E The Lowdown Federal Reserve Bank

 

The world would be a better place! And Bernanke knew he was liquidating and didn't care enough to stop it. It hasn't been the first time this liquidation has taken place. Try the Great Depression.

I believe it certainly pains George Selgin to see and expose this behavior as the nature of the Fed. Certainly, the Fed is incompetent, and behind curves and should do NGDP Targeting, etc, etc, etc. But all that does not explain the heart of the matter, that the Fed is indeed a conspiratorial dirty lowdown organization. It misprices risk and then liquidates the inevitable mistakes caused by the mispriced risk and speculation! It financially rapes main street when the cronies need to make a little money.

Moving on with Selgin's blog post, we see that he goes on to ream the Fed for saying that banks could find other safe assets that pay more than IOER. Selgin's relentless analysis pounds the Fed as he shows there are no safer assets than IOER! He says:

 

Stretch the notion as much as you like, you will never get "safe assets" to include even the safest bank loans. That is, you won't be able to do it unless you are a Fed official trying to claim that the Fed's IOER rate has been "far lower than the rate that banks can earn on alternative safe assets."
Nor is it possible to justify comparing the Fed's IOER rate — a rate on assets (reserves) of essentially zero maturity — to rates on otherwise safe longer-term assets...

Selgin blasts the Fed's interpretation of Regulation D to compare IOER to term rates rather than overnight rates. Overnight rates would be a far more accurate means of comparison and Selgin says the Fed is being self serving and close to "dishonest". He says:

 

Because the IOER rate once defined the upper limit of the FOMC's fed funds target rate range, and is now set 5 basis points below that limit, any interest rate that the Fed pays on reserves is bound to be lower than the Fed's primary credit rate. Thus the Fed has cleverly interpreted and implemented the statute in a manner that allows it to claim that it is obeying the law requiring that its IOER rate not exceed "the general level of short-term interest rates" no matter how it sets that rate, including when it sets it well above truly comparable market-determined short-term rates!

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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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