Posts Tagged ‘central bank’

The Fed’s 2010 Profit? A Cool $81.7 Billion

Tuesday, April 5th, 2011

The Federal Reserve made some serious money in 2010. The central bank’s profit soared to $81.7 billion, a record high, primarily from growing interest earnings on federal agency and government-sponsored enterprise mortgage-backed securities.  The Fed’s balance sheet — which also can be monitored monthly — ballooned to $2.43 trillion, up $193 billion from 2009, as holdings of the Treasury Department and mortgage-backed securities increased. The Fed gave back $79 billion to Treasury in last year, an 68 percent increase over $47 billion the Fed returned in 2009.  The Fed’s previous record high earnings was $53.4 billion.

In reaction to the financial crisis, the Fed acquired securities whose value had collapsed due to fear and uncertainty in markets.  Additionally, the Fed created emergency lending programs for banks and firms, which further boosted its balance sheet.  The central bank came under attack for taking too many risks with taxpayer money and putting itself in a position to endure losses.  So far the Fed’s crisis-lending programs have earned handsome profits.  The 2010 income rise primarily resulted from $24 billion in interest earnings from the $1.0 trillion mortgage-backed securities and agency bonds it bought to stabilize the housing market.  As of last week, the Fed held a virtually identical quantity of such securities.

The Treasury Department plans to slowly sell its $142 billion portfolio of mortgage-backed securities.  Although there’s no direct implication for Fed policy, the market reaction to the Treasury sale provides valuable input into how the central bank may go about selling its own significantly larger holdings, which analyst expect to take place early in 2012. That’s a significant increase over the $907 billion it held in August 2008, just before the financial crisis.  To help the nation’s economy recover, the Fed has created massive amounts of credit to support the banking system and buy bonds.

Writing in the Christian Science Monitor, Doug French notes that “Amongst the assets Mr. Bernanke and Co. are shepherding include sub-prime mortgage bonds that once belonged to American International Group (AIG).  The Wall Street Journal reports that AIG would like to repurchase these bonds as a part of its attempt to break free from government control through a public stock offering.  ‘Ahead of that, AIG wants to be able to show investors it is putting its cash to work and boosting investment income in its insurance units,’ reports the WSJ’s Serena Ng.  The rub is that AIG is offering 53 cents on the dollar for the mortgage bonds.  Maybe the Fed can do better in the marketplace.”

Congress Will Examine the Fed’s Actions During the Financial Crisis

Tuesday, May 25th, 2010

A bipartisan Senate votes to investigate the Fed’s actions before and during the financial crisis.  In a rare moment of bipartisanship, the Senate voted 96 – 0 to attach a modified version of an amendment proposed by Sen. Bernard Sanders (I-VT) to the financial regulatory bill to investigate transparency in emergency lending practices by the Federal Reserve during the financial crisis.  “This amendment begins the process of lifting the veil of secrecy of perhaps the most powerful federal agency,” Sanders said.  The vote also is a nod to public frustration with the government’s Wall Street bailout.

President Barack Obama has asked Congress to enact reform legislation that will make capital markets less susceptible to crises.  The Senate’s vote will clarify the Fed’s emergency lending practices during the crisis when it put hundreds of billions of dollars into the financial markets to stabilize the economy.  The proposal marks the first time the Fed has been investigated this thoroughly by Congress.

The Senate wants to scrutinize the Fed’s role in the time leading up to and during the financial crisis to determine if there were any regulatory gaffes.  Passage of the amendment allows a one-time audit of the Fed’s emergency lending since December 2007.  Additionally, the Fed will have to publicly disclose detailed data about which financial institutions it has lent money to by December 1.  Although the Fed initially was uneasy about the audit, its comfort level has now improved.  According to Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, “I’m comfortable with the modified Sanders amendment.”

Fed Retirement Gives President Obama the Go-Ahead to Chart a New Fiscal Course

Thursday, March 11th, 2010

Donald Kohn’s retirement gives President Obama the opportunity to reshape the Federal Reserve.  Federal Reserve Chairman Ben Bernanke may get all the headlines, but the retirement of Vice Chairman Donald L. Kohn is giving President Barack Obama the historic opportunity to reshape the nation’s central bank. Kohn is one of seven Fed governors who set U.S. monetary policy and regulate the financial system.

The change comes at a time of historic transformation and intense examination of the Fed and its mission.  Over the past 18 months, the Fed has taken extraordinary steps to recue the nation from the worst financial crisis since the Great Depression and stabilize the economy.  The Fed has now reached the point where it must decide how and when to relax some of its emergency actions.  The Fed’s governors also must transform their regulatory approach to prevent future financial crises.  They also must avert attempts by Congress to enact greater monetary policy oversight and take away the Fed’s ability to supervise banks.

Potential candidates for the job include Christina Romer, Council of Economics Advisers Chairman, and Janet Yellen, President of the Federal Reserve of San Francisco.  Kohn, who has been with the Fed for 40 years, will take with him much of the central bank’s institutional memory.  Additionally, Kohn received high praise from his boss.  According to Bernanke, “The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions over 40 years of public service.”

“It’s a pivotal point in the history of the Fed,” says Diane Swonk, chief economist at Mesirow Financial.  “You need somebody who has credibility and can defend the Fed’s independence in a way that doesn’t offend Congress.  They need finesse on regulatory policy.  There will be a lot on their plate.”

Bernanke Edges Closer to Closing the Cash Floodgates

Wednesday, February 17th, 2010

The Fed needs to start paying its own bills from the financial bailout.  Federal Reserve Chairman Ben Bernanke is starting to look at ways to back off from the central bank’s heroic efforts to keep the nation’s economy afloat through the financial crisis of the past 18 months. The trick to raising short-term interest rates, which have been at historic lows for more than a year, is to time them with extraordinary precision to avoid new damage to the still-fragile economy.

At present, the Fed has $2.29 trillion on its balance sheets, an increase from the $934 billion reported in September, 2008, when the financial crisis was at its worst. Bernanke plans to sell some of the Fed’s mortgages, Treasuries and debt by offering reverse repurchasing agreements.  Under these arrangements, the Fed sells its securities to a third party while agreeing to re-buy them at some point in the future.

The Fed’s next step is to sell banks and financial firms the equivalent of certificates of deposit.  In these cases, the Fed gets a portion of the bank’s reserves in exchange for paying interest at a fixed rate.  Called a “term deposit facility,” these deposits would be auctioned off and banks couldn’t count their investment in the Fed as cash or reserves.

“These programs, which imposed no cost on the taxpayer, were a critical part of the government’s efforts to stabilize the financial system and restart the flow of credit,” Bernanke said in testimony at a Capitol Hill hearing.  “As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs.”

Ben Bernanke: Person of the Year

Monday, December 28th, 2009

Ben Bernanke is an excellent choice as Time’s “Person of the Year.”  Time magazine has settled the much-anticipated question of its choice for “Person of the Year” for 2009.  It’s Ben Bernanke,  the scholarly chairman of the Federal Reserve, and “the most important and least understood force shaping the American – and global – economy.”  A former Princeton professor well versed in the causes and cures of the Great Depression, the 56-year-old Bernanke reinvented the Federal Reserve once global markets imploded in the fall of 2008.  Bernanke also has a compelling personal history, having been raised Jewish in small-town South Carolina during the Civil Rights era.

Time, commenting on Bernanke’s achievements over the last year, notes that “He knew how the passive Fed of the 1930s helped create the calamity – through its stubborn refusal to expand the money supply and its tragic lack of imagination and experimentation.  Chairman Bernanke of Washington was determined not to be the Fed chairman who presided over Depression 2.0.  So when turbulence in U.S. housing markets metastasized into the worst global financial crisis in more than 75 years, he conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies; ratcheted down interest rates to zero; lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash; jump-started stalled credit markets in everything from car loans to corporate paper; revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed’s balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation.  He didn’t just reshape U.S. monetary policy; he led an effort to save the world economy.”

What’s remarkable is that Bernanke has achieved all of this in slightly more than one year.

Throughout 2009, Bernanke deposited unprecedented amounts of money into the banking system in entirely new ways, while charting a framework for the Fed’s ultimate return to normality.  He oversaw the financial stress tests that calmed the markets, and launched a ground-breaking public relations campaign to make the Fed more comprehensible to ordinary people.  According to Time, Bernanke’s “creative leadership helped ensure that 2009 was a period of weak recovery rather than catastrophic depression, and he still wields unrivaled power over our money, our jobs, our savings and our national future.  The decisions he has made, and those he has yet to make, will shape the path of our prosperity, the direction of our politics and our relationship to the world.”

Bernanke Report to Congress: Signs of Stabilization

Friday, July 24th, 2009

In his semi-annual testimony before the House Financial Services Committee, Federal Reserve Chairman Ben Bernanke said that although the economy is exhibiting “tentative signs of stabilization,he plans to maintain a “highly accommodative” monetary policy for the time being.  According to Bernanke, “The pace of decline appears to have slowed significantly.  In light of the substantial economic slack and limited inflation pressures, monetary policy remains focused on fostering economic recovery.”

A Fed report related to Bernanke’s testimony notes that policy will be “tightened” as the labor market improves, as the economic recovery begins and as pressures limiting inflation “diminish”.  Bernanke also defended the central bank’s moves to restore financial stability and urged lawmakers to make plans to rein in the deficit.  The Federal Open Market Committee is keeping interest rates “exceptionally low”, with the benchmark lending rate in the zero to 0.25 percent range.

bernankefaithThe Fed is planning to purchase as much as $1.25 trillion of mortgage-backed securities, $200 billion of federal agency debt by the end of 2009, and $300 billion in long-term Treasuries by September.  Bernanke believes that some of these assets may remain on the Fed’s books for an undetermined period of time.

“Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system,” Bernanke noted. “Many of the improvements in financial conditions can be traced, in part, to policy actions taken by the Federal Reserve.”

Bernanke’s comments point to the enormous influence of the Fed worldwide, not least of which is countries pegged to the U.S. dollar – like Kuwait – or that claim the dollar as their currency – like Panama.

How Low Can the Fed Go?

Tuesday, December 30th, 2008

The Federal Reserve is pulling out most – if not all — of the stops to thaw credit.  The central bank has cut its federal funds rate for overnight borrowing to just 0.25 percent, the lowest level ever.  But the move is likely too little, too late because the problem is not the lack of capital — but a lack of confidence.  Marginal rate cuts won’t help commercial real estate.  Rather, the buy-back of real estate securities and extending credit are needed to fuel recovery.

The Fed’s Open Market Committee had been expected to cut the fed funds rate to 0.50 percent, so the drop was a bit of a surprise.  “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the statement said.  Possibilities are the ongoing purchase of agency debt and mortgage-backed securities, as well as the “potential benefits of purchasing longer-term Treasury securities.”