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.

WRAL: Fact check: Has the U.S. ever defaulted on its debt?

From WRAL:

Possible precedents for defaults

In a 2021 op-ed in The Hill, a political news outlet, Alex J. Pollock, a former Treasury Department official, argued that there are four precedents for U.S. defaults. Pollock cited cases of the U.S. Treasury: Resorting to paper money largely not supported by gold during the Civil War in 1862; Redeeming gold bonds with paper money rather than gold coins during the Great Depression in 1933; Not honoring silver certificates with an exchange of silver dollars in 1968; and Abandoning the Bretton Woods Agreement in 1971, which included a commitment to redeem dollars held by foreign governments for gold. Also, a 2016 analysis by the nonpartisan Congressional Research Service noted that in 1979, the Treasury failed to make on-time payments to some small investors because of technical glitches. Most were paid within days or a week. The research service concluded that although the temporary payment delays "inconvenienced many investors, the stability of the wider market in Treasury securities was never at risk." But multiple economic specialists agree that although these were notable episodes, they do not mirror the type of default to which Jeffries was referring.

Mises Institute's Alex Pollock explains how to pay all of Treasury’s bills easily

From Chicago’s Morning Answer:

A “default on our debt” would be unprecedented in American history?

Published in Politifact:

Possible precedents for defaults

In a 2021 op-ed in The Hill, a political news outlet, Alex J. Pollock, a former Treasury Department official, argued that there are four precedents for U.S. defaults.

Pollock cited cases of the U.S. Treasury:

• Resorting to paper money largely not supported by gold during the Civil War in 1862;

• Redeeming gold bonds with paper money rather than gold coins during the Great Depression in 1933; 

• Not honoring silver certificates with an exchange of silver dollars in 1968; and

• Abandoning the Bretton Woods Agreement in 1971, which included a commitment to redeem dollars held by foreign governments for gold. 

…

Our Sources

Hakeem Jeffries, interview with NBC’s "Meet the Press," Jan. 8, 2023

Congressional Research Service, "Has the U.S. Government Ever ‘Defaulted’?" Dec. 8, 2016

Alex J. Pollock, "The US has never defaulted on its debt — except the four times it did," Oct. 7, 2021

Will The FTX Crash Kill Crypto?

Cited in Forbes:

That includes digital currencies. This the irony which Mises Institute scholar Alex Pollock points out in his new book, Surprised Again!, coauthored with Howard Adler: that crypto’s problems may well speed the digitization of national currencies and increase the power and influence of central banks—the crypto enthusiast’s No. 1 nemesis.

Surprised Again! The COVID Crisis and the New Market Bubble

Published in Library Journal:

by Alex J. Pollock & Howard B. Adler

Paul Dry. Nov. 2022. 222p. ISBN 9781589881655. pap. $21.95. ECONOMICS

COPY ISBN

As former senior officials of the U.S. Department of Treasury under the Trump administration, Pollock (Finance and Philosophy: Why We’re Always Surprised) and Adler are qualified to synthesize complex financial behaviors into digestible chapters; the graphs they include are excellent. This book analyzes prime money market funds, cryptocurrencies, mortgages, municipal debt, pension debt, and student loans, in regard to their pre and current pandemic behavior. Each chapter serves as a primer and an update of each category. The authors argue that all finance is political finance, and they believe that predicting financial market behavior is ineffective, since many times those forecasts are wrong or surprising. Salient points are emphasized with a “Dear Reader” salutation that is both annoying and effective, as the examples in those paragraphs are essential for understanding. The chapters on prime market funds and cryptocurrencies are especially enlightening due to their exploration of regulations, both real and theoretical, that influence their behavior. Although the book is designed to be read in sequence, readers looking to delve into these topics beyond daily media coverage will be able to start at the chapter they’re most interested in.

VERDICT A helpful and insightful analysis of current economics.

Reviewed by Tina Panik , Nov 01, 2022

William Isaac Announcements: October 28, 2022

October 28, 2022

My good friend, Alex Pollock and his colleague, Paul Kupiec, co-authored an article on the Federal Reserve, which was just published by The Hill. The legislation creating the Consumer Financial Protection Bureau required the CFPB to be headed by a single individual instead of a bipartisan board governing most independent agencies such as the FDIC, the SEC, the FTC. Moreover, the CFPB receives its funding from the Federal Reserve Board instead of being funded by Congress. A Federal Court recently ruled – I believe correctly – that these governance arrangements are unconstitutional. Alex and Paul address these issues and go on to note that the Federal Reserve is hardly in position to fund the CFPB. I highly recommend this article to you.

• The Fed is in the red: Should it still pay CFPB’s bills? By Alex J. Pollock and Paul Kupiec published by The Hill on October 26, 2022

The article can be found at williamisaac.com. Be safe and be well.

Economic Truths, Perennially Forgotten

A review of Surprised Again! The Covid Crisis and the New Market Bubble, written by William M. Briggs and published in Law & Liberty.

In 2021, Treasury Secretary Janet Yellen assured Americans that recent inflation was “transitory.” Back in 2017, Yellen, then Chairman of the Federal Reserve Board, hinted there would not be another financial crisis “in our lifetimes.”

Maybe she got that idea from Morgan Stanley boss James Gorman, who in 2013 put the chance of a crisis “in our lifetime” as “close to zero” as he could imagine. Well, imagination, as the song says, is crazy. “Your whole perspective gets hazy.”

These two experts, as Alex J. Pollock and Howard B. Adler tell us in Surprised Again! The Covid Crisis and the New Market Bubble, are far from alone. Economic experts, they confirm, have a collective accuracy that would embarrass a busload of blind golfers. Not one expert, they remind us, saw the Great Depression coming. And none foresaw the Calamitous Coronadoom Panic of 2020. Which lasted until now.

What is fascinating is that being wrong in no way dents the awesome armor of assurance donned by our experts. Whatever they do when given power, they do it boldly and without doubt. Whether this lack of humility is caused by amnesia or hubris can be debated. But no one can doubt  the astonishing effects of the economic “solutions” foisted upon us by a string of experts during the panic, each trying to correct the ill effects of the other “solutions.”

Read the rest here.

Mises Institute's Alex Pollock: The Fed’s Tough Year

From Chicago’s Morning Answer. Click here to listen.

Restoring The Fed's Credibility?

Published in Law & Liberty by Andrew Stuttaford.

If any central banker, both literally and figuratively, bestrode, in Shakespeare’s phrase, “the…world like a colossus,” it was the 6-foot-7 Paul Volcker.  But, perversely, the giant shadow he cast helps explain our not-so-transitory inflationary mess.

Alex Pollock offers a brisk, deft analysis of Volcker’s battle against inflation. He sets the stage with a 1979 speech by Arthur Burns, Volcker’s not quite immediate predecessor as Fed Chairman. In what Pollock describes as an “agonizing reappraisal,” Burns conceded (he could hardly do otherwise) that central banks had failed to rein in inflation. Running through his lament was an acknowledgment that the Fed had gone along with “the philosophic and political currents that were transforming American life and culture,” currents that had also swept away traditional notions of fiscal and monetary discipline.

Read the rest here.

SHEFFIELD: Democrats And The Fed — A Tale Of Two Realities

Published in the Daily Caller:

“We estimate that at the end of May, the Federal Reserve had an unrecognized mark-to-market loss of about $540 billion on its $8.8 trillion portfolio of Treasury bonds and mortgage securities,” American Enterprise Institute scholars Paul H. Kupiec and Alex J. Pollock wrote in late June. “This loss, which will only get larger as interest rates increase, is more than 13 times the Federal Reserve System’s consolidated capital of $41 billion … according to the Federal Reserve Act, Fed losses should impact its shareholders, who are the commercial bank members of the 12 district Federal Reserve banks.”

SHEFFIELD: Democrats’ Rosy Economic Picture Has Become A Nightmare As Recession Finally Hits

Published in the Daily Caller.

Under Powell’s watch, banks will win and everyday people lose, as AEI economists Paul H. Kupiec and Alex J. Pollock report: “For the first time in its 108-year history, the Federal Reserve System faces massive and growing mark-to-market losses and is projected to post large operating losses in the near future … Because they are now paid interest on their reserve balances and receive guaranteed dividends on their Federal Reserve stock, member banks will monetarily benefit from the Fed’s policy to fight inflation while the public bears Federal Reserve system losses. Meanwhile, the public at large will also face the costs of higher interest rates, reduced growth and employment and losses in their investment and retirement account balances.”

Mises Institute's Alex Pollock explains why economics is not a science

On Chicago’s Morning Answer radio. Listen here.

The Fed Cannot Go Bankrupt; However, It Can Bankrupt the Country

Published by the Mises Institute.

07/13/2022 Patrick Barron

A recent essay on the Mises Wire triggered quite a bit of discussion among a group of Austrian school economists. Paul H. Kupiec and Alex J. Pollock's "Who Owns Federal Reserve Losses and How Will They Impact Monetary Policy?" became the focal point for a wide-ranging discussion of monetary issues that got to the heart of our monetary and overall economic future.

The Fed Cannot Go Bankrupt

The article itself is a fairly straightforward explanation of how the Fed works, and provides several options that the Fed might pursue in a rising interest rate environment. The authors contend that the Fed has intervened itself into a corner, where losses probably will increase as the Fed raises rates. David Howden opined that this might not happen, as the Fed will roll over its mostly short-term, low-yielding investments into higher-earning assets, which will tend to protect its net interest income and provide an operating profit. Furthermore, the Fed is not required to mark its low-yielding investments to market. Were it required to do so, the Fed's true financial weakness would be revealed.

The Fed Ignores the Rule of Law

But what can or will be done about it? Early in their essay, Kupiec and Pollock conclude that nothing will be done, despite the provisions of the law that created the Fed over one hundred years ago. The losses will not go away; they simply will be transferred to the unwitting public through loss of purchasing power. Per Kupiec and Pollock:

"Innovations" in accounting policies adopted by the Federal Reserve Board in 2011 suggest that the Board intends to ignore the law and monetize Federal Reserve losses, thereby transferring them indirectly through inflation to anyone holding Federal Reserve notes, dollar denominated cash balances and fixed-rate assets.

The "innovation" in accounting policies centers around the Fed's newly minted "deferred asset" account, to which underwater assets will be transferred. Per Kupiec and Pollock:

Today, the Federal Reserve Board's official position is that, should it face operating losses, it would not reduce its book capital surplus, but instead would just create the money needed to meet operating expenses and offset the newly printed money by creating an imaginary "deferred asset" (Section 11.96) on its balance sheet.

If the Fed were subject to the rule of law, either it would have stopped money printing years ago or its creditors would have forced it to close its doors. Yet the rule of law is completely ignored. Per Kupiec and Pollock:

The Federal Reserve Board's proposed treatment of system operating losses is wildly inconsistent with the treatment prescribed by the Federal Reserve Act.

The Keynesians running our economic life may be reassured that the Fed cannot fail in a technical sense, but the public should be appalled. The continual monetization of the federal budget threatens the complete loss of the dollar's purchasing power—to wit, a Weimar Republic–style catastrophe.

Unlawful Monetary Debasement Causes Capital Destruction

Today's monetary leaders fail to understand the true nature of money and, therefore, cannot conceive that there are real consequences to their outlandish irresponsibility in monetizing government debt and brazenly dismissing the rule of law. As the facilitator of monetary debasement, borne by the general public, the Fed fosters the destruction of societal capital.

The federal government does not have to answer to the law nor the public for its irresponsible and destructive spending. The purpose of insolvency is to force an institution, whether public or private, to stop destroying capital. Austrian school economists understand that capital must be created by hard work, innovation, frugality, and, most of all, savings. The market allocates scarce capital to those enterprises that create things worth more than those scarce inputs.

The Solution Is a "Return to Sound Money"

In 1953 Ludwig von Mises added a relatively short final chapter to his 1913 masterpiece The Theory of Money and Credit. Chapter 3 of part 4 is titled "The Return to Sound Money." It is as relevant today as it was almost seventy years ago. Mises explains how the US in particular could anchor the dollar to its gold reserves. The Fed would be eliminated and replaced by little more than a board that would monitor all dollars to make sure they are backed 100 percent by gold.

Mises was a master in presenting what self-serving Keynesian scholars try to hide in a fog of deception; i.e., that money can and should be subject to the rule of law, as are all other economic goods in society. I daresay that there is no single reform that comes closer to fostering peace, freedom, and prosperity than a "return to sound money."

Biden’s Appointments Speak to an Extremist Agenda

Published in TownHall.

Perhaps the most outrageous example of the president’s extremist appointments was his nomination of Saule Omarova to head the Office of the Comptroller of the Currency. A graduate of Moscow State University on the Lenin Personal Academic Scholarship, Omarova tweeted in 2019, “Until I came to the US, I couldn’t imagine that things like gender pay gap still existed in today’s world. Say what you will about old USSR, there was no gender pay gap there. Market doesn’t always 'know best.'” In an academic paper Omarova’s advocated that “central bank accounts fully replace — rather than compete with — private bank accounts.” It’s disturbing that a person who spent much of her academic career deriding capitalist institutions and advocating for unprecedented government management of the economy, was nominated for such a critical economic position. At least the nation can be thankful that Omarova withdrew her nomination in December – as many moderate Democrats made clear they could not support her nomination.

Read the rest here.

Ukraine and the cost of war

Published in the Washington Examiner.

In an example unrelated to war, consider former President Richard Nixon’s 1971 decision to abandon the gold standard and impose wage and price controls and tariffs to calm inflationary forces. This was primarily a response to France’s effort to convert dollars to gold.

It's Another Housing Bubble And The Fed Is Holding The Pin

Published in Zero Hedge:

As economist Alex Pollock put it in an article published by the Mises Wire earlier this year, the Fed “continues to be the price-setting marginal buyer or Big Bid in the mortgage market, expanding its mortgage portfolio with one hand, and printing money with the other.”

In 2006, the Fed owned zero mortgages. Today, The central bank holds about $2.6 trillion in mortgage-backed securities on its balance sheet. According to Pollock, about 24% of all outstanding residential mortgages in the US reside in the central bank. That makes the Fed, by far, the largest savings and loan institution in the world.

William Isaac Announcements: February 15, 2022

February 15, 2022

My long-time friend and brilliant scholar, Alex Pollock, has written an essay on the probable impact of inflation currently gathering steam due to fiscal policies being pursued by Congress and the Administration and monetary policies being pursued by the Federal Reserve. I'm sure the article will resonate and bring back troubling memories of the 1970s and 1980s:

• 'Biden Inflation' made simple: Borrow from the Fed, take away from the rest of us by Alex J. Pollock published by The Hill.

The full article can be found at williamisaac.com. Be safe and be well.

All the best,

World’s biggest S&L

Published in Grant’s Interest Rate Observer.

Yes, agreed Alex J. Pollock, the Federal Reserve might well go broke, or, we should say, “broke.” The quotation marks acknowledge the Treasury’s standing guarantee of the central bank’s solvency. Then again, Pollock pointed out, where would the Treasury be without the Fed to buy its bonds?

So a relationship of codependency, as Dr. Phil might put it, is a foundational element of today’s federal finances. “It’s a paradoxical situation,” mused Pollock, author, think-tank scholar (currently at the Mises Institute) and, most relevantly for the purposes of this discussion, past president and CEO of both the Federal Home Loan Bank of Chicago and Community Federal Savings and Loan Association, St. Louis.

Your editor and Pollock were comparing notes on a Jan. 5 comment by J.P. Morgan Securities titled, “The case for an earlier start to QT.” In it, Morgan’s Fed watcher, Michael Feroli, speculates that so-called quantitative tightening might get a head start to spare the central bank the embarrassment of having to report an operating deficit. He reckoned that a funds rate higher than 2¼% could pitch the Bank of Powell into a loss.

…

Reviewing the Fed’s financials (including the Sept. 30, 2021 edition of the “Federal Reserve Banks Combined Quarterly Financial Report”), Pollock says that they only confirm his view that “the Federal Reserve has made itself into the world’s largest savings and loan, with all of the problems of being a savings and loan.”

Besides his 15 years spent at the head of the Chicago Federal Home Loan Bank, 1991–2014, Pollock led an unsuccessful attempt to rescue a failing S&L, Community Federal, St. Louis, in 1988– 1990. “We got the ball late in the fourth quarter on our own 1-yard line,” Pollock lightly told the St. Louis Post-Dispatch following the forced sale of Community in 1990. “We got it to the 20-yard line and time ran out, but it was one great drive.”

Now, then, Pollock observes, as of Sept. 30, 2021 the Fed showed $143.1 billion in cumulative unrealized gains on its portfolio holdings, down from $354 billion on Dec. 31, 2020. Probably, he speculates, four months of mainly rising interest rates have turned the positive September 2021 mark negative, and “maybe by a lot.”

Of course, the mark forces no action, the Fed being exempt from the regulatory rules governing regulated financial institutions. But if the central bank were not so privileged, and if you, Alex Pollock, were the CEO that had parachuted in to effect a miracle turnaround, what would you do?