Role of Central Bank Reserves

[Joe Leote]

The importance of central bank reserves:

The importance of central bank reserves | LSE Event (youtube.com)

Joe

[Tom Paine II]

This LSE talk is all about reserves held by the British Treasury—the Bank of England being nationalized.

 

Doesn’t this structural difference (versus Fed reserves) substantially/significantly color “the importance of central bank reserves,” if not their very nature?  

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[William Meyer]

Haven't listened yet but I would argue the distinction is only a matter of law rather than substance.  Almost all the Fed's profits go to the treasury or in other words the treasury has a claim on nearly all the Fed's retained earnings/dividends.  So whatever the law may say with regard to independence, we can say that as a matter of economic substance, the govt/treasury owns the Fed and therefore all the reserves therein.  Cheers.

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[Joe Leote]

Congress authorizes the Federal Reserve to conduct monetary policy and other public functions on behalf of the federal government of United States:

Federal Reserve Board - The Fed Explained

The central bank uses its balance sheet (and reserve position) to conduct monetary policy on behalf of the federal government. The institutional roles and balance sheets of the Treasury and Central Bank functions are direct analogs in the United States and United Kingdom. The reserves and Treasuries issued by the consolidated CB/Treasury are liabilities of the public sector held as assets by the private sector. We discussed the public role and functions of the Fed extensively way back when William Hummel was moderating the group.

Joe

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[Tom Paine II]

I deem the concept of the consolidated Treasury/CB a glib way to cover up what is (at the very least arguably) a substantive structural difference between US central banking and nationalized central banks.  That said, I have learned to live with what I perceive as conceptual MMT finesses.  Some misconceptions are contagiously convenient, rendering long-term nit-picking resistance exhausting, ostracizing, even futile.

 

Recently, in upholding the novel funding of the CFPB, the Supreme Court presumptively (i.e. without discussion) announced that “the combined earnings of the Federal Reserve System” were a “specified source of public money”, “drawn from the Treasury.”  See 22-448 Consumer Financial Protection Bureau v. Community Financial Services Assn. of America, Ltd. (05/16/2024) (supremecourt.gov).  In other parts, the majority opinion awkwardly hinted that this might not be not exactly true, citing as analogously expansive such exceptions as the original authorizations for fee-based funding of Customs and of US mail by private clients. 

 

I concur with the decision, but (IMHO) to be rigorous I would affirm a ground not contemplated in the decision, but better covered by these analogies, construing the Fed’s member banks as clients for which the CFPB provides a service necessary in the public interest.  This is how the OCC and FDIC are funded.  The new nuance is that the CFPB’s financial cap is set per a very much fluffier formula, intended to avoid the pitfalls of capture that have plagued those agencies—especially the OCC.

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[Joe Leote]

Consolidating the Central Bank and Treasury simply removes their mutual claims on each other from the financial analysis. This makes it obvious that the Congress sets the spend, tax, and credit policies of the United States; when the federal government has a cash flow deficit for a period it covers the deficit by the issue of Treasuries; when the federal government has a cash flow surplus the federal government retires some of the outstanding Treasuries; and when the Central Bank buys Treasuries it swaps out those instruments for Reserves and Deposits in the aggregate portfolio of the private sector. Consolidation only shows that Monetary Policy and Treasury Finance are operations on the balance sheet of the federal government to implement public policy authorized by Congress.

Joe

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[Tom Paine II]

Intellectually consolidating the Central Bank and Treasury simply glibly removes their mutual claims on each other from the financial analysis. This finesse makes it obvious simple to claim, e.g., that the Congress sets the spend, tax, and credit policies of the United States;…etc. 

 

I’m all for consolidating the Fed and the Treasury--actually.

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[Tom Paine II]

I propose one further amendment, to the phrase “mutual claims.”  Third parties (the public demand for cash, the law requiring the Fed to ordinarily purchase Treasuries on the secondary market, …) muddy the monetary policy and mutual claims picture, as I perceive them.  Perhaps you perceive the two entities as consolidated in a de facto sense?  Or that a consolidation is merely a valid accounting artifice/perspective?  (I don’t think the regular returns of Fed profits to the Treasury renders the entities de facto consolidated/governmental, though that goes a long way in that direction.)

 

If the Fed’s balance sheet were an authentic component of the federal government’s balance sheet, I would not quarrel with you.  And adopting that position what I mean by yielding to MMT’s prevalent perspectives.  If the Supreme Court can play along, I can (and maybe I am bound) to play along. 

 

Intellectually consolidating the Central Bank and Treasury simply glibly removes their mutual complex claims on each other from the financial analysis. This finesse makes it obvious simple to claim, e.g., that the Congress sets the spend, tax, and credit policies of the United States;…etc. 

 

I’m all for consolidating the Fed and the Treasury--actually.

 

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[Joe Leote]

Tom,

Inserting words like "glibly" into the analysis changes nothing about the analysis of the unconsolidated or consolidated balance sheets. The aggregate private sector holds reserves, bank deposits, and Treasuries in its portfolio. If the Fed buys Treasuries then the private sector holds less Treasuries and more reserves and/or deposits. The private sector is not concerned with the mutual claims the Central Bank and Treasury have on each other. The reason to consolidate the CB/Treasury is to understand how they work together to implement government policy working in contact with the financial markets.

Joe

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