Andrew Huszar: Confessions of a Quantitative Easer

[flyingpylon]

So... what do you make of this?

I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

WSJ: Andrew Huszar: Confessions of a Quantitative Easer

[Gumby]

Not all that exciting. A former Fed official wakes up one day and realizes that QE doesn't do much for Main Street and is mostly just a good time for Wall Street (more commissions and capital gains on financial assets). He's stumbled onto the dirty secret that banks are the Fed's true master. Kind of sad that he didn't realize that while he was working there.

Cullen Roche explained it a few months ago when Larry Summers was in line for the nomination of next Fed Chief:

Can Larry Summers remove the distinction between the Executive Branch and the banking system when it comes to the government’s powers over money and banking?  In my opinion, there isn’t a chance in my lifetime that we’ll see something like that happen.  When Larry Summers becomes Fed Chief he’ll quickly realize who his true master is.  And it’s not the President or the US Congress regardless of what they say.  The Fed’s true master is the banking oligopoly and he will become a slave to it just like all the Fed Chiefs that came before him.  And as long as that banking oligopoly is a private for profit industry the Fed will have to act in the independent best interests of the banking oligopoly before it can serve its other masters – the President, the US Congress & the US Taxpayer.

Source: http://pragcap.com/will-larry-summers-r ... dependence

This pretty much lines up with what Huszar is trying to yell from the rooftops.

[Mdraf]

...  And as long as that banking oligopoly is a private for profit industry ...

Gumby, is Roche advocating a nationalization of banks? I didn't think so but I may be wrong.

[Gumby]

...  And as long as that banking oligopoly is a private for profit industry ...

Gumby, is Roche advocating a nationalization of banks? I didn't think so but I may be wrong.

Oh, no. Not at all. He was just pointing out that the dirty secret on Wall Street is that Fed — whether the next Fed chief realizes it or not — has to keep the private banks happy in good shape and running smoothly in order to do its job.

Roche did pen this opinion on the banking "oligopoly," back in 2010...

http://pragcap.com/the-enron-banking-system

...But he doesn't advocate the nationalization of banks. Rather, he says:

I have no issue with banks attempting to make a profit in traditional banking businesses (3-6-3 comes to mind), but when we allow these firms to turn into effective casinos you put the entire system at risk.  When we allow these corporations to risk their own capital in potentially disastrous transactions we risk the very stability of the entire economy.  Letting these banks operate as if they are all Enron is exactly what helped get us into this financial fiasco and it will certainly happen again if we don’t fix the Enron banking system.

I don’t necessarily believe the problem here is one of too big to fail, but rather ensuring that all banks never take the risks that put them and their deposits at risk.  A large Enron is no more unstable or dangerous than several hundred small Enrons running in the same grid.  It’s allowing these firms to operate as if they are Enron that poses a systemic problem.  We must make banks be banks.  Of course, much of this would involve reversing the de-regulation that has occurred over the last 25 years and it appears unlikely that Congress has the gumption to do so.

Source: http://pragcap.com/the-enron-banking-system

[Mdraf]

  We must make banks be banks.  Of course, much of this would involve reversing the de-regulation that has occurred over the last 25 years and it appears unlikely that Congress has the gumption to do so.

Amazing! I actually agree with Roche on this

[ns2]

One of the few communistic thoughts I allow to enter into my libertarian brain is that of public banking. It seems somewhat intuitive to me and I suspect the vast majority of people would agree that banks ought to operate solely in the public interest.

But then I think about the usual devil in the details. Who defines the "public interest". Today it would be Barack Obama. Enough said.

[Libertarian666]

One of the few communistic thoughts I allow to enter into my libertarian brain is that of public banking. It seems somewhat intuitive to me and I suspect the vast majority of people would agree that banks ought to operate solely in the public interest.

But then I think about the usual devil in the details. Who defines the "public interest". Today it would be Barack Obama. Enough said.

There is no need for public banking. All that is required is for the general rules for bailments to be applied to banking rather than their getting a special exemption, and the problem of "leveraged banking" is solved.

[Pointedstick]

There is no need for public banking. All that is required is for the general rules for bailments to be applied to banking rather than their getting a special exemption, and the problem of "leveraged banking" is solved.

Indeed. In fact, it always seemed to me kind of like this is what the FDIC was designed for. If your bank takes silly risks and sets itself on fire, the bank goes bankrupt or gets shut down, but you keep your money… right? Bailing banks out of their own bad decisions seems like it kind of defeats the entire purpose of the FDIC.

[Libertarian666]

There is no need for public banking. All that is required is for the general rules for bailments to be applied to banking rather than their getting a special exemption, and the problem of "leveraged banking" is solved.

Indeed. In fact, it always seemed to me kind of like this is what the FDIC was designed for. If your bank takes silly risks and sets itself on fire, the bank goes bankrupt or gets shut down, but you keep your money… right? Bailing banks out of their own bad decisions seems like it kind of defeats the entire purpose of the FDIC.

No, the purpose of the FDIC was to allow banks to act recklessly without having their customers pull out their money due to worry about its being unsafe.

What I was referring to is that if you store your furniture (for example) in a furniture warehouse, they give you a receipt for it and you can get it back whenever you want. If they were to rent it out to someone else instead of keeping it for you, they would be prosecuted for violating the rules of bailments (http://en.wikipedia.org/wiki/Bailment), not bailouts. Unfortunately, the same rules are not applied to banking, which is why "modern banking" is inherently unstable.

[Pointedstick]

No, the purpose of the FDIC was to allow banks to act recklessly without having their customers pull out their money due to worry about its being unsafe.

Well I think we can both agree that was the effect, but my guess is that it certainly wasn't the intention.

What I was referring to is that if you store your furniture (for example) in a furniture warehouse, they give you a receipt for it and you can get it back whenever you want. If they were to rent it out to someone else instead of keeping it for you, they would be prosecuted for violating the rules of bailments (http://en.wikipedia.org/wiki/Bailment), not bailouts. Unfortunately, the same rules are not applied to banking, which is why "modern banking" is inherently unstable.

I think it's pretty widely known even by financial illiterates that banks loan your money to other people and don't actually have all the cash on hand. As long as the depositors know what they're getting themselves into, what's the problem? In a world of free banking, I imagine the factional reserve banks would compensate depositors with higher rates of interest for the greater risk they were incurring, while the 100%-reserve banks would be more like storehouses for your money that you might even pay for.

[Libertarian666]

No, the purpose of the FDIC was to allow banks to act recklessly without having their customers pull out their money due to worry about its being unsafe.

Well I think we can both agree that was the effect, but my guess is that it certainly wasn't the intention.

What I was referring to is that if you store your furniture (for example) in a furniture warehouse, they give you a receipt for it and you can get it back whenever you want. If they were to rent it out to someone else instead of keeping it for you, they would be prosecuted for violating the rules of bailments (http://en.wikipedia.org/wiki/Bailment), not bailouts. Unfortunately, the same rules are not applied to banking, which is why "modern banking" is inherently unstable.

I think it's pretty widely known even by financial illiterates that banks loan your money to other people and don't actually have all the cash on hand. As long as the depositors know what they're getting themselves into, what's the problem? In a world of free banking, I imagine the factional reserve banks would compensate depositors with higher rates of interest for the greater risk they were incurring, while the 100%-reserve banks would be more like storehouses for your money that you might even pay for.

You would be surprised what financial illiterates believe.
That aside, if you wanted to earn money on your deposit in an honest bank, they would lend it at your risk. That's what the honestly run Swiss banks did, when there were any, e.g., the late lamented Foreign Commerce Bank that HB recommended.