The Revolt at the Fed

Editorial published in The New York Sun:

Congressman Wright Patman was trying to get the Fed audited like any other federal agency. The bank demurred. The late Patman is lucky he’s not alive today, when, as our Alex Pollock has been warning, the Federal Reserve’s real capital is now negative $158 billion. That puts its own light on Martin’s contention that the bank is not part of the government’s three branches. Who’s on the hook for that negative capital?

We Sure Do Need to Talk about Inflation

Published in National Review:

Writing for AIER, Alex Pollock has a superb review of a recent book by Stephen King: We Need to Talk about Inflation. Since that topic is very much on people’s minds these days and with true  believers in omnipotent government like Kamala Harris blaming it on greed and proposing price controls, the book is most welcome.

Pollock writes:

Reflecting on the enduring temptation of governments to inflate and depreciate their currencies, King rightly observes:

• “Inflation is very much a political process.”

• “Left to their own devices, governments cannot help but be tempted by inflation.”

• “Governments can and will resort to inflation.”

• “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” (Here he is quoting J.M. Keynes.)

Absolutely right. Rulers (whether monarchs, elected politicians, military despots, or any other kind) can be counted on to extract wealth from the citizenry to pay for the things they want to do, but prefer to extract it in a hidden fashion by cheapening the currency. And of course, they will try to pin the blame elsewhere.

This new book is must reading.

Newsletter: An update from William Isaac

Published in a newsletter by Secura Isaac:

Weekend Reading

Aug 2

….

My friend Alex Pollock published an important column in the New York Sun titled "The Federal Reserve Lacks the ‘Earnings’ With Which Legally To Fund the Consumer Financial Protection Bureau."

Examining the New Debate on CFPB Funding

Published in Patomak Global Partners.

To generalize, one side, led by Hal Scott, Alan Kaplinsky, Alex Pollock and Paul Kupiec, offers a relatively narrower construction of the term that means something like “net income” or “profits,” while the other side led by Adam Levitin and Jeff Sovern, offers a relative broader construction that means something like “any income.” The correct construction of the term appears material to CFPB operations, with the narrower construction perhaps prohibiting transfers from the Board of Governors under present circumstances, whereas the broader construction permits them. The debate has now advanced past the theoretical, with Director Chopra fielding questions about the meaning of the term in Congressional hearings last month. This post does not presume to resolve the debate today, but instead seeks to offer additional context that may be relevant to continued scholarship.

Conservatives set the stage for another CFPB funding fight

Published in The Hill.

Alex Pollock, a senior fellow at the right-leaning Mises Institute, suggested that the Dodd-Frank Act blocked a future Congress from “disciplining” the agency with “the power of the purse” by granting it a share of the Fed’s earnings. 

“With inescapable logic, however, that depends on there being some earnings to share in,” Pollock wrote in a post on the blog run by the Federalist Society, a conservative legal group. 

Fed Losses May Sour CFPB’s Supreme Court Win

Published in Inside Mortgage Finance:

“Because of the losses, the Fed stopped sending its surplus to the Treasury Department, and it should have done the same for the CFPB, Alex Pollock…”

Challenging the CFPB After CFPB v. CFSA

Published in Ballard Spahr L.L.P.:

On May 20, Professor Emeritus Hal Scott from Harvard Law School, wrote an op-ed in the Wall Street Journal entitled: “The CFPB’s Pyrrhic Victory in the Supreme Court” and on May 21, Alex J Pollock wrote an article which was published on The Federalist Society website entitled: “The Fed has no earnings to send to the CFPB,” Professor Scott and Mr. Pollock stated that Federal Reserve System started incurring losses in September, 2022, that such losses continue to the present day and that the Fed is projected to incur losses until 2027.

Surprise, the Only Constant

Published in the Federalist Society.

A review of Alex Pollock & Howard Adler, Surprised Again! The COVID Crisis and the New Market Bubble (2022)

I approach phenomena that I don’t understand with good cheer and don’t give in to them. I’m above them. Man should be aware that he is above lions, tigers, stars, above everything in nature, even above what is incomprehensible and seems miraculous, otherwise he’s not a man but a mouse afraid of everything.

The House with the Mezzanine: An Artist’s Story, Anton Chekhov

In the late 1980s, the United States experienced what was called the “Savings and Loan Crisis.” Savings and loan associations (S&Ls), firms much like banks, had committed the financial sin of borrowing short and lending long: they borrowed by taking deposits repayable in the near term to finance their making of longer-term thirty-year residential and other real estate loans at fixed interest rates. As interest rates eventually rose, the S&Ls and investment firms found themselves having to pay higher and higher amounts of interest to cover the low fixed amounts of interest they were receiving from their borrowers. That is a financial practice in which one can engage, albeit not indefinitely. Regulators and investors nonetheless were surprised when many S&Ls failed, costing the federal government billions of dollars.

Even after that, in the late 1990s and early 2000s, the government and financial markets incented banks and investment firms to lend to higher-risk low-income borrowers to purchase homes. Policymakers thought sincerely that relaxed lending standards would enable lower-income persons to more quickly and easily realize the American dream of home ownership, which would in turn enable them to build up equity in their newly purchased homes as home values rose. That equity could be used to start a small business or send children to college. Unfortunately, home prices did not continue to rise relentlessly and eventually dropped, leaving lenders with inadequate collateral. As these borrowers eventually were unable to repay their loans, the lenders found themselves holding loans of dubious and uncertain value, and investors were surprised. This all came to a head in 2008 with what is now called the “Great Financial Crisis.” Regulators charged with protecting our financial system were surprised again.

Read the rest here.

Time for colleges to pay, Dem ‘swells’ ‘blinded by privilege’ and other commentary

Published in the New York Post:

Ed desk: Time for Colleges to Pay

“It’s time that the cost of nonpayment of student loans be shared” by “colleges and universities themselves,” argue Arthur Herman and Alex J. Pollock at The Hill. Schools now “get and spend billions in borrowed money and put all the loan risk on somebody else,” which “incentivizes them to push” costs “ever higher — by an average of 169 percent since 1980.” We need a “model that realigns incentives and rewards,” and “the first principle should be that the more affluent the college is, the higher its participation in the losses should be.” Joe Biden has shifted $132 billion “of student debt from borrowers to taxpayers.” “It’s high time to give the rest of us a Christmas present of a new model for government student loans.”

The Federal Reserve Is Running Losses. Does This Cost Anyone Anything?

Published in Zero Hedge.

The debate has raged in the banking and finance communities. Two investigators, Paul Kupiec at the American Enterprise Institute and Alex Pollock at the Mises Institute, have analyzed Fed financial statements and presented their findings about these Fed losses in publications such as the Wall Street Journal and on the websites of the American Enterprise Institute, the Mises Institute, the Federalist Society, and Law and Liberty. The Wall Street Journal has produced a nontechnical video explaining how the Fed makes (and loses) money.

…

Kupiec and Pollock responded with a letter to the editor of the Wall Street Journal to reiterate their earlier conclusions that American taxpayers will ultimately bear the cost of the Fed’s losses. When asked by email how he can justify his claim that no one, including taxpayers, actually bears the cost of the Fed’s losses, Professor Furman responded as follows:

The Fed’s losses do lead to higher debt. And its gains to lower debt. On net it has reduced the debt. But it is a public entity and we didn’t assign it the job of maximizing profits—and for good reason—we should leave that to the private sector. Instead we assigned it macroeconomic goals which it has done well at times and done badly at other times—like in not responding fast enough to inflation in 2021.

How much would debt default damage US? History offers clues.

Published in CS Monitor.

The U.S. has repudiated its financial obligations at other times too, says Alex J. Pollock, a senior fellow at the Mises Institute and author of “Finance and Philosophy – Why We’re Always Surprised.” In 1968, it refused to redeem silver certificate paper dollars for actual silver dollars, despite a written guarantee. Three years later, the U.S. went off the gold standard completely, despite its commitment in an international agreement to convert dollars to gold. The agreement, known as the Bretton Woods system, collapsed.The U.S. has repudiated its financial obligations at other times too, says Alex J. Pollock, a senior fellow at the Mises Institute and author of “Finance and Philosophy – Why We’re Always Surprised.” In 1968, it refused to redeem silver certificate paper dollars for actual silver dollars, despite a written guarantee. Three years later, the U.S. went off the gold standard completely, despite its commitment in an international agreement to convert dollars to gold. The agreement, known as the Bretton Woods system, collapsed.

…

“Eight thousand tonnes of gold is not a gimmick,” says Mr. Pollock of the Mises Institute. “Eight thousand tonnes of gold is reality.”

Quantum attack would trigger Great Depression, think tank warns

Published in SC Media:

“If you were having a dispute with the United States in other ways and you wanted to make it more complicated, why not take down the financial system as a distraction?,” said Alex Pollock, a former deputy director of the Treasury Department’s Office of Financial Research in response to the report.

“If you were having a dispute with the United States in other ways and you wanted to make it more complicated, why not take down the financial system as a distraction?”

What to Know About the History of the Debt Ceiling

Published in TIME:

But Alex Pollock, a former Treasury Department official, argued in a 2021 op-ed in The Hill that there are four precedents for U.S. defaults: 1) During the Civil War in 1862, when the U.S. printed paper money after the Union’s reserves of gold and silver coin were depleted; 2) during the Great Depression in 1933, when the government refused to repay bondholders with gold, as agreed to when the securities were sold; 3) in 1968, when the U.S. did not honor silver certificates with an exchange of silver dollars; and 4) in 1971, when the government abandoned the Bretton Woods Agreement, which included a commitment to redeem dollars held by foreign governments for gold.

Joe Biden Could Use Gold to Solve the Debt Ceiling Crisis

Published in Newsweek:

Economists Paul H. Kupiec and Alex J. Pollock recently published an article advocating for Congress to "simply direct the U.S. Treasury to value its gold holdings, which are real, at real market prices."

…

"If Congress were to make a simple, financially sound amendment to the Gold Reserve Act, it would free up nearly $480 billion in new Treasury cash without raising the debt limit," wrote Kupiec and Pollock in their piece.

"These funds would allow the Treasury to pay all its bills past the end of fiscal 2023, thereby giving Congress an entire session to debate, negotiate budgets, reduce deficits, and set the debt ceiling accordingly, all in bills passed under regular order—something that has not happened in years."

For this to work, write Kupiec and Pollock, Congress would need to change just five words of the Gold Reserve Act.

…

For Pollock, 50 years is too long for the statutory price of gold and the Gold Reserve Act to have remained unchanged.

"The government can fund itself past the end of the fiscal year if Congress merely recognizes that the Treasury's gold is a real massively undervalued monetary asset," Kupiec and Pollock wrote.

"Unlike the phony idea of the Treasury issuing a trillion-dollar platinum coin [a solution that was first floated in 2011], the Treasury already has the legal authority to monetize its gold holdings without creating new government debt. It is only because Congress has failed to amend a woefully outdated law that the Treasury values its gold at an absurdly low price."

They add: "To monetize the market value of the Treasury's gold holding, the Congress need only replace five words in the Gold Reserve Act. Replacing '42 and two-ninths dollars' with 'the current market value (as determined by the Secretary at the time of issuance),' would allow the Treasury to use nearly $480 billion in spendable dollars without raising the current debt limit."

How Would Amending It Help Solve The Debt Ceiling Crisis?

"It's already been done in history, it was done under President Eisenhower in the 1950s," Pollock told Newsweek. "It can be done. It does take an act of Congress to do it," he added.

Neither Kupiec nor Pollock see amending the Gold Reserve Act as a definite solution to the debt ceiling crisis—but as an available alternative.

…

"Of course, that's not a permanent solution," said Pollock. "It's a way for them to create space, to have a serious negotiation of expenses and deficits without raising the debt limit. That's what's so intriguing about it, since there's no debt involved in this transaction. You don't have to raise the debt limit."

…

While the solution suggested by Kupiec and Pollock is legal and could technically work, others are skeptical that it would actually help the current situation.

JPMorgan Chase, FDIC put an end to First Republic's slow bleed

Published in the American Banker:

"There's a lesson in that for all finance that what seems like a darling and a wonderful winner at one moment seems like the opposite only a little while later," said Alex Pollock, a former Treasury Department official.

…

"Obviously there's a very generalized problem of people making the most classic financial mistake, which is investing in long-term fixed-rate assets and funding them with floating-rate money," Pollock said. "They were lulled into it by the actions of the central banks — by keeping interest rates both long and short-term very low for very long periods of time, and convincing people that it was going to continue."

Yes, taxpayers fund the Fed's losses

Published in the Washington Examiner.

Let us start with why the Fed is losing money. Paul H. Kupiec and Alex J. Pollock over at the Wall Street Journal explain in detail, but in short, the Fed purchased Treasurys and mortgage-backed securities — trillions of dollars' worth, in fact — back when they inexplicably held interest rates near zero, despite persistent economic growth. The purchase of these bonds put more money into the economy. They now pay the Fed a low interest rate, meaning they are comparatively worth less than new Treasurys that pay higher rates.

Can we regulate our way towards financial stability?

Published in the Institute of Economic Affairs:

Here a new book by Alex Pollock and Howard Adler gives the answer. The book is called Surprised Again, and for good reason. Central bankers frequently tell us that they have fixed the problems of stability this time, and then, often quite soon afterwards, they are surprised and another shock comes. 

Why is this? However clever they are, the world fools them, and always will. The explanation turns on the difference between risk and uncertainty. Risk is when we know the range of possible outcomes, and the chance of each. There are many such situations about. But there is also uncertainty – when we may not even know the full range of possible outcomes, and we certainly cannot know how likely each is. This important distinction was the subject of a book by Frank Knight in 1921, and was emphasised recently by John Kay and Mervyn King in their Radical Uncertainty. 

The distinction is at the heart of another new book by Jon Danielsson, who shows that to stabilise finance we need to think about the system as a whole. In The Illusion of Control he writes that 

“The more different the financial institutions that make up the system are and the more the authorities embrace that diversity the more stable the system becomes and the better it performs” (p. 9).  

This is an important part of the explanation for the stability of the British banking system in the nineteenth and a good part of the twentieth centuries. The names of banks – Midland Bank, Bank of Scotland, British Linen Bank for example –make one aspect of this diversity clear. 

Mises Institute's Alex Pollock discusses the The Silicon Valley Bailout

First aired on Chicago’s Morning Answer:

The ‘Insolvency’ of the Fed

Published in the New York Sun:

“A bad balance sheet killed Silicon Valley Bank,” Mr. Coy writes. “You know what other bank has a similar balance sheet?” he asks. “The Federal Reserve,” is the reply. An ex-Treasury official, Alex Pollock, goes further, telling us the Fed’s balance sheet “looks just like a Savings & Loan in 1980.” It echoes the worst banking crisis since the Depression. It’s a reminder that while we may be in a banking crisis, the real emergency is fiat money.

It was abandoning the gold standard, after all, that allowed central banks like the Fed to veer into monetary experiments like its Quantitative Easing, buying up trillions in assets while keeping interest rates artificially low. Now that rates are rising, a reckoning is at hand. The Fed’s QE assets “yield 2 percent or 3 percent, but the cost of funding them is now over 4 ½ percent,” Mr. Pollock notes — “a guaranteed way to lose money.” 

…

Mr. Pollock, who directed financial research at Treasury, sums up the Fed’s view as “It doesn’t matter and no one cares.” There may be some truth to this, given the deference the press shows the Fed and the Fed’s own obfuscation of its work via the PhD-inflected language known as FedSpeak. Yet the bank runs could raise scrutiny on the Fed. Asked how Silicon Valley Bank’s balance sheet compares to the Fed’s, Mr. Pollock says “it’s worse.” 

How Should We Regulate Crypto?

Published by David G.W. Birch:

Meanwhile, Howard Adler, a former deputy assistant secretary of the Treasury for the Financial Stability Oversight Council, and Alex Pollock, a former Principal Deputy Director of the Treasury’s Office of Financial Research, advocate a more laissez-faire approach: Why regulate crypto at all?Their view is that we should allow investors to proceed at their own risk under the protections of general commercial law and existing anti-fraud and criminal laws. As they point out, since cryptocurrency originated as a libertarian revolt against the government monopoly on money, this approach is consistent with its founding ideas.