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

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

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”.

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

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.

Fund managers are the agents of shareholders

Published in the Financial Times.

“Large institutional shareholders, notably BlackRock, State Street and Vanguard, recognise that companies must serve broader social purposes,” writes Martin Lipton (Opinion, September 18). There is one big problem with this statement: these firms are not shareholders. They are mere agents for the real shareholders whose money is at risk. They are moreover agents that display all the conflicts of classic agency theory. Yet they go about calling themselves “shareholders”, pushing the personal political agendas of their executives.

What they should be doing is finding out what the real shareholders desire and voting shares accordingly as faithful agents, not pontificating about personal ideas, which are irrelevant as far as what shareholders want.

Greenland gambit finds echo in US frontier deals

Published in the Financial Times.

Theo Vermaelen’s ironic letter about the idea of purchasing Greenland (“Trump and Greenland: it’s a winner all around,” August 30) was fun, but ended with a serious point: “The current frontiers of countries are mainly the result of wars.” However, the frontiers of the United States were heavily influenced by purchases: the 1803 Louisiana Purchase of 827,000 square miles, the 1854 Gadsden Purchase of 30,000 square miles, and the 1867 Alaska Purchase of 586,000 square miles. In this context, one cannot help noticing similarities between Alaska and Greenland.

Echoes of the US savings and loan industry’s collapse

Published in the Financial Times.

Metro Bank has the problem so pointedly observed by the great Walter Bagehot in 1873: “Every banker knows that if he has to prove he is worthy of credit . . . in fact his credit is gone.”

Your editorial “Metro panic shows need for proactive regulation” (May 14) says “Metro’s loan book . . . is fully covered by customer deposits.” Of course, customer deposits are not inherently stable — they are inherently unstable. Their stability, as you suggest, is solely due to the guarantee provided by the government.

This fact, so humbling for bankers, has powerful effects, most strikingly shown by the collapse of the US savings and loan industry in the 1980s. Savings institutions that were irredeemably insolvent were nonetheless able to keep their deposits because they were guaranteed by a government deposit insurance fund. However, this fund, the Federal Savings and Loan Insurance Corporation, was publicly admitted to be itself broke! But the depositors correctly believed that behind it all the time was the US Treasury, as in fact it was. This allowed many insolvent S&Ls to keep funding disastrous speculations, which made the ultimate cost to the Treasury far bigger.

We can’t help feeling that we today are smarter

Published in the Financial Times.

Martin Wolf is certainly correct that “further financial crises are inevitable” (March 20). Let me add one more reason why this is so — another procyclical factor rooted in human nature. This is the intellectual egotism of the present time: the conviction we can’t help feeling that we are smarter than people in the past were, smarter than those old bankers, regulators, economists and politicians of past cycles, and that therefore we will make fewer mistakes. We aren’t and we won’t. The intellectual egotists of the future will condescendingly look back on us in their turn.

The end of ‘too big to fail’ remains difficult to picture

Published in the Financial Times.

If you buy shares of stock for $100 and they fall to $30, we say, “Oh well, that’s the stock market.” If you buy a bond for $100 and it ends up paying 20 cents on the dollar, we say, “Oh well, that’s the bond market.”

But if your deposits in big banks are going to pay 97 cents instead of par, that is a financial crisis, and the government must intervene to protect you.

That is why Simon Samuels is so right that “we are a long way from ending ‘too big to fail’” (“The ECB should resist the lure of bigger banks,” Jan. 31). As long as we insist that no one can lose money on bank deposits, too big to fail can never end and never will.

2 percent inflation is just a central bank fad

Published in the Financial Times.

Your interview with Shinzo Abe (“Japanese PM targets big reforms to cement legacy,” Oct. 8) may indicate some momentum in a fundamental shift in ideas — a shift away from the in-retrospect foolish “golden age” theory of retirement, which was invented in the 1950s. This led to the notion that, starting in their 60s, people should be paid while spending a couple of decades or more in idleness and entertaining themselves, rather than remaining productive. Mr Abe instead wants “a society where people never retire and pursue lifelong careers.” If not lifelong, perhaps, at least significantly longer.

Your article proceeds to assert dogmatically that this “will count for little if deflation is not banished” because “the Bank of Japan’s 2 percent inflation objective is still far off.” This treats the necessity of 2 percent inflation as a fact instead of a pretty dubious theory. In reality, perpetual inflation at 2 percent is merely the latest fashion in central banking ideas. It follows many other central bank fashions, which have succeeded each other over a century, going back to the gold standard. Like the “golden age” theory of retirement, I believe the “2 percent inflation forever” theory will be found wanting and replaced.

Efforts to close the ‘doom loop’ are destined to fail

Published in the Financial Times.

Thomas Huertas (“Bank holdings of sovereign debt need scrutiny,” September 7) makes very reasonable proposals of how to control the “doom loop” of government debt making the banking system more risky, while the banks make the government’s finances more risky. But the sensible reforms he recommends won’t happen and can’t happen. This is for a simple and powerful reason: the financial regulators who would have to take the actions are employees of the government which wants to expand its debt. A top priority of all governments is to be able to increase their debt as needed. The regulators will not act against this fundamental interest of their employer.

An egregious example of this problem in the U.S. context is that as the bubble inflated the banking regulators did, and still do, allow the banks to hold unlimited amounts of the debt of Fannie Mae and Freddie Mac, the government-backed mortgage firms, long since failed and in conservatorship. Moreover, the regulators allowed (and indeed promoted, through low risk-based capital requirements) banks to own and finance with deposits the preferred equity of Fannie and Freddie. These were distinctly bad ideas. But what were the poor regulators to do? Their employer, the US government, wanted to expand housing debt and leverage through Fannie and Freddie, and they went along.