9 Trillion Lost By the Fed (Bogus)

Once again, the 2010 video clip of the Federal Reserve Auditor General is making the rounds over on the right and among the easily alarmed - the clip which supposedly says there is $9 trillion missing” from the Federal Reserve.  (See, e.g., http://www.youtube.com/watch?v=GYNVNhB-m0o -  I picked this one because the uploader amuses us with is paranoia about her lapel pin, inter alia.)


At one point in the clip,  Rep. Alan Grayson asks about the “$9 trillion in Off-balance sheet transactions” - see, e.g., at 3min 45sec.)


A lot of people freak when they hear that exchange and seem to think Grayson is referring to “missing money” or sneaky accounting tricks.  (A few seconds later, he does ask about some supposedly missing money, but he is no longer referring to the off-balance sheet accounts. That the Inspector General bobbles the question adds to the impression some people have that there is something sneaky going on.  Nope, just a missed opportunity.*) 


"Off-balance sheet" accounts are transactions which simply do not fit on a balance sheet. The term does not mean "missing money" or “losses.”  And it does not mean those accounts aren't being tracked and reported.**


An example of an “off-balance sheet" transaction: 


Suppose that today, Dollars are trading 1:1 against Doubloons.  I think Dollars are going to go up against Doubloons in the next month, you think they are going to go down.   We place our bets by agreeing that in one month, I'll deliver 1,000 Doubloons to you and you'll deliver 1,000 Dollars to me.  (Most foreign exchange contracts are simply to deal with potential exchange rate shifts when one is dealing internationally and aren't simply bets.)


If I'm right, and dollars go up, in a month I can perform by buying those 1,000 Doubloons with less than the $1,000 I'm going to receive from you. Say the exchange rate has shifted so that I can buy those 1,000 Doubloons for $950 I've made $50, you've lost $50. 


But how should that transaction be recorded on our balance sheets as of Day 1?  


A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time.


So what is the value of that foreign exchange contract?


Is the value $1,000?  Nope. even if  you fail and go out of business before then, I won't lose a thing.


Is the value zero since today they have the same value?


Is it $50?  (Remember, until the settlement date, neither of us knows what the rate will be on the delivery date.)


It simply makes no sense to put that sort of transaction on a balance sheet.  That DOES NOT mean the transaction is not accounted for in our books and records - it just means it isn't in the balance sheet, it is being kept track of in other ways.  (Actually, such transactions are “on the balance sheet" in footnotes, but not included in the balance calculation because there is no exact figure which can be given.)


Furthermore, one of the features of an off-balance sheet transaction is that in the real world, the amount at risk (one way of measuring value) is nowhere near the face amount of the transaction. That adds to the rationale for keeping such transactions “Off-balance sheet” since including them would mislead people.  (Just as the fact that people are mislead when they think “Off-balance sheet” means “lost” or sneaky.




And that is why off-balance sheet accounts are typically such large numbers - the real risk is a minuscule fraction of the face amount.


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* Just before that exchange, the Inspector General explains that her only jurisdiction is over the Board of Governors of the Federal Reserve, not over the Federal Reserve Banks.  Despite that, Grayson persists in asking her about reviews of the Federal Reserve Banks.  I think she is still trying to figure out how to got him to understand that he is asking the wrong person when asked about the off-balance sheet accounts.


** FWIW, I learned this stuff when I was legal counsel to several areas  of a major bank which dealt with "off-balance sheet accounts" (including the foreign exchange trading desk).  I too originally though "off-balance sheet" meant or at least implied something tricky and I didn’t understand that it refers to transactions that are being accounted for in other ways.  It doesn't mean anything tricky.

Small Business and Regulations

The GOP loves to talk about “crushing regulatory burdens” on small businesses and they claim their policies will make it easier for entrepreneurs to start businesses and “create jobs.” 


"Crushing regulatory burden?"  "Crushing?"


I have never heard a conservative mention (and possibly many don’t even know) that many, if not most, business regulations exempt small businesses.  


And the GOP leaders ignore that many regulations protect small businesses from the giant businesses' practices. In fighting regulations, are they really on the side of small businesses?  When is the last time a small business contributed enough to them to get their attention?


It seems to me that if the GOP and right wingers really wanted to unleash the pent-up entrepreneurial power in America and help them create jobs, they would support a national health care system - think of how many people with great ideas are unable to start businesses because the need health insurance and the cost of it for a new business is prohibitive.

Or maybe they'd fight against the tax schemes that allow huge mega-retailers to invade our towns and push small businesses out - aka "crushing" small business people.


(Regarding regulations: I practiced law doing regulatory compliance from the 70s to the 90s and I later lobbied on behalf of small businesses for a particular trade.)

The Bank Bailouts of 2008

Someone asked on Facebook: >>Remember when we were told we "had to" bail out the banks for the sake of our economy?<<


Yes, we did have to bail them out from their then certain collapse.  Business depends on bank credit to do business. Everyday.  Business depends on the bank payment systems to do business.  Everyday.  Imports and exports of goods depend on trade finance systems to do business.  Everyday.


The commercial banking parts of today’s banks are the providers of those three functions.  Functions which are, day to day, critical for our economy


If the banks had failed, how long would you have lasted with just the cash in your pockets?  How long would you have survived if your grocery story didn't have any available credit to finance its inventory, and no payment systems to pay its suppliers?  How long would you have survived if your gas station's supplier couldn't pay for imports of oil products? 


We had to bail out the banks because our primary banking regulator, the Federal Reserve, was run by a libertarian for 2 decades leading up to the 2008 collapse, and libertarianism was what let the recently  combined commercial and investment banks run amuck and gamble away the rent money, and the seed money, and your and my deposits. 


Yes, the bailout sucked, and Wall Street got away with economic murder.  The triumph of the Chicago School of Economics is that Obama and Congress kissed Wall Street ass.  http://en.wikipedia.org/wiki/Chicago_school_of_economics


But it is mistaken to think each of us didn't have our literal survival at stake had the banks been allowed to fail.

Student Loan Rates - How Much Profit?

Many conservatives argue "Government should be run like a business!"


But they complain when it is.  Look at student loans.  Currently, the average rate paid for money the Government borrows is 2.187% (down from 2.370% a year ago. [1])


For student loans, the government charges 3.4% So, at the existing rate, the government is making a spread of about 1.2% - we are making money on those student loans.


That is exactly what banks do - borrow low and lend higher.  Our student loans are already a profitable "business."


But the GOP either wants to double the interest rate or "pay for" keeping it low and affordable by taking money away from other programs.  


There is no need to "pay for" the lower rate - what the GOP is pushing to do is take money from other programs if they can't make obscene profits from students.


When they say "government should be run like a business," apparently they really mean government should be run like a loan sharking business - with excessive profits screwed out from students.


Education makes our country stronger.  Why is the GOP trying to increase the cost of making our country stronger?

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[1]  http://www.treasurydirect.gov/govt/rates/pd/avg/2012/2012_03.htm

Incurring Debt For College

Rep. Virginia Foxx (R-NC) has “very little tolerance for people who tell me that they graduate with $200,000 of debt or even $80,000 of debt.”

She said, “There’s no reason for that.”

Hmmmm.

Adjusted for inflation, in 1968, the year she was graduated, the average tuition, room & board for public university was $1,064

In 2007 the average tuition, room & board for public university was $11,034.

That's 1,037 percent increase in the basic costs of a public university education.

But “there’s no reason for” these levels of educational debt,” she said.

In my experience, most working college folks make about minimum wage or slightly above.

In 1968, the federal minimum wage was $7.21. (Adjusted for 1996 dollars, the first chart I found.)

In 2007, the federal minimum wage was $4.41 (adjusted for 1996 dollars.)

So.... For a public university, at minimum wage as adjusted, in 1968 it would have taken 148 hours a year to earn room, board and tuition. (Less than 4 weeks working full time.)

For a public university, at minimum wage as adjusted, in 2007 it would have taken 2,502 hours a year to earn room, board and tuition. (A full time job at 40 hours a week is 2,000 hours a year.)

But “there’s no reason for” these levels of educational debt,” Rep. Virginia Foxx, Republican of NC, said.

By the way, Representative Foxx chairs the House subcommittee on higher education.

And she even

has a higher education, herself.

She was graduated from the University of North Carolina at Chapel Hill with a bachelor's degree in 1968 and later earned both a Master of Arts in college teaching (1972) and Ed.D (1985) from the University of North Carolina at Greensboro.

I was only a sophomore in 1968, but I'm pretty sure we were all taught concepts like "then and now" and "adjusting for inflation" and "things change." Some of us even learned "critical thinking skills." I guess not all of us - or maybe she's just forgotten.

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Of course, if the idea of incurring debt to develop a better, more prosperous future is a bad idea, then America's corporations are really screwed up. At the end of 2011, US corporations had $7.8 Trillion aggregate debt.

Is that going to bother people who really think corporations are almost always right? Or Is Rep Foxx just a trifle confused about the role of debt?

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Sources:

http://nces.ed.gov/programs/digest/d07/tables/dt07_320.asp

http://www.infoplease.com/ipa/A0774473.html

http://www.infoplease.com/ipa/A0774473.html

http://www.federalreserve.gov/releases/z1/current/z1r-2.pdf

Common Sense and Voter Fraud

To there extent that there is "voter fraud," one would have to assume that it is evenly split between votes for Republican candidates and for Democratic candidates -- effectively self-cancelling.

Or do Republicans claim that all fraudulent votes would be caste for Democrats? That the only fraudulent voters are democrats?

Are concerns about voter fraud nothing more than psychological projection?

In my experience, you can tell a lot about a person and his values by the way he views others - honest people tend to assume others are honest -- liars tend to assume everyone else is a liar.

So, when someone gets all worked up about other folks committing voter fraud - well, you figure it out.....

Temp-Post Gas Prices

For a FB thread