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Federal Reserve Bank Board Chairman Ben Bernanke delivers remarks at the Fed Sept. 15, 2011 in Washington, DC.
The New York Times' Steven Davidoff — the Deal Professor — argues that the Federal Reserve is actually the world's most successful hedge fund. But it's not like any other hedge fund. It creates its own money and doesn't care about profits (hedge funds borrow lots of other people's money and are OBSESSED with profits). It also pays its employees squat for making about $77 billion in 2011.
By the usual hedge fund rule of "2 and 20" — a 2 percent management fee plus 20 percent of the profits — the Fed's staff should be dividing up more than $14 billion on profits, exclusive of whatever it might charge to run $3 trillion in assets (2 percent of that would be $60 billion).
I call the Fed a hedge fund because it is operating like one, leveraging its balance sheet to earn huge profits. The main difference between a hedge fund and the Fed is that the Fed effectively creates its own money, so it doesn’t have any borrowing costs, meaning yet more profits. Remarkably, the Fed’s profits are also an afterthought. The Fed is trying to stabilize and increase the United States economy in the wake of the financial crisis, and its profits are a nice byproduct.
Still, these earnings blow away any other hedge fund profits.
The Fed employees who manage this operation receive a federal salary for their efforts. The money is well above the pay of the average American but still relatively modest compared with those in the financial industry. The top salary class at the Federal Reserve has a maximum of $205,570 a year. Ben S. Bernanke, the chairman of the Federal Reserve, earns $199,700 a year, while the other members of the Federal Reserve board earn $179,700.
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Well, this is interesting. The Federal Reserve has produced a white paper that tackles the Very Big Problem of the ongoing housing crisis and submitted it to Congress. It's a veritable treasure trove of clear-eyed analysis about why the housing market is still in such rotten shape. But beyond that, it offers a suite of equally clear-eyed ways to fix the problem.
One of these is particularly intriguing: taking foreclosed properties and, instead of trying to sell them to new homeowners — which requires mortgage financing which isn't now widely available to any but the most creditworthy borrowers — turning them into rentals. And who will do the renting? Real estate investors are the secret sauce (just a bit of translation: "REO" means "real estate owned," i.e. foreclosures):
To date, REO holders have avoided selling properties in bulk to third-party investors because the recoveries that REO holders receive on such sales are generally lower than the corresponding recoveries on sales to owner occupants. Investors considering such bulk-sale transactions tend to demand a higher risk premium than owner occupants and thus will purchase only at lower prices. Investors in such transactions also might have more difficulty obtaining debt financing than owner occupants. Although mortgage products are available for individual one- to four-family houses and for multifamily properties (albeit currently at tight terms), no mortgage products currently exist for a portfolio of single-family homes. [My emphasis] In addition, REO holders must absorb the costs of assembling inventory for bulk sale — that is, holding properties off the market until enough properties have been assembled to cover the fixed costs of a rental program. Until the inventory is assembled, the REO holder receives no revenue from the property but incurs direct financing costs; carrying costs such as taxes, utilities, and maintenance expenses; and the continued depreciation of the property.
An REO-to-rental program that relies on sales to third-party investors will be more viable if this cost-pricing differential can be narrowed. REO holders will likely get better pricing on these sales if the program is designed to be attractive to a wide variety of investors. Selling to third-party investors via competitive auction processes may also improve the loss recoveries.
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Secretary of the Treasury Timothy F. Geithner (L) and William C. Dudley (R), President and Chief Executive Officer of the Federal Reserve Bank of New York, listen to Federal Reserve Chairman Ben S. Bernanke (C) speak during a hearing of the House Financial Services Committee on Capitol Hill March 24, 2009 in Washington, D.C.
As Bloomberg reports, the Federal Reserve is trying to change its image. And the chief image-changer is none other than Chairman Ben Bernanke:
Bernanke, who took office in February 2006, has pushed the Fed toward greater openness at a faster pace than any of his predecessors. He holds press conferences four times a year and has aired his views on monetary policy and the financial crisis in television interviews.
The 58-year former Princeton University professor has also traveled to town hall meetings in locales such as El Paso, Texas. In addition, the FOMC publishes its forecasts four times a year, compared with two under former Fed chairman Alan Greenspan.
This is absolutely the right thing to do. Most Americans have no earthly idea what the Fed does, so Bernanke's new push for transparency isn't just good for the institution, it's good for the public.
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An employee changes the numbers of the currency information board in front of an exchange office on Aug. 8th in Budapest. The Swiss franc remained at its highs against the dollar, changing hands at 0.7594 to the dollar.
I've written several posts about Bitcoin and have used the feedback I've received from commenters to undertake a deeper dive into crypto-currencies. This led me to a recent op-ed in the Cypress Times by David Barker, tackling the idea that a "private" currency like Bitcoin could displace or at least compete with government-backed money.
Here's a salient paragraph, laying out the historical/academic case:
Nobel Prize winning economist Fredrick Hayek advocated privatization of the money supply as early as 1978. Barry Eichengreen, a respected, mainstream scholar of international finance recently wrote that “maybe the Tea Party should look for monetary salvation not to the gold standard but to private monies like Bitcoin.” Former Federal Reserve Governor Randall Kroszner and widely read blogger Tyler Cowen wrote a book in 1994 that discussed “the potential consequences of a complete deregulation of money and banking.” An article in the ultra-establishment Journal of Economic Literature by George Selgin was titled “How Would the Invisible Hand Handle Money?” Other economists study historical episodes where money was privately produced, often with favorable results.
The above chart from the Federal Reserve tells two amazing stories about California and money. As you can see, per capita personal income — all income in the state at a given time, divided by the population at that time — moved on an ever-ascending upward trajectory from the Great Depression on, right through numerous postwar recessions, until...
The financial crisis of 2008-09, when it fell off a cliff, pretty much for the first time since the Fed started keeping track of this data. Personal income is now recovering, but it still hasn't returned to trend.
So California incomes aren't as recession-proof as they once were. And if a new trend asserts itself, with incomes falling with each new recession, life in the Golden State will be a lot bumpier than it has been in the past. But the drama in the chart is really all about what happened up to 2008. California was a good place to go, if you wanted you income to go up, up, up.