric@...]
                    Sent: Sunday, January 23, 2011 8:18 PM
                    To: Wray, Randall
                    Cc: Dr. Richard Werner; gang8@yahoogroups.com; 'Eric Janszen'
                    Subject: RE: [gang8] An accounting ploy

                    As Greenspan famously told the Senate Banking Committee Feb. 2005, in
                    response to Democratic Senator Jack Reed on the topic of funding Social
                    Security (Greenspan of course was arguing to raise the qualification age):

                    "We can guarantee cash benefits as far out and at whatever size you like,
                    but we cannot guarantee their purchasing power."

                    The sovereign is unconstrained with respect to the volume of issuance but
                    remains constrained by the market's view of the purchasing power of the
                    issuance, which assessment is expressed in the interest rate of the bonds
                    and exchange rate of the currency in which the bonds are denominated.

                    This paper offers a decent overview of dozens of cases of sovereign debt
                    defaults since 1820. The historical record is clear: sovereigns rarely
                    default the way a household or a business does, technically by missing one
                    debt payment. The preferred method of the sovereign, that is unique to the
                    sovereign, is to repay in a depreciated currency. The rest of us can't
                    print our own money.

                    mitpress.mit.edu/books/chapters/0262195534chapm1.pdf

                    Eric

                    > I do not agree. Fed has apparently made commitments of perhaps
                    > $20trillion. These are govt commitments, Fed is creature of Congress. It
                    > is not just the bad assets they bought. When all heck breaks loose (again)
                    > the commitments will come out in the open. A promise by govt is a
                    > debt--contingent, of course, but many of those contingencies will bind.
                    > So yes I agree Fed made commitments w/o approval of Congress (Treas is
                    > irrelevant). There must be and will be changes to Fed's procedures after
                    > all this plays out.
                    > Private "ownership" of the Fed is also irrelevant. OK, so what if the
                    > bank's equity is wiped out--they are already massively insolvent, anyway.
                    > And any accounting would find the Fed massively insolvent too based on its
                    > commitments relative to equity, on any reasonable assessment of
                    > probability of losses.
                    > But, again, govt accounting is never constraining for sovereign govt.
                    > ________________________________________
                    > From: Dr. Richard Werner [werner@...]
                    > Sent: Sunday, January 23, 2011 1:31 PM
                    > To: gang8@yahoogroups.com
                    > Cc: Wray, Randall; 'Eric Janszen'
                    > Subject: RE: [gang8] An accounting ploy
                    >
                    > Michael, Randy, Gang,
                    >
                    > I think it has meaning, and we must assume it is designed to further suit
                    > the Fed’s purposes.
                    >
                    > Remember, it was the Fed that created the asset bubble that bust the
                    > banking system.
                    > It was the Fed that made key bail-out decisions, without direct primary
                    > involvement of the Treasury.
                    > But the Fed did not just use its power to create money to bail out
                    > specific financial institutions, as would have been most efficient. No,
                    > for many of its actions (though not all) it sent the bill to the Treasury,
                    > which signed it off afterwards (e.g. AIG bail-out, etc.). Thus the Fed’s
                    > actions were designed to further increase US national debt.
                    >
                    > The latest accounting changes are fully consistent with this strategy:
                    > they raise the prospect of further rises in national debt, when in terms
                    > of the economics there was no reason to render such non-performing assets
                    > a government liability: the Fed banks are privately-owned, and their
                    > losses are the result of the Fed’s policies. Most of all, the Fed could
                    > just keep book losses on its book and not mark them to market, thereby
                    > ensuring that they are never realised, and thus there is no cost attached
                    > to them.
                    >
                    > If the Fed wanted to avoid an eventually much bigger financial crisis,
                    > involving default of the major sovereigns, it would have acted quite
                    > differently.
                    >
                    > According to the principle of revealed preference, what the Fed does is
                    > what it wants. Over the long run, its revealed preference has not been to
                    > create stable growth and stable markets. As I warned in 2002/3: since we
                    > have given more and more powers to less and less accountable central banks
                    > we must expect more and bigger cycles and financial crises. Nothing has
                    > changed in this analysis.
                    >
                    > Regards,
                    > Richard
                    >
                    > ________________________________
                    > From: gang8@yahoogroups.com [mailto:gang8@yahoogroups.com] On Behalf Of
                    > Michael Hudson
                    > Sent: 23 January 2011 14:45
                    > To: GANG8
                    > Cc: randall wray; Eric Janszen
                    > Subject: [gang8] An accounting ploy
                    >
                    >
                    >
                    > What do you think of this Fed accounting ploy?
                    > This from CNBC, http://www.cnbc.com/id/41198789/
                    > Accounting Tweak Could Save Fed From Losses
                    > Published: Friday, 21 Jan 2011 | 4:58 PM ET
                    > Reuters
                    > Concerns that the Federal Reserve could suffer losses on its massive bond
                    > holdings may have driven the central bank to adopt a little-noticed
                    > accounting change with huge implications: it makes insolvency
                    > <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent><http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent>
                    > much less likely.
                    > The significant shift was tucked quietly into the Fed's weekly report on
                    > its balance sheet and phrased in such technical terms that it was not even
                    > reported by financial media when originally announced on Jan. 6.
                    > But the new rules have slowly begun to catch the attention of market
                    > analysts. Many are at once surprised that the Fed can set its own
                    > guidelines, and also relieved that the remote but dangerous possibility
                    > that the world's most powerful central bank might need to ask the U.S.
                    > Treasury or its member banks for money is now more likely to be averted.
                    >
                    > "Could the Fed go broke? The answer to this question was 'Yes,' but is now
                    > 'No,'" said Raymond Stone, managing director at Stone & McCarthy in
                    > Princeton, New Jersey. "An accounting methodology change at the central
                    > bank will allow the Fed to incur losses, even substantial losses, without
                    > eroding its capital."
                    >
                    > The change essentially allows the Fed to denote losses by the various
                    > regional reserve banks that make up the Fed system as a liability to the
                    > Treasury rather than a hit to its capital. It would then simply direct
                    > future profits from Fed operations toward that liability.
                    >
                    > This enhances transparency by providing clearer, more frequent, snapshots
                    > of the central bank's finances, analysts say. The bonus: the number can
                    > now turn negative without affecting the central bank's underlying
                    > financial condition.
                    >
                    > "Any future losses the Fed may incur will now show up as a negative
                    > liability as opposed to a reduction in Fed capital, thereby making a
                    > negative capital situation technically impossible," said Brian Smedley, a
                    > rates strategist at Bank of America-Merrill Lynch and a former New York
                    > Fed staffer.
                    >
                    > "The timing of the change is not coincidental, as politicians and market
                    > participants alike have expressed concerns since the announcement (of a
                    > second round of asset buys) about the possibility of Fed 'insolvency' in a
                    > scenario where interest rates rise significantly," Smedley and his
                    > colleague Priya Misra wrote in a research note.
                    >
                    >
                    >
                  • Dr. Richard Werner
                    Dear Randy, I don t think we disagree that much... I am talking about the Fed manoeuvring the government into a corner of massive national debt, just like the
                    Message 9 of 12 , Jan 25, 2011
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                      Dear Randy,

                      I don't think we disagree that much... I am talking about the Fed
                      manoeuvring the government into a corner of massive national debt, just like
                      the Bank of Japan did in Japan, and the ECB in Europe with many countries...
                      My point is that different policies would have been possible for the
                      respective central banks, but they chose to take the ones resulting in high
                      national debt.

                      Your argument is a legal/structural one about the economics of our financial
                      system (of which many players, especially politicians, may not be aware),
                      and it is not about the political issues: the Fed is a political player and
                      its leadership is not part of the US government, and its decisions are not
                      identical with government or Congress decisions/actions/goals.

                      Central banks have been pursuing their own agendas without meaningful
                      accountability, and this is also true for the Fed. This accounting rule
                      change is a case in point. Why else would there be a unilateral change,
                      without a wider debate, especially in Congress, about the implications and
                      about possible alternative approaches?

                      So in my view it is not good enough to simply say, like many textbooks, that
                      the central bank is to be considered as part of the government.

                      Warm regards,
                      Richard

                      -----Original Message-----
                      From: Wray, Randall [mailto:WrayR@...]
                      Sent: 23 January 2011 21:00
                      To: Dr. Richard Werner; gang8@yahoogroups.com
                      Cc: 'Eric Janszen'
                      Subject: RE: [gang8] An accounting ploy

                      I do not agree. Fed has apparently made commitments of perhaps $20trillion.
                      These are govt commitments, Fed is creature of Congress. It is not just the
                      bad assets they bought. When all heck breaks loose (again) the commitments
                      will come out in the open. A promise by govt is a debt--contingent, of
                      course, but many of those contingencies will bind.
                      So yes I agree Fed made commitments w/o approval of Congress (Treas is
                      irrelevant). There must be and will be changes to Fed's procedures after all
                      this plays out.
                      Private "ownership" of the Fed is also irrelevant. OK, so what if the bank's
                      equity is wiped out--they are already massively insolvent, anyway. And any
                      accounting would find the Fed massively insolvent too based on its
                      commitments relative to equity, on any reasonable assessment of probability
                      of losses.
                      But, again, govt accounting is never constraining for sovereign govt.
                      ________________________________________
                      From: Dr. Richard Werner [werner@...]
                      Sent: Sunday, January 23, 2011 1:31 PM
                      To: gang8@yahoogroups.com
                      Cc: Wray, Randall; 'Eric Janszen'
                      Subject: RE: [gang8] An accounting ploy

                      Michael, Randy, Gang,

                      I think it has meaning, and we must assume it is designed to further suit
                      the Fed's purposes.

                      Remember, it was the Fed that created the asset bubble that bust the banking
                      system.
                      It was the Fed that made key bail-out decisions, without direct primary
                      involvement of the Treasury.
                      But the Fed did not just use its power to create money to bail out specific
                      financial institutions, as would have been most efficient. No, for many of
                      its actions (though not all) it sent the bill to the Treasury, which signed
                      it off afterwards (e.g. AIG bail-out, etc.). Thus the Fed's actions were
                      designed to further increase US national debt.

                      The latest accounting changes are fully consistent with this strategy: they
                      raise the prospect of further rises in national debt, when in terms of the
                      economics there was no reason to render such non-performing assets a
                      government liability: the Fed banks are privately-owned, and their losses
                      are the result of the Fed's policies. Most of all, the Fed could just keep
                      book losses on its book and not mark them to market, thereby ensuring that
                      they are never realised, and thus there is no cost attached to them.

                      If the Fed wanted to avoid an eventually much bigger financial crisis,
                      involving default of the major sovereigns, it would have acted quite
                      differently.

                      According to the principle of revealed preference, what the Fed does is what
                      it wants. Over the long run, its revealed preference has not been to create
                      stable growth and stable markets. As I warned in 2002/3: since we have given
                      more and more powers to less and less accountable central banks we must
                      expect more and bigger cycles and financial crises. Nothing has changed in
                      this analysis.

                      Regards,
                      Richard

                      ________________________________
                      From: gang8@yahoogroups.com [mailto:gang8@yahoogroups.com] On Behalf Of
                      Michael Hudson
                      Sent: 23 January 2011 14:45
                      To: GANG8
                      Cc: randall wray; Eric Janszen
                      Subject: [gang8] An accounting ploy



                      What do you think of this Fed accounting ploy?
                      This from CNBC, http://www.cnbc.com/id/41198789/
                      Accounting Tweak Could Save Fed From Losses
                      Published: Friday, 21 Jan 2011 | 4:58 PM ET
                      Reuters
                      Concerns that the Federal Reserve could suffer losses on its massive bond
                      holdings may have driven the central bank to adopt a little-noticed
                      accounting change with huge implications: it makes insolvency
                      <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent
                      ><http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolven
                      t> much less likely.
                      The significant shift was tucked quietly into the Fed's weekly report on its
                      balance sheet and phrased in such technical terms that it was not even
                      reported by financial media when originally announced on Jan. 6.
                      But the new rules have slowly begun to catch the attention of market
                      analysts. Many are at once surprised that the Fed can set its own
                      guidelines, and also relieved that the remote but dangerous possibility that
                      the world's most powerful central bank might need to ask the U.S. Treasury
                      or its member banks for money is now more likely to be averted.

                      "Could the Fed go broke? The answer to this question was 'Yes,' but is now
                      'No,'" said Raymond Stone, managing director at Stone & McCarthy in
                      Princeton, New Jersey. "An accounting methodology change at the central bank
                      will allow the Fed to incur losses, even substantial losses, without eroding
                      its capital."

                      The change essentially allows the Fed to denote losses by the various
                      regional reserve banks that make up the Fed system as a liability to the
                      Treasury rather than a hit to its capital. It would then simply direct
                      future profits from Fed operations toward that liability.

                      This enhances transparency by providing clearer, more frequent, snapshots of
                      the central bank's finances, analysts say. The bonus: the number can now
                      turn negative without affecting the central bank's underlying financial
                      condition.

                      "Any future losses the Fed may incur will now show up as a negative
                      liability as opposed to a reduction in Fed capital, thereby making a
                      negative capital situation technically impossible," said Brian Smedley, a
                      rates strategist at Bank of America-Merrill Lynch and a former New York Fed
                      staffer.

                      "The timing of the change is not coincidental, as politicians and market
                      participants alike have expressed concerns since the announcement (of a
                      second round of asset buys) about the possibility of Fed 'insolvency' in a
                      scenario where interest rates rise significantly," Smedley and his colleague
                      Priya Misra wrote in a research note.
                    • G W Gardiner
                      The effect of the FED having a negative equity as a result of losses would be psychological only, I think, but that matters. Getting the Treasury to
                      Message 10 of 12 , Jan 27, 2011
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                        The effect of the FED having a negative equity as a result of losses would be psychological only, I think, but that matters. Getting the Treasury to recapitalise is therefore of some value, but not logically necessary.
                         
                        Presumably the amount of the losses will be debited to the Treasury’s balance at the FED. See http://www.federalreserve.gov/releases/h41/current/h41.htm (The FED balance sheet would be easier to understand if it  were presented in traditional textbook format.)
                         
                        If the FED’s accounts were kept secret, the negative balance could be left for ever. If one insisted it be charged to the banks who normally finance the FED, it would destroy their liquidity and the FED would have to lend them the wherewithal to restore the liquidity. The banks would have to recoup their losses charged to them by charging borrowers more and allowing depositors less. Presumably for macro-economic reasons the government is reluctant to make that happen as it would stall recovery. The governments’ overall objective is, I assume, to restore the credit bubble so that the president will be re-elected. If he is not, the next president will pursue the same policy, and so on ad infinitum. With the bubble restored the loans will cease to be toxic for a while, the FED will make a huge profit, which the Treasury will grab.
                         
                        I doubt if there is any point in getting fussed up about these changes. What they show is that the FED is de facto a US government agency, despite the pretence that it is a bankers’ club.
                         
                        Geoffrey
                         
                         
                        Sent: Sunday, January 23, 2011 1:44 PM
                        To: GANG8
                        Subject: [gang8] An accounting ploy
                         
                         

                        What do you think of this Fed accounting ploy?
                        This from CNBC, http://www.cnbc.com/id/41198789/
                        Accounting Tweak Could Save Fed From Losses
                        Published: Friday, 21 Jan 2011 | 4:58 PM ET
                        Reuters
                        Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent>  much less likely.
                        The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.
                        But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.
                         
                        "Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."
                         
                        The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.
                         
                        This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.
                         
                        "Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
                         
                        "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.
                         

                      • G W Gardiner
                        Wish I had said it so succinctly, Chris. Geoff From: Ercouncil@aol.com Sent: Sunday, January 23, 2011 2:56 PM To: gang8@yahoogroups.com Subject: Re: [gang8] An
                        Message 11 of 12 , Jan 27, 2011
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                          Wish I had said it so succinctly, Chris.
                           
                          Geoff
                           
                           
                          Sent: Sunday, January 23, 2011 2:56 PM
                          Subject: Re: [gang8] An accounting ploy
                           
                           

                          .
                           
                          In neffect the Fed is asaying that iuts shareholder is the US Treasury.
                           
                          In a message dated 23/01/2011 13:45:00 GMT Standard Time, michael.hudson@... writes:
                           

                          What do you think of this Fed accounting ploy?
                          This from CNBC, http://www.cnbc.com/id/41198789/
                          Accounting Tweak Could Save Fed From Losses
                          Published: Friday, 21 Jan 2011 | 4:58 PM ET
                          Reuters
                          Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent>  much less likely.
                          The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6.
                          But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.
                           
                          "Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."
                           
                          The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.
                           
                          This enhances transparency by providing clearer, more frequent, snapshots of the central bank's finances, analysts say. The bonus: the number can now turn negative without affecting the central bank's underlying financial condition.
                           
                          "Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.
                           
                          "The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed 'insolvency' in a scenario where interest rates rise significantly," Smedley and his colleague Priya Misra wrote in a research note.
                           

                        • G W Gardiner
                          The last, Geoff From: Michael Hudson Sent: Sunday, January 23, 2011 3:20 PM To: gang8@yahoogroups.com Subject: Re: [gang8] An accounting ploy OK. So where do
                          Message 12 of 12 , Jan 27, 2011
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                            The last,
                             
                            Geoff
                             
                            Sent: Sunday, January 23, 2011 3:20 PM
                            Subject: Re: [gang8] An accounting ploy
                             
                             

                            OK. So where do we go from here? Is it all a pretense? Does it mean anything in practice (political as well as economic practice). Or is it just playing with numbers?
                                Michael


                            On 1/23/11 10:02 AM, "Ercouncil@..." <Ercouncil@...> wrote:


                             
                             
                              

                            .

                            In effect, Mike it seems the Fed is saying that the regional Feds are now the financial responsibility,  and thus the property,  of the US Treasury. So the Fed has put itself into liquidation (to avoid insolvency) and handed over some of it assets to the US government, in a voluntary act of nationalisation!
                             
                            Chris
                             
                            --oo0oo--
                             
                            In a message dated 23/01/2011 13:45:00 GMT Standard Time, michael.hudson@... writes:

                             

                            What do you  think of this Fed accounting ploy?
                            This from CNBC, http://www.cnbc.com/id/41198789/
                            Accounting  Tweak Could Save Fed From Losses
                            Published: Friday, 21 Jan 2011 | 4:58 PM  ET
                            Reuters
                            Concerns that the Federal Reserve could suffer losses  on its massive bond holdings may have driven the central bank to adopt a  little-noticed accounting change with huge implications: it makes insolvency  <http://www.cnbc.com/id/41015501/?Could_the_Federal_Reserve_Become_Insolvent>   much less likely.
                            The significant shift was tucked quietly into the  Fed's weekly report on its balance sheet and phrased in such technical terms  that it was not even reported by financial media when originally announced on  Jan. 6.
                            But the new rules have slowly begun to catch the attention of  market analysts. Many are at once surprised that the Fed can set its own  guidelines, and also relieved that the remote but dangerous possibility that  the world's most powerful central bank might need to ask the U.S. Treasury or  its member banks for money is now more likely to be  averted.
                             
                            "Could the Fed go broke? The answer to this question was  'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone &  McCarthy in Princeton, New Jersey. "An accounting methodology change at the  central bank will allow the Fed to incur losses, even substantial losses,  without eroding its capital."
                             
                            The change essentially allows the  Fed to denote losses by the various regional reserve banks that make up the  Fed system as a liability to the Treasury rather than a hit to its capital. It  would then simply direct future profits from Fed operations toward that  liability.
                             
                            This enhances transparency by providing clearer, more  frequent, snapshots of the central bank's finances, analysts say. The bonus:  the number can now turn negative without affecting the central bank's  underlying financial condition.
                             
                            "Any future losses the Fed may  incur will now show up as a negative liability as opposed to a reduction in  Fed capital, thereby making a negative capital situation technically  impossible," said Brian Smedley, a rates strategist at Bank of America-Merrill  Lynch and a former New York Fed staffer.
                             
                            "The timing of the  change is not coincidental, as politicians and market participants alike have  expressed concerns since the announcement (of a second round of asset buys)  about the possibility of Fed 'insolvency' in a scenario where interest rates  rise significantly," Smedley and his colleague Priya Misra wrote in a research  note.
                              


                             


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