Letter: Who do you think had the biggest US bond expos­ure?

Published in the Financial Times.

“Long-dated bonds are still a dan­ger­ous place to be right now,” an investor in hedge funds is quoted as warn­ing in the report by Kate Duguid and Cos­tas Mour­selas “Hedge funds revive ‘Trump trade’ in bet on US bonds” (Report, July 19).

I would say he is right.

So who would you guess has the biggest naked risk pos­i­tion in very long-dated US bonds and mort­gage-­backed secur­it­ies, super-lever­aged, fun­ded short, and unhedged? None other than the lead­ing cent­ral bank in the world — the US Fed­eral Reserve.

As of July 17, the Fed owns — exclud­ing its pos­i­tion in short-term Treas­ury bills — the vast sum of over $6tn in Treas­ury notes and bonds and very long mort­gage-backed secur­it­ies. Of this sum, $3.8tn still has more than 10 years left to matur­ity, accord­ing to the Fed’s own report.

The Fed had a mark-to-mar­ket loss of over $1tn on its invest­ments in its most recent quarterly state­ment (March 31), against its repor­ted total cap­ital of $43bn. Quite a not­able example of asset-liab­il­ity man­age­ment!

Alex J Pol­lock

Senior Fel­low, Mises Insti­tute, Lake Forest, IL, US

Macro or Micro, Blinder Can’t Sell Bidenomics

Published in The Wall Street Journal.

Mr. Blinder wants to compare Mr. Biden to former President Franklin Roosevelt, but the current president doesn’t display the supreme deviousness and talent for manipulation, wrapped in rhetorical brilliance, of Roosevelt. There is, however, an important parallel.

In 1944, the Democratic Party bosses knew that whoever got nominated for vice president had a high probability of becoming the president, as indeed happened when Roosevelt died three months into his new term. They forced sitting Vice President Henry Wallace to be replaced on the new ticket by Harry Truman, luckily for the country and the world. Are the current Democratic bosses as smart and as responsible as the old pols of 1944?

Letter: FDIC Swiss stance — case of pot calling kettle black

Published in the Financial Times:

One may doubt the diplomatic wisdom of the decision of the chair of the US Federal Deposit Insurance Corporation to criticise the Swiss government’s handling of the Credit Suisse failure (Report, April 11), but one cannot fail to be amused by the FDIC pot calling the Swiss kettle black.

Far from using “standard bank closure powers”, the FDIC and other US regulators in 2023 gave assurances all was in good shape, in an attempt to avoid widespread panic in the banking system, and then took the extraordinary action of guaranteeing all the uninsured deposits of collapsing banks. This cost the FDIC $16bn it could not afford; it took these billions from other banks to save wealthy venture capitalists and crypto barons from taking a moderate and well-deserved haircut on the uninsured deposits they so imprudently held in sometimes extravagant amounts. The Swiss are probably too polite to point out to the FDIC chair that this was certainly an unfortunate precedent.

Alex J Pollock Senior Fellow, Mises Institute, Lake Forest, IL, US

The Fed Doesn’t Know the Natural Rate of Interest

Published in The Wall Street Journal.

Mr. Levy describes the Fed’s permanent problem: It doesn’t and can’t know what the natural rate of interest is. Everyone should pity the members of the Federal Open Market Committee, who must inwardly confess that they can’t know the answers, yet have to play their parts in the Fed melodrama nonetheless.

Alex J. Pollock

Senior fellow, Mises Institute

Lake Forest, Ill.

Appeared in the March 14, 2024, print edition as 'Fed Doesn’t Know the Natural Rate of Interest'.

No ‘Pat on the Back’ for the Federal Reserve

Published in The Wall Street Journal.

Mr. Cochrane writes that “the Fed can costlessly buy bonds and issue interest-paying money.” To the contrary, by following exactly this formula, the Fed has so far accumulated net losses of about $130 billion for itself, the Treasury and the taxpayers, and there are unavoidably tens of billions in losses still to come.

This “costless” formula meant the Fed took massive interest-rate risk, investing very long and borrowing very short, thereby also imposing that risk on the Treasury and the taxpayers. For the Fed as for anybody else, taking interest-rate risk isn’t costless. It has proved far more costly than the Fed ever expected.

Alex J. Pollock

Senior fellow, Mises Institute

Letter: Bitcoin loses its lustre next to gold bullion

Published in the Financial Times.

Your editorial, “Bitcoin’s bounceback déjà vu” (FT View, December 6), is oh so right that bitcoin “has no intrinsic value, nor is it backed by anything” and is different from gold. Indeed, a mere electronic accounting entry like a bitcoin is utterly unlike a gold coin — the gold coin being a notable piece of physical reality, not dependent on anybody’s accounting system to exist. Yet at the top of your page one of December 5, illustrating your story, “Bets on cuts boost bitcoin”, you misleadingly depict bitcoin precisely as a large gold coin stamped with a “B.” This silly illustration promotes the fallacy that bitcoin is like a gold coin and flatly contradicts the sound and sensible statements of your editorial.

I suggest that FT policy should eliminate depicting bitcoin as a gold coin. Of course, it is difficult to illustrate bitcoin as the mere electronic accounting entry it is, but you should try to reflect the reality.

Alex J Pollock Senior Fellow, Mises Institute,

Lake Forest, IL, US

Letter: Fed rates slogan should read: ‘Normal for longer’

Published in the Financial Times.

From Alex J Pollock, Senior Fellow, Mises Institute, Lake Forest, IL,

With your page one headline “Fed’s ‘higher for longer’ interest rate message weighs on stocks and bonds” (Report, September 28), the Financial Times joins the chorus of commentators singing a similar tune.

But interest rates are not particularly high — they are normal, historically speaking.

For example, in the half-century from 1960 to 2010, before a decade of suppression of interest rates to abnormal lows by the Federal Reserve and other central banks, the 10-year US Treasury note yielded more than 4 per cent, for 90 per cent of the time.

Interest rates only seem high because we got used to the abnormal lows.

So the right slogan now is not “higher for longer,” but “normal for longer”.

Why the Fed’s Unprecedented Losses Matter

Published in The Wall Street Journal.

The Federal Reserve’s risky policy has backfired.

Mr. Furman excuses the Fed’s unprecedented losses, which have surpassed $100 billion on their way to $200 billion or more, suggesting taxpayers shouldn’t care. To the contrary, taxpayers should care that the Fed will spend, without authorization, $200 billion or more that will be added to their future taxes.

These Fed losses are the result of a radical and exceptionally risky Fed choice to build a balance sheet resembling a giant 1980s savings and loan. In the process, it stoked bubbles in bonds, stocks, houses and cryptocurrencies, in addition to inducing enormous interest-rate risk in the banking system. Those risks have now come home to roost.

Mr. Furman argues that the Fed’s negative capital position doesn’t matter. If so, why cook the books to avoid reporting it? The Fed books its cash losses as a “deferred asset” so that it can obscure its true negative capital position. The Fed changed its own previous accounting rules precisely so it could do so. We know what would happen if Citibank tried that.

Who authorized the Fed to take an enormous interest-rate bet, risking taxpayer money? Nobody but the Fed itself. Does “independence” give the Fed the right to spend hundreds of billions of taxpayer dollars without congressional approval? That question needs to be debated.

Alex J. Pollock and Paul H. Kupiec

Mises Institute and AEI

Lake Forest, Ill., and Washington

Letter: Fed at the forefront of inflation-driven losses

Published in the Financial Times.

Martin Wolf (“Inflation’s return changes the world”, Opinion, July 5) rightly points out the “further problems . . . as losses build up in institutions most exposed to property, interest rate and maturity risks.”

He does not mention that the institution with the biggest losses of all from interest rate risk, the one most changed by inflation’s return, is none other than the world’s leading central bank. In the past nine months, the Federal Reserve has suffered previously unimaginable operating losses of $74bn from its deeply underwater interest rate risk position, a loss which far exceeds its total capital of $42bn. In misleading and arguably fraudulent accounting, the Fed refuses to reduce its reported capital by these losses; with proper bookkeeping, it would now be reporting capital of negative $32bn, growing more negative every month. It insists that no one should care about its negative capital, but carefully cooks the books to avoid reporting it.

The Fed is on the way to operating losses of an estimated $110bn this year. Its mark to market loss as of March 31 2023 was $911bn. The Fed has no possibility of generating offsetting gains from revaluing gold, since it owns exactly zero gold. Wolf reasonably asks if “economies must be kept permanently feeble in order to stop the financial sector from blowing them up”. We can likewise ask, “Must central banks make themselves so feeble in order to prop up economies and the financial sector?”

Letter: Bagehot had much to say on the caution of bankers

Published in the Financial Times.

The run on Credit Suisse “has got every thoughtful banker and regulator in the world looking over their shoulder”, writes Robin Harding (Opinion, May 31).

Congratulations to them! They have understood the fundamental nature of the business they’re in. Walter Bagehot, the great 19th-century economist and journalist, had already explained this in Lombard Street in 1873: “A banker, dealing with the money of others, and money payable on demand, must be always, as it were, looking behind him and seeing that he has reserve enough in store if payment should be asked for.” Bagehot adds: “Adventure is the life of commerce, but caution is the life of banking.”

Alex J Pollock

Senior Fellow, Mises Institute, Auburn, AL, US

Letter: A piece that displayed that iron law of finance

Published in the Financial Times:

Martin Wolf’s timely opinion piece “We must tackle crisis of global debt” (January 18) displays once again an iron law of finance that “loans which cannot be paid will not be paid” — which applies to sovereign debtors as well as all others who have borrowed beyond their means.

Once we realise that this is the situation we have got ourselves into, the only question is how to divide up the losses among the parties. “Who gets to eat how much loss?” is the simple statement of what all the discussions of “debt restructuring” are about.

Letter: The Fed’s accounting ploy has echoes of S&L crisis

Published in the Financial Times:

Your article “Central banks: Rising losses risk bailouts and political pressure” (Report, December 12) points out that central banks, having bought a lot of low-yielding bonds together, are now losing a lot of money together. Do these losses matter? You quote a Danske Bank strategist saying “central banks do not aim to make profits” — a comment offered as a rationalisation. But this is contradicted by the fact that central banks are all structured precisely to make money by seigniorage from their currency monopolies. As for the Federal Reserve, whose losses are rapidly mounting, its so-called “deferred asset” accounting is not a solution, but simply a phoney accounting used to keep the losses from reducing the Fed’s publicly reported net worth, or rendering it negative. This is the same accounting ploy used by insolvent savings and loans in the 1980s during the collapse of their industry. This has some poetic justice since the Fed, with its $2.7tn of fixed rate mortgage assets, has inside it the financial equivalent of the largest savings and loan in the world by far. Alex J Pollock Lake Forest, IL, US

Letter: On this measure, the Fed is already in negative equity

Published in the Financial Times:

“Are central banks going bankrupt?” Robin Wigglesworth asks (FT Alphaville, FT.com, October 10).

He points out that the Federal Reserve has disclosed a $720bn unrealised loss on its investments as of June 30 of this year. By now, this loss is much bigger.

Paul Kupiec and I have estimated it at about $1tn — an especially remarkable number when compared to the Fed’s total capital of $42bn.

Moreover, the mark-to-market loss presages cash operating losses on the way, as the Fed will be funding low-yielding fixed rate investments with expensive floating rate liabilities, generating negative net interest income — just like a 1980s savings and loan.

Depending on the path of interest rates, these operating losses could go on for some years. “Central bank negative equity,” Wigglesworth writes, “coming to a Fed or BoE or ECB near you soon?”

On a mark-to-market basis, Federal Reserve negative equity in size is already here. Alex J Pollock Senior Fellow, Mises Institute Auburn, AL, US

Don’t Let Colleges Off the Hook for Loan Debt

Published in The Wall Street Journal:

Mitch Daniels makes many insightful points in his indictment of the utterly failed and, as he says, “bankrupt” system of federal student loans (“Student Loans and the National Debt,” op-ed, Sept. 2). Among the most important is that the colleges “encouraged students to borrow.” The colleges played the same role in this credit disaster as subprime-mortgage brokers did in the housing bubble: inducing excessive debt while sticking somebody else with all the risk.

Alex J. Pollock

Letter: Money, machines and fundamental mistakes

Published in the Financial Times:

In his interesting letter (Letter, August 3), Konstantinos Gravas says that “money is a machine” and repeats the thought in several ways. To the contrary, money is not a machine. Financial markets are not machines. Economies are not machines. The mechanistic metaphor when applied to money, markets and economies is a source of fundamental mistakes.

All of these are complex, uncertain, recursive, reflexive, expectational, unpredictable, intertwined, interacting events, not machines. We don’t have a good name for these fascinating and often surprising worlds in which we live and interact.

FA Hayek in 1968 proposed the name “catallaxy,” to express that they are composed of ongoing exchanges, based on the Greek word “to exchange.” This did not catch on.

My suggestion is to name them “interactivities.” A key aspect of interactivities is that no one is outside them, looking down in divine fashion. Everyone, including central banks, regulators and experts of every kind, is inside the interactivity, subject to its fundamental uncertainty.

Letter: Raising a family is economically productive

Published in the Financial Times.

On page 1 of your June 20 edition is a graph which shows women who are “looking after family” as “economically inactive”. What nonsense.

Keeping a household going, raising children and caring for family members is a most productive economic activity — far more productive than, say, marketing cryptocurrencies.

Your mistaken graph is part of the same confusion that thinks cooking in a restaurant is production, but cooking at home isn’t; that working in a day care centre is production, but bringing up your own children isn’t; that growing food to sell is production, but growing your own food isn’t; that painting a room for money is production, but painting your own room isn’t. It’s a pretty silly conceptual mistake. The Financial Times apparently has forgotten that the root meaning of “economics” in Greek is “management of a household.”

Alex J Pollock

Senior Fellow, Mises Institute

Lake Forest, IL, US

Also cited in a following letter:

Letter: At last some recognition for the housewife

In response to the letter by Alex J Pollock (“Raising a family is economically productive”, June 27) I say “hear, hear” and “thank you”!

At last, women who’ve been or are full-time housewives for years are being given recognition as being valuable contributors to the economics of everyday life.

It seems we have saved the “breadwinners” a fortune by rearing the children, doing the cooking, the gardening, painting, walking the dogs, doing the laundry and being a chauffeur.

We also have the time to help with non-profit-making activities in the community. I remember a quote from the late Anita Roddick: “If a woman can run a home, she can run a business”.

It’s a good life too; we are our own bosses, every day is different and it’s up to us to use our free time well.

Sarah Tilson

Kilternan, Ireland

Letter: Central banker chattiness is a flawed PR strategy

Published in the Financial Times.

Gary Silverman observes that “US central bankers . . . have become relentlessly chatty, appearing on stage and screen” in contrast to “opaqueness in the old days” (“The Fed transforms into reality TV show”, On Wall Street, FT Weekend, April 9).

The former opacity had a huge advantage for central bankers: it hid the fact that they did not know what was going to happen or what they would be doing about it.

Transparency has a corresponding big disadvantage. It makes obvious to all that they have no more knowledge of the future than anybody else.

They cannot escape this problem because the financial and economic future always displays what economists call the “Knightian uncertainty” after Frank Knight’s book Risk, Uncertainty and Profit (1921) and his theory that the future is not only unknown but unknowable.

Given this fact, the Federal Reserve and all central bankers have a public relations problem. Opacity looks like a superior strategy to chattiness.

Letter: Here are two steps to reform cryptocurrencies

Published in the Financial Times.

Your editorial “Crypto’s rise requires a global response” (FT View, February 21), which backs the US Financial Stability Board’s proposal for “accelerated monitoring”, is good as far as it goes. Yet when it comes to stablecoins, there is another simple and obvious reform that needs to be made immediately. Whether you think stablecoins are more like a bank, a money-market fund or an exchange traded fund, the indubitable fact is that they are putting their liabilities as assets into the hands of the public. Like everybody else who does this, they need to publish full audited financial statements. Of course the statements would also include their profit and loss statement. This is a minimum requirement for the public to have an idea of what they are buying. A second simple requirement would be the publication of a clear description in plain English of the conditions and processes to redeem each stablecoin, since they all make so much of their “stable” character, and that stability depends on what happens when you want out. By all means, keep monitoring along with the Financial Stability Board, but get these two steps done in the meantime.

Alex J Pollock

Senior Fellow, Mises Institute

Auburn, AL, US

Letter: Principals must have the final say in how funds use their votes

Published in the Financial Times.

Michael Mackenzie and Attracta Mooney write that BlackRock is to hand clients a greater say in proxy voting (Report, October 8). It’s a good idea in general, but in fact BlackRock is handing zero voting power to the real owners of the shares which it manages as agent.

Indeed, BlackRock represents a giant and profound principal-agent conflict. It should not be voting any shares at all without instructions from the real owners, whose money is really at risk. As BlackRock itself has stated: “The money we manage is not our own, it belongs to our clients.” For sure. But the other asset managers to whom BlackRock wants to give votes are also not the ones whose money is at risk — they are mere agents, like BlackRock itself.

The real owners whose own money is at risk are the owners of the mutual fund and exchange-traded fund shares and the beneficiaries of pension funds, not their hired agents.

Large proportions of these principals certainly do not want their shares voted according to the political preferences of BlackRock’s management — or more cynically, they do not want the possibility of having their shares voted to advance the political strategies of that management.

The voting instructions of the principals for all shares should be solicited exactly as broker-dealers must solicit instructions from the real owners of the shares that the brokers hold in street name. Without such instructions, the shares should not be voted. Surely the systems for this process are well within the capability of our wondrous computer age.

The Price of Inflation, Now and in the Future

Published in The Wall Street Journal.

Your excellent editorial “Biden Has an Inflation Problem” (Aug. 12) points out that average real wages have fallen for seven months in a row. In other words, the Biden inflation has reduced the real wages of workers in every month that he has been in office. This confirms yet again that high inflation is a way of cutting wages by sneaky central-bank means.

This inflation has come as a surprise to the Federal Reserve, as it busily monetizes government debt, but it is no surprise at all. It reflects the most fundamental principle in economics: Nothing is free. You pay for monetizing government debt by taking money from the wage earners and robbing the savers.

Alex J. Pollock

R Street Institute