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Fed admits: Money is a spreadsheet

[Welcome, Naked Capitalism readers! Welcome, Dealbook readers! --lambert]

NPR has a fluff piece from "All Thing Considered" [sic] on how two Flunkies For The Masters Of The Universe saved the world ZOMG!!! which includes this gem, hidden in plain sight:

In the face of the financial crisis, the Federal Reserve decided to buy $1.25 trillion of mortgage-backed bonds as part of its effort to prop up the economy. ....

[Julie Remache] and her team worked in a plain room with four small cubicles, [and] spent six weeks coming up with a plan of attack, and 15 months actually buying mortgage-backed bonds, all of which came with a government guarantee that they’d be paid back even if the borrowers defaulted.

The program’s intent was to keep interest rates low, and slow the decline in housing prices. The team ended up buying more than a fifth of all of the government-backed bonds on the market. ...

In the end, they came very, very close to their target: They told us they were just 61 cents short. (In other words, they bought $1,249,999,999,999.39 worth of mortgage-backed bonds.)

The Fed was able to spend so much money so quickly because it has a unique* power: It can create money out of thin air, whenever it decides to do so. So, [the New York Fed's Richard] Dzina explains, the mortgage team would decide to buy a bond, they’d push a button on the computer — "and voila, money is created."

"Voilà, money is created." Savor that. Not knowing what they said, they said it. Because you just saw the Fed validate one of MMT's (Modern Monetary Theory's) central claims: That, for a government that is sovereign in its own currency, spending is not operationally constrained by revenues.* When Julie Remache pushed the button on her computer, did a red light go on because money was going to run out? Did an alert pop up, saying "This transaction will cause the country to run out of money. Please OK or Cancel"? How about "Insufficient $$$: Abort, Retry, Fail"? Of course not!

In other words, Jamie Galbraith is 100% correct, and according to the Fed; modern money is a spreadsheet:

[M]odern money is a spreadsheet! It works by computer! When government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it shifts funds from a demand deposit (called a reserve account) to savings (called a securities account). And that for practical purposes is all there is. The money government spends doesn't come from anywhere, and it doesn't cost anything to produce. The government therefore cannot run out.

(So much, therefore, for the ideology underlying the Cat Food Commission, which is, in short form, that "We're running out of money ZOMG!" and so the MOTU, in order to continue to live the lifestyle to which they have become accustomed, must -- Must, I tell you! Must! -- strategically default on their obligations to elders under Social Security, and use that money for themselves.)

So, was Julie's program a success? The answer, too, NPR hides in plain sight, right in the lead:

In the face of the financial crisis, the Federal Reserve decided to buy $1.25 trillion of mortgage-backed bonds as part of its effort to prop up the economy...

Whenever you read "the economy," ask yourself "Whose economy?" And the answer to that question couldn't be more clear. The money chart:

bailoutnationchart-912x1024

(Via The Big Picture.) The stack on the right is money used for public purpose: The New Deal, for example. The stack on the left is money handed to the banksters in the bailouts. Different, aren't they? Like, the public stack is a lot smaller, and spread over 200 (two hundred) years. And the bankster stack is a lot bigger, and took place all in 1 (one) year. Any questions?

get-out-of-jail-free-card So, indeed, the program was a "success." The banksters and the MOTU put the rest of us peasants on the hook for $22 trillion dollars, kept their jobs, kept their bonuses, never did the perp walk in orange jumpsuits on the teebee for accounting control fraud, and are still too big to fail. Mission accomplished!

But let's return to first principles for a moment:

1. Who creates money? The state. See Article I, Section 8, at "coin Money, regulate the Value thereof, and of foreign Coin."***

2. Why should money be created? To serve the public purpose. See the Preamble at "general welfare."

Did Julie Remache and her team use the powers of our state**** to create money for a public purpose? No. They did not. If they had done so, disemployment wouldn't be 10% nominal (20% real), we wouldn't be losing our homes, we wouldn't be getting sick and dying for lack of health care. We might have a Jobs Guarantee. But our money wasn't used for that, now was it?

So, money is a spreadsheet. The real question: Cui bono?

Who enters the data into the spreadsheet, and who benefits from SUM() at the bottom line?

NOTE * NPR isn't even wrong here. The "power" is not "unique," not only the Fed has it. Any government that is sovereign in its own currency has this power. Greece is not sovereign, since it uses the Euro, and California is not sovereign, because it uses the dollar.

NOTE ** Some MMT critics argue that money shouldn't be a spreadsheet, that the oil producers will never sell oil to a country with money like that, and so forth. Such critiques miss the point, because our money is already a spreadsheet, and the oil producers are already happily exchanging oil for that money.

MMT is about looking at what happens operationally -- real resources, real actions in real time by real actors -- and operationally there's no question, as we see from the description of how Julie Remache creates money, that government spending is not operationally constrained by revenues. Now, it may be that recognizing reality will have big knock-on effects -- doesn't it always? -- but the reality is clear enough, and has nothing to do with the chalkboards that mainsteam economists use, let alone the talking points developed by MOTU-funded think tanks.

NOTE *** Hat tip, Warren Mosler, for underlining the importance of "regulate the value thereof" in Article I, section 8.

NOTE **** See, e.g.:


wtp1

NOTE NPR link via Warren Mosler. And then there's this:

The New York Fed is a big, fancy place — lots of marble, a vault full of gold in the basement.

Like The Mighty Corrente Building! Except all we've got in our basement is mighty hamsters in mighty cages powering the mighty servers.

UPDATE Here is a simple example that shows the key MMT concepts.

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Comments

Submitted by jawbone on

I didn't realize NPR was breaking new ground for them -- I'm so used to the idea of sovereign governments (via whatever organizations, here it's the Fed) "making" money on spread sheets.

What NPR did is, as you note, hide in plain sight the true import of the report. And minimize, by taking it down to the mid-level employees and a contract employee (at least, I gathered Julie was being hired only for a short time to implement this mortgage buy for the Fed). IIRC, it opened with the information that when we sendf in our mortgage money, it may well be going directly to the Fed (altho' still in a decent bank's name or, much more likely, a Banksters' name.

I was busy working, but it hit me that yet again, Planet Money, which made it's name by really helping people to understand credit default swaps, was once again playing the game for the Big Money side. See this, folks! Nothing to really think about! All's well in mortgage land....

Question: Did these purchased mortgages get parked somewhere? Like on Fannie and Freddie's books, so they're off the Big Banksters' books?

Submitted by brucedixon on

Could not resist it, you did this so beautifully.

Damn, that picture reminds me that I really need a haircut. Like now.

bd

"If you want that good feeling that comes from doing things for other people, then you have to pay for it in abuse and misunderstanding" Zora Neale Hurston, from Moses, Man of the Mountain

Bruce Dixon
www.blackagendareport.com

Submitted by lambert on

And especially for the beautifully.

First they ignore you, then they ridicule you, then they fight you, then you win. -- Mahatma Gandhi

Submitted by Elliott Lake on

print money any old time it wanted? Srsly? People old enough to vote? And these people are making monetary decisions for themselves... is that kind of lack of knowledge in tandem with accepting horribly twisted mortgage terms from banksters?

No wonder we are so screwed in this country.

Makes me wonder what else I know that others don't. Don't people have dinner table conversations about the economy, about government, corporations, etc. any more? I remember my parents discussing how inflation worked, about money, the gold standard, paper money, the stock market (and how it rather miraculously ended up benefitting a certain strata of the population, with prices rallying or dropping not so randomly..) when I was in grade school & high school.

Maybe we need a remedial school section, for things that ought to be obvious but aren't. But how to know what has been lost?

Elliot Lake

Submitted by jm on

You can probably include the fact that the Federal Reserve is literally owned by its member banks.

I'd think the news media would find this to be useful context to include in stories about Fed policies. Sigh.

Submitted by jawbone on

budget" comparison to the Federal budget. Yes, people may realize at one level that the Feds can "make" money, but in so may ways people are bombarded with this metaphor of their own family budget situation that they're likely to not realize the government could "make" money to help them.

And, as people are learning over and over nowadays, if you don't have the money in your accounts, you can't pay your bills, mortgage, rent -- and you lose the roof over your head. It's pretty easy to scare those not immersed in the news about finance and government budgets when they're almost underwater themselves and see many who are already adrift or clinging anything to stay afloat, even their plastic running up more debt....

So, not shocking at all. It's what the MCM has been drilling into people's thinking. It's what's necessary to keep people from demanding their government do something to assist and save them. They have to be trained to give up, to know that if they don't make it on their own there is no help....

Thus, they don't demand that Obama act as a Democrat and they think there's no choice between the two parties when it comes to their economic security.

Think it might be working?

It does seem to assist the Uberwealthy and Big Bidness...and their minions.

Submitted by jawbone on

to government budgeting. Civil liberties would be good, these days. General legal rights. The Constitution and what it means. Lots of things!

Oh, and science. Right now, global warming and climate change really could be revisited to remind people of, like, facts. Consequences. And that physics really is does not respond to political arguments....

Dan in CA's picture
Submitted by Dan in CA on

Imagine the sh#!storm Brian Williams, Katie Couric, et al. would put up if the government created $1.25 trillion for a jobs creation program or extending Medicare coverage. Nobody raised an eyebrow when it was done for the banksters.

So here's what we do. Anytime someone complains about the deficit, just say, "Well, the Fed created $1.25 trillion to buy up mortgages from the banks, and you didn't raise an eyebrow. So let's create another $1.25 trillion and do something useful with it."

Submitted by jawbone on

The only duty of the Fed the MCM* ever talks about is its mandate to achieve price stability, which is usually interpreted as bringing down or fighting inflation, but this past Great Recession, aka Jobs Depression, has been mostly on stabilizing the Big Banks. Little banks are being continually taken over.

But jobs?? It's as if Bernanke never heard his Fed has some responsibility and obligation in that area! Jobs are...for the private sector to create...perhaps with tax credits and lower interest rates to "encourage" it to do so. But only if inflation is not a danger.

Well, in doing some googliing, I found this paper, A Dual Mandate for the Federal Reserve, by Willem Thorbecke, written in 2002.

The paper indicates that, while not prominently discussed, the Fed had used monetary policy to try to achieve the modern definition of full employment. According to the modern understanding, full employment means not zero unemployment but "the level of unemployment that arises in a healthy economy as
employers and employees seek good matches." And, as of 2002 (I didn't find legislation to the contrary as of yet), the Fed still had a dual mandate, "promote fullemployement" and "reasonable price stability."

The Federal Reserve currently has two legislated goals: price stability and full employment. The original Federal Reserve Act of 1913 contained no macroeconomic goals. Rather it instructed the Fed to prevent financial panics and bank runs by providing loans to the banking system. In the aftermath of the Great Depression, the Employment Act of 1946 required the Fed to pursue "conditions under which there will be afforded useful employment opportunities . . . for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power." By the 1970s the term maximum employment was understood to mean not zero percent unemployment, but the level of unemployment that arises in a healthy economy as employers and employees seek good matches. In 1978, the Full Employment and Balanced Growth Act required the federal government to "promote full employment . . . and reasonable price stability."1

Although this dual mandate exists, Congress is now debating whether the Federal Reserve should assign primacy to fighting inflation. The Price Stability Act, introduced in 1999, sets price stability as the "primary and overriding goal" of monetary policy; it requires the Federal Reserve to establish an explicit numerical goal for inflation and to specify a time frame for achieving this goal. Although the bill did not pass, momentum in favor of inflation targeting is growing, and similar legislation will be introduced again.

Although some might argue that in recent years the Fed has focused solely on inflation, evidence from Taylor's rule, statements of Federal Reserve governors, the behavior of the federal funds futures market, and recent monetary policy history indicates that high employment as well as price stability have been goals of the Fed. The Federal Reserve can affect inflation and unemployment through its manipulation of the federal funds rate (the rate banks charge each other on one-day loans). The Fed sets a target value for the funds rate and then adjusts the amount of funds (reserves) in the banking system to cause the funds rate to move toward the Public Policy Brief Highlights No. 60A 10/7/03 11:00 AM
file://localhost/Volumes/wwwroot/docs/hili/60a.html Page 1 of 5 target value. When the funds rate increases, longer-term interest rates tend to increase and the dollar tends to appreciate. The increase in longer-term rates reduces spending on interest sensitive items such as houses and automobiles; the appreciation of the dollar reduces spending on net exports. As spending declines, employment, output, and inflation decline as well. Thus, when the Fed seeks to lower inflation, it raises the funds rate target, and when it seeks to lower unemployment, it decreases the rate target.

In recent years, during which the Fed has adjusted the funds rate to affect both inflation and unemployment, macroeconomic performance has been excellent. Both unemployment and inflation have been low. Since both high economic growth and low inflation benefit the stock market, recent macroeconomic performance has contributed to the 180 percent increase in the Dow Jones Industrial Average between January 1995 and August 1999.

In spite of the economy's good performance under the dual mandate of the Full Employment and Balanced Growth Act, research on inflation targeting has convinced many analysts that the mandate needs to be changed. The case for inflation targeting rests on several arguments (Bernanke, Laubach, Mishkin, and Posen 1999). First, monetary policy cannot affect real variables in the long run; it can affect only inflation. Second, monetary policy cannot be used effectively to moderate short-run economic fluctuations because it has an inflationary bias. Third, even moderate rates of inflation are harmful to economic growth. Fourth, a nominal anchor for monetary policy is necessary, and inflation targeting provides such an anchor. [My emphasis]

So, to answer my question, yes, the Fed has worked to increase employment, but as Thorbecke notes, since the late '90's (remember that was when Clinton's policies resulted in real wage increases for even the poor, the first time it had happened in decades) some influential economists, Bernanke among them, have been more fearful of inflation than lower employment. And, in general, Republicans do like "cheap labor," so the actual increase in real wages was probably viewed as a negative by them, not a positive.

Well, the Banksters sure took care of the rising real wages, eh?

Yes, the Fed in the past worked for higher employment numbers. It appears the talk of the "new unemployment" is part of making sure that fighting inflation trumps fighting unemployment. And Obama et al are taken in by the conservative Repubs and Big Bidness interests on yet another important goal. And screw the workers, screw Democratic Party principles.

Hard moon rising....

This is from a PDF and requires reformatting to copy and paste; I hope what shows up in preview will work when it's posted.

*MCM--Mainstream Corporate Media, of which NPR is a member in good standing with fewer and fewer outlying reports....

Submitted by jm on

To think, just 19 days ago, in a story about how deficits are financed, the same NPR reporter explicitly stated, "You don't get to just create the money out of thin air." (You have to listen to the audio to hear the quote. It's not included in the written summary.)

I wrote am email to NPR at the time pointing out the fallacy. So, is Kestenbaum learning or, given the jaw-dropping ignorance of the statement above (he has a PhD in physics), is he merely repeating the last thing he heard? Sadly, given Planet Money's performance of late, I fear it's the latter.

Submitted by jm on

I forgot the link to the story refered to in my previous post

Cocomaan's picture
Submitted by Cocomaan on

I really enjoyed this post (got to it from Yves'). I think it gets to the heart of the problems we face.

However, I didn't get the same vibe you did from the Planet Money piece; while it was not critical, I got the feeling that they wanted to show the incredible power of the Fed. They didn't condemn it (perhaps this is the litmus test for fluff), but I think they succeeded in confirming what the critics, including your readers, thought.

Did anyone else get this feeling? Sometimes I roll my eyes at PM, but not on this one. They did a great job of showing how low level employees in the fed basically were given free reign to create this money.

joebhed's picture
Submitted by joebhed on

I'm sorry but I don't believe that this buying of mortgage-backed "bonds" by the Fed really results in the creation of money.
It seems to result in the creation of "no-money".

Yes, Fed's the balance-sheet bulges with ...... stuff and things.
But, is there any more money?
When the Fed pushes another $Trillion or $two out there, I don't see the corresponding change to the M1, 2 or 3 that we street people think of, somewhat colloquially, as the money supply.

So, this stuff that ends up being hoarded by financial companies and bancorps around the world becomes NOT the circulating medium of exchange for the national economy(a.k.a. money), but rather, the non-circulating private financial booty to provide the basis for greater asset accumulation when the next shoe drops, very likely sometime soon.

The result is a rather strained dialogue among the media-ites.
They call it QE or fiscal stimulus, yet they also observe that down in the street, nothing is happening.
Therefore, they opine, what we need is obviously NOT more stimulus, but rather less, so as to restore the confidence of the capital markets that will result in more lending again. Somehow.

Happy days; brought to you by the ignorati Austeriana.

What is needed instead is a reform that guarantees we the people that every dollar actually created by the government - and that AIN'T the Fed - ends up first deposited into a business or consumer bank account, so as to fund the demand needed to restore a semblance of vitality to our national economy.

The reforms needed are both here:
http://www.economicstability.org/history...

and here
http://www.monetary.org/amacolorpamphlet...

Thanks.

Joe Bongiovanni
Harborton, Virginia
The Kettle Pond Institute

DPirate's picture
Submitted by DPirate on

An owner of one of these mortgages needs to take the issue to court stating that his mortgage has been paid off by the federal government.