Wednesday, September 07, 2016

INET Economics Video: Income Inequality
Collapsed Household Wealth
The financial crisis meltdown wiped out what was left of the savings of millions of American families, but Professor Edward Wolff says decades of income inequality had set the stage for the collapse of their household wealth .. 19 minutes

1 comment:

Anonymous said...

Has the Fed Been Breaking the Law?

Alas, things didn't work out quite as Bernanke and other Fed officials intended. Instead, the "floor" they'd laid out so carefully turned out to be rotten, chiefly because, although they keep balances with the Fed, Fannie and Freddie and other GSEs aren't eligible for IOR. Consequently, their involvement created an arbitrage opportunity that Fed officials hadn't anticipated, with banks borrowing funds from GSEs overnight at rates sufficiently below the IOR rate to turn the banks a tidy (if modest) profit.

The crux of the matter is that the effective federal funds rate — that is, the rate that was actually being paid for overnight funds — quickly ended up falling below the IOR "floor" and, therefore, below the Fed's target rate. In fact, as the red plot in the figure below shows, since December 2008, when the Fed set the IOR rate for both required and excess reserves at 25 basis points, the rate has always exceeded the effective federal funds rate, besting it on occasion by as much as 19 basis points.


Faced by this reality, the Fed made the best of a bad job by declaring (1) that instead of setting a fed funds rate target it would henceforth set a target "range;" and (2) that the rate of IOR was to define, not the lower bound (or "floor") of the new target range, but the upper bound.

Man, I bet the Board of Governors makes some mean lemonade!
But while the Fed may have succeeded in saving face, it doesn't follow that it managed to do so while still obeying the law.

HENSARLING: Madam Chair, please. It's a simple question. Would it be legal under the statute to pay a 100 percent premium? If you don't know the answer to the question, you don't know the answer to the question.

YELLEN: Well, my interpretation is that it is legal.

HENSARLING: It would be legal to pay twice the market rate? That would not exceed the general level of short-term interest?

YELLEN: There is likely to be for quite some time a small number of basis points gap…


YELLEN: … between interest on reserves and the Fed funds rate, and that is something that…

HENSARLING: I would simply advise discussing that with the legal counsel, because I think that, frankly, it (inaudible) common sense.

I'm going to go out on a limb and guess that Hensarling's last "inaudible" word was "defies."

Whatever the word was, it sure seems to me that, no matter how one slices it, an IOR rate "a small number of basis points" above the fed funds rate is one that "exceeds" that rate. But I'm not a Federal Reserve lawyer, so what do I know? Still, I wish someone deeply committed to making sure that financial institutions don't get away with any hanky-panky (the CFPB, perhaps?) would go ahead and sue the Fed, so that Representative Hensarling and I can find out once and for all just what "not to exceed" really means.