Monday, July 25, 2016

No The Fed Is Not Missing $9 Trillion

There is a meme going around (again) that, inter alia, "the Federal Reserve
 is missing $9 trillion."  (See the graphic below.) 

I agree with the overall intent of the meme but that claim that "the Federal Reserve is missing $9 trillion" is flat out wrong. [1]

The idea comes from the fact that awhile ago the Fed had $9 trillion listed as "off balance sheet."

Off-balance sheet does not mean "missing" or "hidden" or "we’re trying to trick you."

It is a standard accounting concept, it is how uncertain assets and liabilities are reported since, because of their uncertain, contingent  nature it is inappropriate (in fact, it could be misleading) to include them on a balance sheet.  

Off-balance sheet items are reported, just not on a balance sheet - nothing is missing, nothing is being hidden.

A balance sheet basically reports "This is how much I'm worth today."

I own a Mega millions ticket which is sitting on my desk from the day someone won over $300 million.  I haven't checked it yet.

That is a contingent asset - contingent on the right numbers being on it.

Should I record that $300 million plus on my balance sheet?  Tell the world I'm worth over $300 million?

Or should I report is as a wholly uncertain long shot.  As something else, not as a fixed asset or liability. Off my balance sheet.

So, no, the Fed is not missing $9 trillion and it is not trying to trick us.

And yes, there are real problems with the Fed.  Libertarian Alan Greenspan changed its fundamental nature as guardian of our banking system.

The Fed did a great job of protecting our banking system for decades, until Greenspan worked his libertarian magic.

We should not do away with the Fed - we should restore it - IOW, "Make the Fed Great Again!"  ;)

Thursday, April 28, 2016

Judges Can And Should Make Law

Another miscarriage of justice has just occurred. I believe this wrong is rooted in attacks on our judicial system by the idea that "judges can't and shouldn't make law."

n March, 2016 an Oklahoma appeals court decided that state law doesn’t criminalize oral sex with a victim who is completely unconscious. The decision was based on statutory law.*

Courts are charged with delivering justice, the Oklahoma court didn't do so, apparently in the belief that "judges can't make law."  

Some folks (mainly conservative) insist judges can’t and shouldn’t “make law.” The reason?  I believe it is because for much of the 20th century, judges made a lot of law protecting individuals, especially consumers, a development quite upsetting to many conservatives.

But the fact is that throughout our history, judges have made law in order to do justice. ** (See, e.g., my blog entries linked below.)

The Oklahoma appeals court decision is an example of how this “judge’s can’t make law" idea has perverted justice in the US 

Per articles about the case, legal experts and victims’ advocates said they view the ruling as showing the gaps that exist between the nation’s patchwork of laws and evolving ideas about rape and consent.
. . . .

“And the appeals court ruling, on 24 March, affirmed that prosecutors could not apply the law to a victim who was incapacitated by alcohol.” ***

"Michelle Anderson, the dean of the CUNY School of Law who has written extensively about rape law, called the ruling “appropriate” but the law “archaic”.
“This is a call for the legislature to change the statute...."  Op cit.

That idea ignores the history of US law and of our legal system. This case is a clarion call for the courts to remember they are judges and have the power and responsibility to do justice - including "making law."

The idea that judges shouldn't make law and only legislatures can make law seems to be a relatively modern (mid to late 20th century) renewal of a political conservative idea which I believe arose because conservatives didn't like courts favoring people and justice as they often did throughout the 20th century, often merrily making law along the way. Lawyers, think MacPherson.  (Note that conservatives are perfectly fine with “activist judges making law favoring corporate adventurism.)

The fact is that throughout our history, judges have made law, often in order to simply do justice.

And this 
Oklahoma case and the reaction to it demonstrate why slavish adherence to legislative action doesn't do justice, it perverts justice.  

(It should remind of us the early period in English legal history when, if I recall correctly) the courts became mired in technicalities to the detriment of actual justice and the courts of equity arose to provide a degree of correction and an avenue to actual justice.)

One reason courts should make law is well-illustrated by Dean Anderson as quoted above: legislatures are often slow to act, and, not infrequently, important and necessary changes in our law can be blocked by even one powerful legislator.

The power to promote justice rests in the hands of those who make the laws. Insisting that such power rests only in the hands of legislatures doesn't 
promote justice, at times it frustrates it.

BTW: Two things to keep in mind with regard to judges "making law":

1: Legislatures can always over-rule "court made law" (with the exception of constitutional law.)

2:  Judges don't like to be over-ruled; they will hesitate long and hard before taking the chance of making law and then being over-ruled.

My earlier discussions on "judicial activism:"


= = = =

**Legal scholars: if you don't think judges have made law throughout our history, aside from the actual history of our common law legal system, please consider why our library of legal authorities include an extensive collection of the ALI's Restatements of the Law - seeking to explain and rationalize much of the law courts have made in the US throughout our history.

And try to explain why the "codification movement" didn't take place until well after our Constitution was adopted.  See, e.g.,

The codification movement and the Fields Code are also discussed in Grant Gilmore's "Ages of American Law."

And finally, if courts can't make law, there would be no reason for ethical Rule 3.1: "Meritorious Claims & Contentions

"Rule 3.1 Meritorious Claims And Contentions
"A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification or reversal of existing law..... 

- - -

Thursday, March 31, 2016

Regarding Fractional Reserve Banking

I read a page linked today from Facebook which asserted the proposition that banks create "money ... from something called the Fractional Reserve Banking system.... This scam creates money out of thin air."

“Ahhh,” I said, “the old ‘fractional reserve banking’ misunderstanding.” MISunderstanding. (To avoid, ah, misunderstanding.)
Here’s what “fractional reserve banking” really is:

Banking law (the Federal Reserve Act in the US) requires that for each $100 dollars of deposits banks have received from customers, they have to keep 10% on deposit with the reserve bank (those deposits are called, you guessed it, "reserves" they are a form of safety net.) That requirement has the natural consequence or, better yet, corollary that they can only lend out up to 90% of the deposits they have accepted.

One way this reserve requirement is sometimes characterized is by saying “banks can loan up to 9 times the amount they have on reserve.”  Which is true, but incomplete.  And describing it in that incomplete way is what leads to the misunderstanding on the subject.

The folks all worked up about "fractional reserve banking" see the 10% reserves and they see the "9 times that" in loans  they can make -- but they don't see or understand is that a bank cannot loan out any money which hasn't already been loaned to them - that the 10% is 10% of deposits of real money people have  made with them, as is the remaining 90%.  They haven't "created" one penny.

But they think the bank has somehow created money out of thin air: as in the FB post’s proclamation "This scam creates money out of thin air."

They simply aren't “creating money out of thin air." .  This idea is simply wrong.

I've been trying to think of an analogy.  How about this? In US football, the last 20 yards before the goal line is called "the red zone."  That is "20% of the field.  The rest of the field is "4 times that," right?  Claiming "fractional reserve banking" means the banks "create money out of thin" air is like arguing that the football teams have created that other 80% of the field ("4 times the red zone!") out of thin air.  (Not a perfect analogy, but maybe it'll help conceptualize the issue.)

How do I know this about reserve banking?  I practiced regulatory compliance for a couple of the country's largest banks during the last century.  I had to know and, sometimes, work with the reserve requirement of the Federal Reserve Act, as amended over the years.

Does that mean I'm somehow in the tank for banks?  Because I worked for them?

Nope, but it does mean I know a lot more about some of the shitty stuff banks do than most people know.

Our banking system needs major reform, but we simply can't do it effectively if we believe nonsense like this "fractional reserve banking" lets banks "create money" idea.


Monday, January 18, 2016

Religious Beliefs And Piercing Corporate Veils

Some religious folks claim they have a right to intermix their personal religious views with their corporations' commercial activities.

But there is a long standing legal principle that when the owners of a corporation intermix their finances with those of the corporation, the owners lose their limited liability* for the corporation's obligations and debts.

This principle is called "piercing the corporate veil."

It seems to me that the same principle should apply when thew owners of a corporation intermix their personal beliefs with the business of the corporation - deny them the limited liability of stock ownership.
= = = = * A bit of history: before corporations were "invented," one could do business as a sole proprietorship or as a partnership. Under either, as an owner one was personally liable for all of the obligations of the business. (That rule still holds true today.) As the industrial age developed, people were reluctant to take such huge risks necessitated by industrialization. I might be willing to take the business risk of losing the amount I have invested, but I don't want the risks of, say an industrial accident or of the purchase price for a 747 should I own one share in an airline. So the idea of limited liability of owners of a corporation was developed and became part of the laws which govern us. Each shareholder's liability is limited to the "par value" of the shares owned. And the liability is for the obligation for that par value to have been paid into the corporation when the shares were issued. So when I buy a share of a corporation from someone else, as the general rule, I have and can have no financial obligations arising from the corporation's activities. That limited liability is lost when the corporate veil is pierced.