The nut of Hussman's piece:
Last week, Ben Bernanke appeared before Congress for his regular Humphrey-Hawkins testimony. For most of that testimony, it fascinated me that every time the Bernanke said that the Fed has taken no losses on its operations, there was absolutely no remark that the reason the Fed has not lost money is that the Treasury, directly (Fannie, Freddie) or indirectly (AIG) has made the liabilities held by the Fed whole.From that perspective, the critical part of Bernanke's testimony was the following exchange with New Jersey Congressman Scott Garrett of the House Financial Services Committee. Importantly, Bernanke concedes that by placing two-thirds of its balance sheet into the liabilities of insolvent agencies (Fannie Mae and Freddie Mac), now under conservatorship, the Fed is essentially relying on Congress to make these institutions whole at taxpayer expense. The Fed has put the public on the hook to bail out the GSEs.
SCOTT GARRETT: You bought over a trillion dollars of GSE debt, and to that point, under normal circumstances, on the Fed's balance sheet what you have on there are Treasuries, or if you had anything else on there, I assume you would have a repurchase agreement for those securities on your balance sheet. Now of course around two-thirds of that are in GSE debt.
BEN BERNANKE: Correct.
GARRETT: So right now, those are guaranteed - whether they're sovereign debt or not, we don't know - but they're guaranteed by the U.S. government. But they're only guaranteed to when? 2012, right? After that, Congress may in its wisdom make another decision, and at that point in time, you may be holding on your balance sheet - two thirds of your balance sheet - something that is not guaranteed by the Federal government. First of all, you don't have a ... do you have a repurchase agreement on those with anyone? No.
BERNANKE: I don't know what you mean by a repurchase agreement. We own those securities.
GARRETT: You own those securities. Right. So there is no repurchase agreement outside to buy them back. You own them.
BERNANKE: Right.
GARRETT: So after 2012, if they're no longer guaranteed, is it fair to say that you may at that point in time actually engage in fiscal policy, because you basically are creating money at that time? And I know that you'd agree that it would be an unconstitutional role for the Fed to engage in fiscal policy - so where will you be at 2012 if they had to take a haircut on those because they're no longer guaranteed?
BERNANKE: Well, first from the government's perspective, I, uh, such an act would, uh, there would, the Federal Reserve would lose money which the Treasury would gain. There would be no overall change to the position of the U.S. government. Secondly, the Federal Reserve act explicitly gives..
GARRETT: How would we be gaining? How is the Treasury gaining?
BERNANKE: Well, if there's a bad mortgage and the Treasury.. it requires $10 to make it good, if the Treasury refuses to do that then the Fed loses $10, so one way or another the government's going to lose $10. But I would just say two things, one is that I think, uh...
GARRETT: But if you didn't purchase them in the first place, it would just be a total - then what would have occurred? There would not have been the creation of that $10. Now that you've purchased them, and in essence if we don't back them up, then you will have created that additional $10.
BERNANKE: Well, I hope that doesn't happen, because I think it's very important for financial stability and confidence that we, that we guarantee...
GARRETT: Let's play out that hypothetical that it does happen.
BERNANKE: Well, then the Fed would lose money there. But let me just point out that the Federal Reserve Act, that we did not invoke any emergency or unusual powers to buy those agencies. It is explicitly in the Federal Reserve Act that we can buy Treasuries or agency securities and so we did not do anything unusual there.
GARRETT: In what status were they when you bought them? Were they in conservatorship at that point?
BERNANKE: Um, yes.
GARRETT: Is it normal practice for the Fed to buy agency securities when they're in conservatorship? Was that ever done before?
BERNANKE: It's never been in conservatorship before.
GARRETT: Well, there you go. So the normal practice is not what was followed here. It just seems to me that we may have gone down a different road than we've ever gone down in U.S. history, where the Federal Reserve has engaged in buying a security, it's not Treasury, it's not guaranteed by the full faith and credit of the United States for its lifetime, nor is there any repurchase agreement from any other entity that you purchased - that you have a trade with an agreement with - and that the Fed in essence could have created money if the government does not guarantee them. At least, that could be the situation we could find ourselves in 2012.
It's important to understand that historically, the Fed has never actually "created money" out of thin air. What it has always done is purchase Treasury debt, paying for that debt by creating "Federal Reserve Notes" (see the top of your dollar bill). When it has purchased other types of securities, it has historically done so using "repurchase agreements." These enable the Fed to sell those securities back at a known price, even if the security itself was to default. By restricting the vast majority of its purchases to U.S. Treasury securities, the Fed has always operated under a budget constraint: Congress has always had the sole, Constitutionally enumerated power to authorize the spending that creates government liabilities, and the Fed has merely affected whether those liabilities were held by the public in the form of Treasury debt or in the form of Federal Reserve Notes (money).
For example, if Congress votes on a billion dollars of spending, and the Treasury issues debt to finance this spending, the Fed might buy that billion dollars of Treasury debt and create a billion dollars of currency to pay for it. But notice that from the standpoint of the public, the end result is still a billion dollars of government liabilities, that was explicitly authorized by Congress. The Fed was never involved in spending decisions, which is fiscal policy.
Contrast this with what the Fed has done in this instance. It has taken its balance sheet up from about $800 billion two years ago (almost exclusively in Treasury securities) to over $2 trillion today, mostly in Fannie Mae and Freddie Mac liabilities. The government's backing of Fannie and Freddie debt was always implicit - they do not have the full faith and credit of the U.S. for their full maturity. If Congress chooses to restructure that debt after 2012, the Federal Reserve will have created money without an offsetting asset of equal value on its balance sheet. It will have spent money out of thin air to pay off the holders of Fannie and Freddie securities. This would constitute a fiscal policy decision that was not actually voted on by elected representatives in Congress
0 comments:
Post a Comment