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Could take 5-8 years to shrink Fed portfolio: Yellen

By Ann Saphir

NEW YORK/WASHINGTON Thu May 8, 2014 1:55pm EDT


U.S. Federal Reserve Chair Janet Yellen testifies about the U.S. economy before a Senate Budget Committee hearing on Capitol Hill in Washington May 8, 2014. REUTERS/Jonathan Ernst

U.S. Federal Reserve Chair Janet Yellen testifies about the U.S. economy before a Senate Budget Committee hearing on Capitol Hill in Washington May 8, 2014.

Credit: Reuters/Jonathan Ernst

(Reuters) - The U.S. Federal Reserve is in no rush to decide the appropriate size of its balance sheet, but if it ultimately shrinks it to a pre-crisis size, the process could take the better part of a decade, Fed Chair Janet Yellen said on Thursday.

Yellen, in testimony to a Senate panel, said no decision had yet been made on the central bank's portfolio of assets, which has swollen to $4.5 trillion from about $800 billion in 2007.

Three rounds of asset purchases meant to stimulate the economy in the wake of the 2007-2009 financial crisis have boosted the balance sheet to this record level. Unsatisfied with the U.S. recovery, the Fed is still adding $45 billion in bonds each month, though the purchases should end later this year.

Yellen said the portfolio should start to shrink once the Fed decides to raise near-zero interest rates.

"We've not decided, and we'll probably wait until we're in the process of normalizing policy to decide, just what our long-run balance sheet will be," she told lawmakers, adding it will be "substantially lower" than it is now.

While the central bank could sell the mortgage-based bonds it has accumulated, in the past it has telegraphed that it would more likely simply stop re-investing funds from expired assets and then, over years, let the assets run off the balance sheet naturally.

"If we do that and nothing more, it would probably take somewhere in the neighborhood of five to eight years to get it back to pre-crisis levels," Yellen said of halting reinvestments.

It was the Fed's most explicit time frame yet for the delicate task of shrinking its balance sheet to a more normal level. The massive portfolio has sparked worries that, once the Fed starts to raise rates, inflation will shoot up. The Fed could also absorb losses if it decides to sell assets in the years ahead, a potential political headache for Yellen.

The five-to-eight-year timeline generally aligns with estimates of both private economists and a paper published last year by top Fed economists. A paper by JPMorgan economists predicts shrinking the Fed's portfolio would take seven years.

A COMMUNITY BANKER FOR FED BOARD

Yellen, in her second day of testimony before lawmakers, again stressed that excessively low inflation drags on economic growth. But she rejected the idea, floated by some private economists, of trying to boost inflation above the Fed's 2-percent target to ratchet down unemployment, saying it was critical to keep inflation expectations firmly anchored.

Inflation has been running just above 1 percent in the world's biggest economy while unemployment, albeit falling, is still elevated at 6.3 percent.

Asked repeatedly about fiscal policies, Yellen took a page from her predecessor Ben Bernanke and urged the Congress to address the nation's long-term budget challenges, warning that the current course was unsustainable.

"We can see that going out 20, 30, 50 years without some further shifts in fiscal policy, it's projected that the ratio of debt to GDP will rise to unsustainable levels," Yellen told the Senate Budget Committee.

"I would join my predecessor in saying that I do think it's important that the Congress address that issue," she said, adding recent tightening of fiscal policy had been one of the "headwinds" that had undercut the Fed's efforts to foster a stronger economic recovery.

In another exchange, Angus King, an independent from Maine who caucuses with the Democrats, asked Yellen if she would favor the addition of a community banker to the Fed board, which currently has only four of its seven seats filled.

"Certainly I am in favor of that," Yellen said, noting recently retired governors Elizabeth Duke and Sarah Bloom Raskin were very familiar with small banks. The Fed governor said she had conveyed her desire for a community banker on the Fed board to the White House, which nominates central bank governors.

Reuters reported last month that the White House was considering a former banking lawyer, as well as two others with direct community-banking experience, as possible nominees to the depleted Fed board.


LINK: http://www.reuters.com/article/2014/05/08/us-usa-fed-yellen-idUSBREA470QE20140508


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Lets say they want to shrink it to 1 trillion U$.. that is 3.5 trillion dollars or something like U$435 billion/year for 8 years...

KEEP CALM AND HOLD YOUR BITCOINS  ;D ;D ;D ;D ;D ;D ;D

"
Asked repeatedly about fiscal policies, Yellen took a page from her predecessor Ben Bernanke and urged the Congress to address the nation's long-term budget challenges, warning that the current course was unsustainable.

"We can see that going out 20, 30, 50 years without some further shifts in fiscal policy, it's projected that the ratio of debt to GDP will rise to unsustainable levels," Yellen told the Senate Budget Committee.
"

She lost any respect I might have had for her with this:

I lost all respect for odolvlovo with his comment ^^^^

Since you obviously know more and better than Yellen, why aren't you running the Fed?

Why is there a FED to begin with would be the best question, nobody should be running it.  It should be run down, its a pointless invention. 

The Fed made sense kinda in the 20th century where centralisation was believed to create he bet social outcomes
Very different paradigms will evolve in this century

You must be very short-sighted if you unconditionally believe in what Yellen and other great economists say.

On the topic. It's quite predictable that Fed is likely to hold most of bought assets to maturity. In case they start raising interest rates they will incur paper losses. They will likely try to avoid realizing these losses by holding to maturity.
The only situation in which they might incur losses is if the rates they pay on liabilities are greater than average yield on assets.
But anyways earning profits is not a purpose of Fed's operations, so it may not matter.

Because he knows better. The current economy is a giant scam. Nobody who points this out stands any kind of chance of being part of its leadership.

Impossible

Banks financed and constructed many houses and sold them to people who don't have a good job, when the house price dropped, those people went for default. Central banks print lots of money to buy those houses from banks to artificially support the house price so that other house owners with better finance situation won't be pulled into this crisis together

Now central banks are holding those huge amount of houses at hand, value about 1/4 of the size of US GDP, and hope to sell those houses in the coming 5-8 years

Who is going to buy those used houses at such a high price? Unless the inflation raise quickly to make those houses attractive again, the only way going forward is for them to hold onto those houses indefinitely. If they release those houses on market, they will push the housing price down and pull the economy back into recession

And real income is dropping quickly because of automation, so new houses will be cheaper to gain more buyer, those old houses that FED holds will become more and more difficult to sell

On the other hand, commercial banks who successfully dumped those houses to FED are holding huge amount of cash right now. If those cash flow out, the inflation will shoot up quickly

You are wrong.
MBS which Fed holds are securitized and guaranteed by government-sponsored enterprises (Freddie, Fannie, Ginnie). The credit risk is their burden.
Fed will get the money no matter what, even if it implies another GSEs bailout.

LOL! Do you seriously think the Fed would ever let him near the application form if there is one if they heard he supported deflation? These people want hyperinflation and inflation of the money supply to continue because they profit from it enormously, they're scam artists that's why the keep talking about QE and then keep carrying it on so they can keep their system going for a few more years.

Just you wait, when the depression happens, all these people involved with the fed are going to mysteriously disappear or move somewhere else like Mark karpeles and you'll be left holding all the debt, well, not us, because we're in crpytocurrencies and precious metals but everyone else will be :P

Agree with you Ibian, especially when the CPI formula they use is "non-transparent". Their reason for this being they don't want other companies "to gain an unfair advantage" over another. I really really so love the concern the Feds have in protecting me from commercial corporations and I love that they have my best interest at heart. Great big hugs with love and kisses to our great benefactors the Federal Reserve and The Bureau of Labor statistics for keeping the inflation rate so low so that I can pay my bills and still have some money left over to buy shiny trinkets that will make me happy and make me the envy of my  peers and neighbors  ;D

when the goverment would have no debts bitcoin would not be important. but so its unstoppable to break the systems of banks reproducing money and getting richer and richer by stealing it from the people.

Just curious, is Yellen providing the functionality here of getmininginfo() ? 

Is there a way for the public to verify the number in any way? 

No way :)

Mostly only info provided by Fed itself. They are regularly publishing their balance sheet, which I believe is being periodically audited by government.
They also publish the info regarding their open market operations.

Not rushing this decision process is good, because the balance sheet will never shrink again.

It's a joke but with very sad consequences for the majority of the population.

In these days blessed are those who own some Bitcoin.

The idea of them reducing the money supply is laughable. If the huge debt burden that the US owes were to suddenly increase in value the system would collapse under it's own weight. A huge debt that we all owe that we never agreed to btw. 

+1. I was skeptical of Yellen, but she has said a few things that make me tentatively respect her. Also, though we might disagree on certain things, she came to her point of view through a lot of experience and knowledge. Might she be wrong? Absolutely. That being said we should consider what she has to say carefully.

My main problem with her is that she continues to cite the CPI as a measure of inflation, which I do not believe is accurate.

How would you describe the key differences between Yellen and Bernanke?  Kinda surprised Larry Summers withdrew.  Maybe he was too vocal and Yellen was more "safe"

No, I think he knew that there is no way out of the QE-Experiment his predecessors have started. Yellen will be the scapegoat when this giant ponzi-scheme collapses.

Its not really an experiment.  They saw Japan do same thing in late 80s and all the way to current times

I'm not really sure. I'm not a Fed fan so I tend to ignore it most of the time. It's just that Yellen has said some things that make me think she's not as far out of line with what I believe.

It will take much longer then 5-8 years to shirk it's portfolio to a normalized level.

The Fed will have been buying bonds via QE for at least the lower bond of Yellen's estimate by the time it stops purchases.

They will not be able to sell bonds (including not reinvesting payments when bonds are paid off) at a rate that is anywhere near the rate they have purchased bonds.

IMO it will take 2 decades to reduce the Fed's portfolio to a normalized size.

There's no apparent need in cutting the portfolio. It will decrease naturally as bonds mature.
If there's a need in soaking up the excessive liquidity they have a range of other instruments, namely repos and manipulating rates on excess reserves.

Yes I agree with Harley, current events will leave a mark like a high tide for many years probably a generation.     Japanese are richer per capita and havent ever reversed QE, maybe this could be presumed as good and they didnt want to or need to.   Really its more like they cant reverse, its effects will be around till they either default, radically revise gov spending or more likely is two decades of stagnation waiting the bond terms out

Hard to shrink the portfolio.

They buy it at high premium and no sane person will pay the same price they paid. The only reason the portfolio is so high at the moment because they are the last sucker.

As soon as they stop easing, the market will crap at least 20%.

The ownership of newly created money is the biggest problem here, it will just get worse and worse if people finds out the truth

They can't disengage from the markets and allow the markets to price risk into the bond market. Does anyone alive believe that yields on everything from junk to TBills reflect default risk? Can a government with a debt/GDP over 100% withstand a yield that would divert more sources to making the interest payment on the debt than paying for social security?

NO!

They know this is the end game.

Its negative interest rates next and stay the course until the barbarians (monomer they are the real barbarians) are at the gates. Then kick the can done the road have lots of technocratic meetings all the while flames consume the streets outside meeting halls.

How do I know this?

Because its happened before countless times over the 6 millennium history of man, and always the same outcome. With the same type of people, aristocrats who prancing around pretending to be noble who derive substance from the status quo.

  

The fed would need to reinvest the proceeds of matured bonds into new bonds or else liquidity would dry up.

When US treasury bonds mature the treasury must issue more bonds to repay the bonds that are maturing. If the Fed does not buy some of those bonds then the effect would be the same as if it had sold the bonds in the open market.

Are you saying that 80% of the Treasury bonds sold by the U.S. are bought by the Fed, and if the Fed doesn't buy them, nobody else will? That can't be true! ;)

That is not what I am saying.

What I am saying is that if the treasury sells bonds that are not purchased by the fed then they will need to be purchased by banks. If banks buy these bonds then they will have less money to lend to other banks, corporations, small businesses, people and the like

Liquidity is abundant, nobody knows what to do with it (just look at excess reserves).

Yes, effect for a state as a whole this would be the same. But thr Fed would not incur any direct losses, the Treasury would bear the burden instead.

Banks don't lend money they have, they create new money out of thin air instead. And their reserve position doesn't matter when bank makes a decision whether to lend or not.

Most likely the portfolio will keep growing until the world stop supporting dollar.

Banks primarily create money by lending to each other and via their customers.  If the banks lever up a deposit ten times and then loan it out, it only takes one borrower to deposit the cash at another bank and you can see how large amounts of money are being created.
They do need reserves or need to lie about it like Lehmans did.  I think that part of expansion is secondary, most of the risk is in the 1st point with natural double counting of the same cash.

This is where usury or a debt ban starts to make sense like the Muslims used to do.   However I think that spins round again to explain why Saudi Arabia is prepared to gift such support to the USA now.   The way to really find out when it ends is when the backers decide its no benefit for them to continue to float yellens titanic debt situation

That assumes someone wants to actually buy it.

If the fed don't buy the bond, the interest rate will most likely go up the roof as no rational bank or institution will lend the government at near 0% rate.

That would probably be an exaggeration. If QE were to suddenly stop then interest rates would rise. The federal government is considered to be risk free in terms of a possible default. The only risk that banks take in lending to the federal government is inflation risk

They do need reserves at the Fed but that's not important as they can always obtain them.
What they need more is capital, and the capital requirement is far more important to lending.

Nope. The interest rates will likely adjust, but not up the roof (what is considered the roof btw?  :D).

In the late 70's and early 80's, Paul Volcker had to raise interest to 20% to kill inflation and end stagflation. Zombie companies need to die to free up the labors and resources for more efficient use.

Given the huge debt Federal, states and consumers have today, the interest rate will most likely need to go higher to clean up the system and let people go bankrupt and start from fresh.

Interest rates would adjust upwards as if the fed was in fact selling the bods that are maturing

That's not certain. I remember the time QE2 ended... The yields tumbled despite being expected to rise.

Yields tumbled because it was expected that QE3 would be announced in the near future.

Yup, that's how market analysis works. :D Trying to find an explanation post factum.
Of these explanation the one I like most is because of expectations.

"Shrink"? Good luck with that.

The Fed does not need capital or reserves because they can simply "print" additional money to satisfy any capital needs  or when member banks withdraw money from the fed

I was talking about commercial banks reserves which they are obliged to have at Fed.

Commercial banks reserve can be "raised" by having the Fed buying up all the useless securities from them.

If at the time QE2 was finished market participants thought that the Fed would continue to buy bonds (with a possible short break between programs) then this logic would be valid.

Most people know QE will never end in the foreseeable future.

The Fed is actually winding down additional purchases of bonds at a rate of $10 billion per month. Once the additional purchases are complete they will likely have a larger then usual balance sheet for decades. 

Yep, the Fed doesn't even have to buy anything from them. There's a mechanism that has been used for ages - repo operations. It's a part of normal central bank functioning.

An average person do not know what tool bank have that allow them manipulate price and control interest rate. If they do, most banks won't exist today.

interest rates are manipulated to try to keep inflation low

In theory, but not in practice. For the last 25 years, interest rates have been kept low to benefit the wealthy, and the result has been inflation that has destroyed the wealth of the poor and middle class.

To manipulate interest rate to keep inflation low, you will need to raise the rate to market rate.


In practice, inflation is exported to export countries. While the inflation is reasonable low in the US, the inflation rate is extremely high in export countries in Asia/middle east.


In export countries, cost of a "small/average" home has doubled in 2-3 years. Food price also double compare to 2-3 years ago. And hence you aww a lot of internal/external conflict going on and a lot of political instability going on in Asia/middle eastern countries.

What inflation??

http://www.dollarsandsense.org/archives/2009/Inflation500x312.gif

Just so no question of graph bias for ending where it did, 2009-2014 adj. CPI-U still avg 2.08% annually. Over ten years, would be ~23% inflation, which is pretty reasonable looking at the past. I'm sure I'm not understanding how inflation works after seeing lack of effect on CPI from QE. I always figured CPI was tied to M2 and that CPI growth lagged a bit behind M2, but doesn't seem to be the case or we're on the verge of hyperinflation, but I'm not sure how long I can buy "we're on the verge of hyperinflation" without seeing it.

At the grocery store, beef & pork's prohibitively expensive, but it doesn't really translate elsewhere from my unscientific observations. Looks in line with BLS CPI-U numbers. Milk, grain, and soy products are all still reasonably priced. Chicken a bit high, but reasonable. Rice and potatoes still about as cheap as topsoil. Fruits haven't exploded in price, but are somewhat expensive-seeming. Packaged foods and restaurants have become terribly expensive, but "real food" hasn't exploded in price even though rented acreage out for farming here at near-record prices. High prices for pre-made food maybe a result of skyrocketing minimum wages throughout the states, where farms don't necessarily need to pay it.

that is debatable

the standard of living of the middle class has risen significantly over the last 25 years. Even the pool can buy things today that could not even be purchased by the most wealthy 25 years ago.

I think you will find standard of living rose mostly from widely available technology and mass production.  Its arguable with so many imports this is reliance on efficiency outside USA but some will say loose monetary policy and endless gov spending is what enabled growth 'you didnt build that' et al
http://en.wikipedia.org/wiki/You_didn't_build_that

Ties into the same thing via hedonics.     Of course prices have risen over decades, we know thats obvious but the cpi is mitigated by saying well the product has improved therefore a 5% rise this year is in line with a better product.   Are cars now better then they were in the 1970's?  Sure, though I prefer old cars but Im not sure even nicer products nullify the price rises.
  Personally as Ive studied stats, I would prefer the raw figure and then let an audience and press interpret the ongoing effect themselves but we dont have that, most gov stats are adjusted for better digestion in some way
http://en.wikipedia.org/wiki/Hedonic_regression

Repo operations have a much shorter term effect then outright buying bonds/assets. Repos usually last a day (or other short periods of time) while bonds that the Fed is buying mature on average in 5 years

I read a few years ago now that on average all the trillions of USA debt rolling over in bonds has a weighted average span of about 4 years.   One of the lowest terms in the world, UK for example comes to 13 years to refinance the debt.  That is a result of the UK being bailed out by the IMF in the 1970's and policy since

Further more, this is a deliberate policy in play since Clinton.  Obviously we know base rates are low, so by keeping the debt terms low it actually causes the debt cost to be as small as possible.  Clever but also more dangerous as it can become a bad juggle

I cant find a wiki for debt term reduction policy, its out there somewhere but this is an impressive chart.  Think of all the debt added in recent years and yet theres no more interest payable -

https://i.imgur.com/297X0RQ.png

This policy is to make it so that other social programs can appear to be cheaper then they really are. There have been several budget agreements that used "interest savings" or "lower interest costs" as a way to cut spending.

the fed has done a pretty good job of minimizing inflation with interest rates over the past several decades. 

Do you really believe the graph and what you just said?

(Bold) That's not the case. According to monetary equation M*V=P*Q, the price level P is one of four variables, so it doesn't make any sense to imply it correlates only with money quantity M.
On the left side of the equation there's a very volatile variable called money velocity (V), that also greatly influences price level.
I'm not calling this equation as the only true, but even this one doesn't let you equate monetary inflation with price inflation.

I would argue that 4% inflation (the ~rate after the 70's) is a good target to try for in reference to inflation.

During the 70's and the oil crisis the Fed did a very poor job handling inflation.

Thanks. Does increasing M create a kind of "potential energy effect" when V is low? M2V was much higher before '08 recession and is at lowest point in recorded history (well, by FRED, going to 1960).

Otherwise phrased, if M increases dramatically while V is low, isn't "realized inflation" (or P*Q) severely understated and demanding a harsh, "multiplied" correction when V picks up to pre-'08 levels?

Not after Volcker took over

Once inflation was lowered to ~4% annually, I would argue that it was under control and remained under control up until the financial crisis when it became too low.

Is my question really stupid? I've asked it a couple places, now, without satisfying response (which usually means my question's stupid). It's really bothering me. Money supply is soaring at historical rates, but we shouldn't expect hyperinflation because money velocity is at a historical low - but isn't it reasonable to assume velocity will pick up when/if the US economy picks back up and consumer confidence increases?

Was also wondering what the implications of another HELOC/mortgage crisis within the next two years would bring. US banks are beefing up their reserves across the board in preparation. When a large portion of those reserves are wiped by forgiving debt, what is the inflationary impact of that, if any? Does it effectively become a deflationary force since money which the end-user doesn't have is basically erased, but which only existed from QE/TARP/etc and was ultra-low-velocity "money"? It's almost like a correction for systemic bad lending practices, isn't it? Nobody really wins or loses since banks were only artificially being allowed to limp on with ultra-low interest rates and intentionally bad Fed purchases, anyway. Those presumptions and assumptions off-base?

4% inflation is just above what the Fed would like it to be at as of now, and is much higher then it is now.

Exactly! 4% is a happy medium between everyone's life savings is rapidly declining in value and that inflation is so low that there is serious risk of wide spread, long term deflation and economic contraction

4% inflation is very high. Losing 40% of your saving every 10 years compounded to financial elite on top of taxes mean no ordinary citizen will be able to have any saving.

Only if your income doesn't keep up.   If you sell goods or services those prices rise w inflation

Salary lag inflation by months if not years while good are service are very sensitive to market and monetary policy.

Fix wages income,where most people belong to this category, can not keep up with inflation.

The thing everyone should fear is deflationary spiral or runaway inflation.  You want a little inflation now to get us out of recession.   Otherwise unemployment gets worse

I would rather have price stability and let free market decide which companies survive than letting government plays god.

Remember, innovation means finding a new way to do things more efficiently and cheaply. In the process, that will kill off old industry and inefficiently run companies. Labor law needs to be more flexible to allow re-training and re-tooling workers.

What does that have to do w inflation? Or the topic.   Why is this the "economics" subforum when everyone keep talking politics

Politician set the economic and tax policy, which influence market, price and pretty much everything we do.

Nah its the other way.  Market forces are stronger than policy.   Govt makes policy in response to market forces. The contradiction is that evreyone expects policy to counteract recessions but nobody demands govt to cockblock the boom times so we gets bubbles and subsequent busts. 

If inflation was constant around 3% it would be very manageable

Could take even longer..... forever.

This is true. A small amount of inflation means that people have an incentive not to put off purchases, but too much inflation means people's savings will be worthless or worth less (LOL)

The Fed portfolio will eventually be able to be shrunk to a more manageable size, it will just take many years and careful planning to ensure that doing so does not create economic chaos.

Policy is designed to somewhat control the market and to give it incentives to act in certain ways.

Sorry, I'm not following this thread closely.

What's needed to be understood is that this money supply is not homogeneous. I mean Fed had bought a lot of treasuries, but it didn't really increase the amount of money in the economy.
What it did was actually replacing long-term treasury securities with short-term bank reserves (you can look up the excess reserves which closely correlate with Fed balance sheet).

So while on the paper the amount of money increased dramatically, for the real economy it didn't.

As of another crisis, banks set aside some capital (according to capital requirement rules) for this possibility. The possible consequence of another crisis is likely another deflation event and another dumb QE.

No, this a common misunderstanding. Even when you pay raise comes timely, is is only neutral for your consumption, not for your savings in money and money denomitated securities. It makes saving in money impossible, and force savers to investments involving risk.

 

All investments carry some type of risk, otherwise there would be no incentive for others to pay you interest. Traditional "savers" (those who put money in the bank) are risking that inflation will eat away at the buying power of the money they have in the bank.

Savings in money do not carry risk - when the money is good. I mentioned also money denominated securities, because they loose value to inflation just like money. It is basically loans - you lend money for others to invest, but still take a share of the risk.

Old advice for prudence is to save some money - which is risk free when the money is good, when you are comfortable with saving in money you can invest. With bad money, this is inpossible. Please distinguish saving in money from investment, it is not possible to discuss these things in a constructive way if the wrong words are used.

So inflation in both consumables and wages is neutral to consumption, but kills savings in money.

(snipped out some irrelevant stuff from my quotes)
Thanks! I'm assuming there are other ignorant idiots like myself, so it's really helpful.

If I'm understanding you, the banks actually had long treasury bonds, and they wanted those cashed out for... cash, right? Just to hold to meet reserve requirements and prepare for a possible second crisis. Does the Federal Reserve create the money, or is this money the Fed actually had to spend? I mean - is the Fed profitable and have real assets they pay from to these banks selling T-bonds? The Fed's supposed to be a kind of non-profit, where any "profit" goes to the Treasury, so how could they have "real" assets to pay cash to all these banks for T-bonds?

Does this bond-cash exchange introduce moral hazard to the banks, in that they can buy these long-term assets but have ability to sell them near-immediately and (I'm guessing) without any loss to the Fed, and doesn't this definitely indicate the value of treasury bonds are artificially and significantly inflated since they can be converted to cash whenever a bank needs it to boost their capital reserves (which basically negates all cons of holding T-bonds)? It seems like the Fed is almost forcing them to hold T-bonds instead of cash, since cash is basically worse than useless outside of capital reserves compared to T-bonds the Fed's willing to buy up at/near face value whenever a bank winds up with capital crunch. Maybe it's supposed to be some kind of consolation for reserve requirements?

How does would another HELOC/mortgage crisis cause a deflation event? From assumed decrease in money velocity (assuming a stronger lending freeze, decrease in consumer confidence), or because the money supply is "corrected" if a consumer or business defaults (due literally to lack of funds) and the bank wipes the debt out, basically removing the money from the money supply? (or both?)

But why would anyone pay you to hold your money if you were not taking on any kind of risk?

You should understand that anything you do with your money will carry some level of risk. If you spend all of your money then you could lose money in the way of late charges and interest payments if you had an emergency and needed to spend more money then you had. If you invest in the stock market then you risk that the price of your stocks declines more then the amount of dividends paid. If you invest in bonds then you risk that the issuing company is not able to repay their debt.

It is more like a price adjustment than deflation event. When people buy over price property and if the market can no longer handle additional supply, price will have to adjust to market demand.

:) Yes, banks hold some quantity of treasuries at almost any time (and recent Basel rules oblige them to do so). It's important to note that treasuries carry price risk, i.e. they can decline in price and bank would suffer, and the longer the maturity, the higher the price risk. The reserve position at Fed doesn't have this risk, it's just cash. That's why banks may prefer reserves in certain situations.

The Fed doesn't need assets to create money, it acquires (buys) assets when it creates new money. It's needed to be noted that when the Fed creates money it doesn't add any financial assets (wealth) to the economy, only changes the composition. When the Fed posts operating profit, most of it goes to Treasury. When the Fed posts loss, it's usually also offset by capital injection by Treasury.

Treasury securities are the perfect collateral for the markets. When the Fed buys bonds under QE, it does so for market prices. But it's also possible (and was possible long before the crisis) to sell them to the Fed at a small discount and get reserves in return (so called discount window). This combined with Fed's repo operations makes reserves virtually unlimited and reserve requirements obsolete.

You also have to distinguish between reserves and capital. Reserves can only be used in transactions between banks and Treasury, be converted to cash and be exchanged for treasuries. These operations can't help if a bank has capital shortfall. Capital can only be replenished with external sources (like bailout by Treasury).

Another crisis event will likely cause deflation because of lending freeze, unemployment rise and incomes fall. These consequences together will cause demand slump and in turn price deflation. The alternative option is stagflation, but it's hard to predict.

As long as your currency is a stable store of value then it can be considered as money. 4% inflation, would in general be considered stable, especially considering that interest rates on deposits historically tends to be right around the rate of inflation

Thanks. I'm going to try regurgitating my understanding with some new assumptions and hope I'm getting close to truth.

-So banks don't get to sell T-bonds at face value, just market price or sometimes even below for cash. The Fed allows this both to prevent problems with reserve requirements (and everything going along with banks not having enough) and I'd guess to also prevent large dumps on the T-bond market, which in turn makes T-bonds relatively stable, thus more attractive.

Many large banks are members of the Fed (paying both dues and fees), but the profit goes to the Treasury. The Treasury does create money, but it doesn't create wealth -- banks don't get free wealth from the Fed, while benefits are all fairly well-balanced to keep money-creation powers not fully divested to either the market or the government, permitting a semi-market-based approach to money creation. Since Fed profits go to the Treasury (less overhead, losses, etc), the Treasury is effectively allowed to issue T-bonds and not pay interest, but only for T-bonds sold to the Fed at or below market rates. Discounting debt devaluation (in real terms) from inflation, this scheme of doing things prevents the government from just printing any financial troubles away (if they tried, the uncertainty from breaking this unspoken contract risks complete USD and T-bond meltdown, which could bring a ruinous banking crisis). In times of banking turbulence, like now and in recent history, lots of money is created this way, but banks use this money generally to meet reserve requirements (either those set by gov't or those self-imposed) after taking losses or otherwise over-extending themselves, so it doesn't just go right back into the economy, at least not until the banks recover and a healthy (or dangerously over-permissive, maybe "predatory") state of lending resumes. Everything works in a very complex, somewhat balanced way that usually (except in cases of extreme political pressure?) prevents quick and extreme reactions to short-term or mid-term problems. This permits long-term health for the US dollar.

I'm still not sure why M2 increase doesn't eventually mean we'll feel inflation from it when lending fully un-thaws, especially if the effects are suppressed/delayed by low money velocity. It doesn't factor in debts written off by banks for things like mortgages or LoCs, so maybe that acts as a deflationary force, reducing money velocity (lower home prices, less money circulating, especially lent money) and reducing the money supply (houses aren't counted in M2, but banks do have to write off the debts occasionally and usually take large losses in trying to sell the mortgaged property - consumers and businesses taking LoC probably aren't buying CDs, T-bonds, or making demand deposits). -But the housing market's had a huge uptick over the last couple years, unemployment's stabilized, and real wages are on the way up, so if M2 had any impact at all, why hasn't it effectively turned the value of our dollars to ash? Conservative banks?

(side-question: is money for repos also created or even significant compared to Fed T-bond purchases?)

No one would pay you interest for holding money. With good money, why would you want to? The money you hold is the compressed value of the work you have done, but not yet traded for other goods. With good money there is no risk, it is the definition of good money.

Currencey is something that holds value....at least for the immediate future.

No, that is not stable. It means that every dollar you save in your first productive year, is reduced to 0.18 after 40 years, when you need it.

That is right. People who advocate inflation don't seem to understand compound rate.

1.04 to the power of 40        or 4% interest over 40 years is alot of growth = 480% I think

I assume if I take it as a decline in value compounded, then 4% less each year or 0.96^40 results in 20% left after 40 years.

Every time they give your gains, they exclude inflation usually.  If you ever wondered why you arent getting any richer, thats probably it.  Hence constant wage increases are demanded by unions which can lead to labour disputes and strikes, production disruption because a company doesnt necessarily have the money just because the workers need it and are poorer.

That's only if you are an outside observer.  If you are inside the economy inflation lifts everything.  If you sell stuff you can inflate your prices so your income stays the same

All boats rise in a rising tide is how Ive read that in articles IVe read.    I dont believe inflation is that perfect an effect and it benefits the rich far more then the poor.   Owning a Ferrari F40 in the last decade has been a profitable endeavour but that is partly because classic car collecting is such an exclusive pursuit to begin with, its not really helped your average Chevy owner; 'lifts everything' is unfortunately not linear, its uneven,  so tip over is more like its effects for many people.     Microsoft, Intel, Apple and a few others can issue their debt at a 1% cost, gigantic benefit to them and their shareholders so thats about as close to mainstream it gets imo; I dont believe that is filtering through to the public more like the 1% argument comes in here
 Your average worker really doesnt have assets in many cases but he will notice the rising cost of everything.     In that analogy I would say it creates turbulence, some boats break from their moorings unable to resist the increasing currents becoming rapids and some even sink :p

http://en.wikipedia.org/wiki/A_rising_tide_lifts_all_boats

You've definitely identified what Fed policy reflects, they really think they will make us better off but they are closer to fraud then benevolence

I think it's fair to assume that treasuries are quasi-money. They can be used as collateral in most market operations. And the money thing has been eroded to a degree by financialization of the economy.

What about wealth. I tend to argue that Treasury is the govt entity that creates wealth, while the Fed doesn't. That's because when the govt does deficit spending, it adds net financial assets to the private sector, while the Fed only changes the assets composition. That's all about accounting basics and sectoral balances. On this topic I'd recommend reading Modern Monetary Theory ideas.

Now about M2. I think this money measure doesn't work in this QE reality. Just because a large part of money counted just sits idle and doesn't participate in economic activity. I also think that money velocity didn't fall as much as calculations show, just because it consider this 'idle money' created by QE.

It all looks like a big Théâtre de l'Absurde and does carry very little economical sense. But time will tell.

Very good post.  I think it'll be difficult for folks here to understand MMT without understand double entry book keeping.

But I agree with you.  Wealth comes from the "real economy" rather than monetary policies.  But even with QE & stimulus on a grand scale experiment like Abenomics have not shown to produce results.  Time will tell indeed

Wages tend to rise faster then inflation, this is one reason why the Social Security trust fund is in the shape that it is in because it gives recipients raises in terms of wage growth instead of purchasing power (inflation). So someone who received social security 10 years ago will have started with a monthly award that had less purchasing power then their monthly award today.

Majority make higher wages as they compete in the workplace for promotions.   Then they invest in real estate or retirement accounts.   Most people dont care about mild deflation,  they care about employment.   If you are talking about too much inflation or stagflation then thats a different discussion

I don't buy the arguments here for deflation.   Too much assumption about a static economy when in fact economies are dynamic

This is exactly why that mild inflation is not necessarily a bad thing. Another point to make for savers/investors is that most asset prices increase faster then the rate of inflation (including dividends and similar payments).

Why punish workers who save cash?

Its the individuals choice to save cash.  Most people only save cash short term to buy something.  Its not wise to save cash if you plan to hold for long term

This would not punish people who save cash, as generally people can earn more with their bank account from interest then inflation would reduce the buying power.

That might be true today but thats wrong in the grand scheme of things.   Saving is not waste, pure cash kept in a biscuit jar sure I guess its not wise but savings deposited with a insurance or savings company is a good thing that supports a community.  This is no longer cash then, it is investment
A country needs capital for investment, it cant always be about debt because where does the money come from to enable that debt.   At some point savings or unspent production must be directed towards investment, it cannot always be about spending every penny you've got.   But hey dont worry, the asians are obsessed with saving, its their problem

I agree about owning your own home and so on but that does require savings also, all debt is not a good idea or basis for an economy to operate on.  Leverage adds risk and timing failure possible.   In the end we see it ends up with government being forced to save consumers from themselves and because this is a democracy this has the country bending over backwards to serve people who failed to save, did not engage foresight in their actions or caution as to the consequences.

 In the end we are all poorer for not saving, for not being to access savings as a nation.  Externally this gap is being covered by foreigners but this brings danger of imbalance and compromised sovereign integrity also

Debt is risk.  And if people want take on risk then let them.   Who am I to tell someone not to take a student loan or borrow money for startup that might fail.   If people use credit to buy cars or whatever.   Thats fine by me too.   I thought bitcoiners were libertarian??

But deposit accounts aren't necessary for bank to create credit.   Savers aren't required for capital

Inflation doesn't directly hurt or help the economy. Its basically just slowly shifting the accounting units. Just makes doing some math a bit harder lol.

When it starts hurting is if inflation isn't distributed evenly (i.e, only the fed gets to inflate the money supply, causing certain individuals to get disproportionate access to the newly printed funds), or if there are negative real interest rates. These two things tend to go hand in hand.

This is a lie.

Savings are required for investment, because currency is a representation of labor an individual has expended without yet receiving a payout from this labor.

For example, if I grow apples in my back yard and sell you the apples, you give me currency, which represents the amount of work, capital, and risk I put into growing those apples.

You can print currency without anybody working, sure. But then somebody has to work to build the capital that you're basically borrowing from him in this scenario. (The currency you just printed representing your debt to him). If the person wanted consumption immediately upon receiving your currency (i.e, he wasn't a saver) he would give it back to you in return for some service of your own, destroying the currency in the process (the currency found its way back to the issuer). In this scenario, you are now the saver, because you now have put in labor to pay off your debt to the person you originally paid, without receiving any immediate consumption in return (you just get the thing you "invested" in). I suppose you could have refused to accept your own currency, in which case I suppose one can argue there was no saving, merely the unfulfilled promise of saving, i.e, theft.

Long story short, unless somebody somewhere is willing to take on the disutility of working without an immediate consumption payoff (i.e, saving) then there can never be any investment.

Now it might SEEM like there might be capital created without savings if the fed were to right now print $100M, lend it to a bank, who lends it to a company, who uses it to finance building a better oil rig for example, but indeed the savers are those that accepted the newly printed $100M as payment for their labour. If this currency never is repaid by the issuer, then that's equivalent of the theft explained in the prior example.

Commercial banks have deposit accounts but shadow banks don't even have deposit accounts.  How can you explain money creation from within shadow banking then?  You're right that capital comes from production (in a Marxist sense).  But even in the Marxist view savers aren't needed only labor

A company does an IPO and sell stock.  Voila! Instant capitalization.  There are no savers here either

Lumpy distribution of newly created money is it.  Thats whats happening, those closest to the FED are the ones who benefit most.   The people to suffer most arent even in USA, they use dollars as their national currency and they dont even receive them till its grubby and used ten times already.  By then the money they get is worth far less then the FED bought its bonds with.  
Hate to say it but its kinda similar to Mugabe paying out his war pensions, the new money worked fine but if you were far down the line in the economic chain the cash worth was far less then half in that case


Cash is a promissory note.   It is a promise to deliver in future some worth.   That is what we use for money now, we used to exchange metal and the coin itself could be melted right.  WE dont do that and maybe its clever but we do have to exchange something.
If I promise to pay you and I dont, its a failed contract.   I know people can get away with it but as an economy, this would not make sense.   A saver or some kind of capital is required behind the money exchanged.  A bill is produced and a payer is required or the note to describe the transaction is no use, so its just allowing transmission of work.
  One day I work hard till tired or ill even and I dont use up all my work in favours, I save my labour to spend another day when I need it.  I think thats roughly how it works,  I rely on the job contract to pay me and utilities who service me then rely on me to pay them,  theres a chain there and Im saving one day to spend another.  Maybe its a really tight chain, I work for the utility company!
 Or maybe its super long chain and the promise is going to Zimbabwe and they send us back diamonds or who knows but its about paying and saving really?

Hmm, I'm not sure which country uses USD except the USA.  A lot of foreign investors do hold US Bonds.  But thats not really the same thing

I'm not saying savings is not important.  I'm saying its not necessary to create money (credit).  There are a lot of ways for companies to raise capital without going to commercial banks (that have deposit accounts).  For example investment banks, private equity, etc..

Even within commercial banks, they don't need deposit accounts.  They need reserves, which they can get from interbank lending, repo market, FED funds

Banks use the money that depositors have in their accounts to lend to borrowers. Banks need to keep a little bit of their own money (capital) on hand to protect their depositors in the event that they lose money on some of their loans. If banks solely used their capital to lend money then the amount they would earn would be small and not worth it for banks to lend (they need to use leverage in order for the loan to make sense to them). Banks needs both capital and money from depositors in order to lend money.

You're talking about commercial banking.  Shadow banking don't have deposit accounts.

BTW, Before the 2008 WFC, the size of shadow banking was BIGGER than commercial banking.

Read this article, it's interesting

http://www.stlouisfed.org/publications/re/articles/?id=2165

The savers are the people that bought the stock...

How do you not see this. Or do you only define "savings" as "holding cash reserves or other cash reserve denominated debt?" Because I'm pretty sure that's not how most people would define savings.

I also don't understand how its at all Marxist to say that money is the promise of labour, or something worth an equivalent amount of labour, in the future. AFAIK thats a pretty well accepted fact.

Furthermore I don't understand why you are quite so obsessed with "shadow banking." There's nothing special about a "shadow bank" rather than any other bank. It matches savers up with creditors just like any other bank. In some cases the savers might be the equity holders of the bank itself, but this changes the purpose of the bank not.

I can see why you are confused.  I'm responding to the idea that you need savings to capitalize the economy.  You define a saver as a person who saves.  But I define a saver as a person w a savings account so I can use the term savings & saver interchangeably.  I think I'm using banking language but you are using common language.

Savings = savings account (deposit account).  A saver is someone who has a deposit account.  Bank pays interest on deposit account
Stock = Investment account.  Investor is someone who has investment portfolio.  Investor take some risk

1 person can be both saver & investor at the same time.  But when your money is in savings account you are a saver.  When you money is in stocks you are an investor.  The guy can withdraw money from his savings account to buy stocks but its not "necessary".  He could be using money from selling his house, from his checking account, money gift, whatever.  Its not necessary to have savings in order to have capitalization.  

Capitalization happens when a company sells its stock to investors.  Neither the company, the investor, or the underwriter need to be savers in this scenario.  Its totally possible for an economy to exist without savings.  Savings are good when you are starting out and you need to accumulate funds.  Doesn't mean its necessary.  Did Zuckerburg need savings to start Facebook?  I don't think so.  He got an investment from his roommate, then other and bigger investors.

Shadow banking perform same function as a commercial bank (albeit in a different manner).  They function as credit intermediary.  The difference is that they are unregulated so they are not required to have any deposit accounts at all.  And most of them don't.  Once again no savings (deposit account) is needed to create money.  Deposit accounts are probably a very small portion of finance.  Saving is good for the individual but has minimal effect on the larger economy

I brought up Marx because someone made an example of labor to capital which was Marx contribution to economics.  But even when you equate labor to capital no savings are needed in that equation either

Investment should not be classified as saving.

There is a reason why glass steagall act is there after the great depression. The 2008 meltdown should not be a surprise for scholars of great depression.

Saving is very much investing. When you put cash in the bank, you are "investing" in a savings account, the same is true with a CD. The only difference between these investments and traditional investments (like stocks, bonds and index funds) is that bank deposits have much less risk.

You forgot about how modern banking system works.
Nowadays loans create deposits, not the other way around. It means that the bank lends money (just creates it electronically) and puts it in a borrower's account, and then (usually at the end of the day) corrects its reserve balances.

Without understanding these operational principles one cannot understand the whole monetary system.

There is a risk to saving, the only reason we might believe otherwise is government guarantees.     Everybody here accepts you can give (or lend) your money to someone and they fail to pay it back.    When you deposit cash at a bank, it feels alot safer.   They promise to always return the original amount no matter what.   They promise to give interest usually no matter what also.  
However a bank can fail, either totally or partially they can fail to return the original amount.     Everyone accepts this surely?    Some banks did lend to sub prime, a bank could just fail to keep good accounts, be corrupted or lose via theft.   It might not be their fault but a bank can lose your savings and maybe thats only a 1% risk but its real

When you put cash in a bank it is no longer pure cash.   As said, most banks are using fractional reserve.   There is risk in this and we are risking our cash to get interest.     Now to me this sounds mighty close to investment

Im not going to argue over a word like this, its pointless.  No doubt the FED backs the idea saving is antiquated, they certainly have done their best to make that true

http://www.youtube.com/watch?v=wM1DgihKHVI

When banks loan money to companies the company does not need to deposit the funds from the loan at the same bank, the funds end up in the banking system, not the lending bank.

It doesn't matter, anyways loans create deposits, that was my point.

What about loans that, after the money is spent, the money ends up in cash (as in paper fiat money) instead of funds in a bank account?

Cash is also on the bank's balance sheet.
If a borrower takes a cash loan, then the bank adds this loan to bank's assets, and deducts the equivalent amount of cash from assets.
For the bank it means that only the composition of assets changes, but this cash ends up in the economy, effectively creating money (and possibly a deposit in another bank).

I think shaky was referring to someone takes out a loan for $1,000.00, spends that $1,000 on say a set of tools from someone on Craigslist and the seller of those tools doesn't deposit the $1,000 from the sale into their bank account but instead keeps in "under his mattress"

Doesn't matter, at some point the borrower has to pay back $1000, but it doesn't need to be the same bills -- "fungible"

Paying back the loan is not what creates the money, it is the additional deposits in the banking system.

Paying back the loan destroys money as it either destroys the electronic deposit at the bank or withdraws cash from the economy to the bank's balance sheet (cash vaults e.g.).

Not necessarily as now the borrower would have additional monthly cash flow (that they previously used to repay the loan every month) to use to invest in the economy. The bank would then also have additional capital to lend to others who need a loan.

Do you know where does this additional cashflow come from? From borrowings as well. The money that banks issue is always backed by  the liability of equal size. This is called 'double-entry accounting principle'. The process of expanding credit can only continue until interest burden becomes too heavy, then credit starts to collapse, so does the economic activity and money aggregates. Unless the gov't starts to fix private sector's balances by deficit spending.

Once the borrower had paid off their loan with profits they would be able to spend an equal amount of money that they were using for debt repayment on other investments. Additional borrowing would not necessarily need to take place for this to happen, only higher asset prices.

Additional borrowing economy-wide.
Asset prices are in dollars, can you explain how they contribute to money supply?

If banks have any excess capital then this would not be the case. This is only true when all of a bank's money is deployed, which pretty much never happens.

I don't get your point, care to elaborate?

If a bank has all of their capital deployed then unless they earn money they cannot make additional loans. If a bank has some extra amount of capital then they are able to make additional loans.

The same is true for the overall banking system. If there is no excess capital in the banking system then banks are not able to make additional loans. If there is excess capital in the overall banking system then banks can make more loans.

When someone pays back a loan then money is essentially taken out of the banking system. If the banking system did not have excess capital then it would need to "call" some of the loans in order to have the proper amount of capital on hand. If the banking system does have excess capital then the banking system would simply have less excess capital after the loan is paid off.

Real value are from production. When they law discourage production and encourage speculation, real wealth will eventually leave the country.

This is correct... The limit to credit creation in banks is their capital, so when the bank credit creation multiplier is exhausted, there is no more credit creation. Traditionlally the multiplier is about 10, depending on reserve requirements, and that's it.

But... two other things. The capital in a bank is not an absolute number. A loan can be marked bad, reducing the bank capital with an amount, and then the credit is reduced ten times that. But the loan can also be market as maybe bad, maybe not bad. There can also be mark to fantasy. This means real undercapitalization, with risk of bank collapse. Then the bad loans can be parked in a bad bank that is spun off, and the party can continue. There is a strong unwillingness to just regard the loan as lost and write it off.

Second but... Government credit creation, credit money more or less given to the banks, this is regarded as reserves. Multiply by 10, more credit. This is for example QE. When this becomes politically depressing, invent new methods of credit creation with new names. There is no limit.

As long as people want to hold the money (including the credit money that appears on your account statement), they will have value. Currently people want to hold the money, because of growth, phantastic innovation, military force (and there is no better alternative).

I still don't get how it relates to the point I made.

But I'll reply.

When a bank makes a loan, it distracts the risk-weighted loan amount from the available capital. There's a thing called capital requirement which sets how much capital reserves must be held against the loans made.

When a loan is paid back by the borrower, then the opposite happens. The risk weight of assets is improved, capital is freed, thus available capital is actually increased. Also consider adding profits the bank made with this loan to capital.

You are confusing completely different things: capital requirement and reserve requirement. The first is meant to limit the risks associated with lending, while the second is mean only to support the bank's liquidity in its operations (and actually doesn't limit lending).

production is important in order to be able to create value however companies need land in order to produce their product.

What laws encourage speculation? I would argue that in the US the law encourage workers to sit idle (in the form of UI, and other social programs).

It will take a lot longer then 5 years to shrink the Fed portfolio as it has taken them that long to build it up to the level that it is at now, and they would not be able to shrink it to normal levels at the same pace.

But Yellen wasn't asked if the current system is a scam, she was asked what the relationship is between low inflation and economic activity.

The low interest rate but high level of regulation cost and taxation discourages actual production business and favours finance and capital speculation especially abroad.    This is self bias, government is aided by debt handled by investment banks.   If the finance fails then government itself is in far more trouble then it suffers from other avenues like unemployment and business migrating abroad

Also the laws stop companies bringing international earnings back home to the USA.  USA has some of the highest tax on companies in the world.  USA is the only country to tax its citizens not living or earning in the country.  [sorry - The other is Eritrea. ]  Basically USA is unique not just now but historically this has never happened to this extreme, that could be celebrated maybe and it makes for 'interesting' times but probably its going to end badly.
   The most positive event for the citizens within its borders anyway would be straight out default much like the USSR turmoil but anyhow until then the USA is the poorest nation that has ever existed, nobody has ever owed so much.
 I dont blame Yellen, she cant even look in the direction of the truth.   The last five years was spent running down hill or freefalling even, to scale back this debt would be like ascending a mountain though I do think it could mean lower unemployment in that task not many would agree less government spending, defecit, size of, laws could make the country better off.
  If spending more didnt work then spending less, running a surplus is a reasonable argument.  The statistics dont favour (in their appearance) a harsh change of course yet but its still required I think

The low interest rates are not laws, it is a result of the forces of the market (yes the Fed has been a major force in this). Taxes of foreign profits encourage money to be spent overseas but not necessarily on speculation, but rather on production overseas.

yea i agree . but i think that why this will be long term succesfully giant scam . as you say .

I am not sure how you link low interest rates and taxation to encouraging speculation. It is important that the Fed is an independent agency that does not take politics into consideration and since the Fed sets short term interest rates, and recently guides longer term interest rates, this point should not be considered (about the interest rates).

I do agree that the higher levels of regulation do discourage production, but I would argue that companies would be more likely to "sit" on their money instead of speculate with it as there are very few types of companies that can engage in any type of speculation. 

If microsoft or similar can borrow money for five years at 1% it will encourage speculation by them.   Quite sensibly they buy their own shares as this in turn reduces the dividend payable on those shares, sensible refinancing almost.   The idea is they can invest this cheap money for more employment (trickle down is still the hope), in effect they will speculate more and employ outside of rising government cost

Government is altering the bias of business.   They do fix interest rates.   They employ laws to enforce their actions and they do encourage speculation.  In a free market we have elements that would normally short sell bad prices.  The western fiscal economic model is not a free market and it does encourage speculation by fixing cost of money, when 50% of GDP is government this is fair to say QE has eclipsed business and monetary flow in a normal capitalist system.
 QE is a monopoly, a kings charter gifted to a modern day apprentice on the governments wishes



How many institutions can issue federal reserve notes.     It doesn't even qualify as capitalism anymore really.
Too few hands carrying too much power is a problem, its why we have democracy and its why we should have capitalism and the problem is we dont and its causing continual failures to occur that could be stopped if people had the power that government has taken from them.  

 We have centralised capital control.  Capitalism is far closer to peer to peer where each unit is fungible against all others equally.  When the Fed issues QE at their own agenda and timetable they are determining monatary worth and who will receive that benefit of the newly produced money.  Im not calling a conspiracy, they do put that worth into government which in theory passes it onto the people but it is still not capitalism and QE will encourage speculation and unfairly benefit the largest dealers in QE assets which is government debt mostly and also housing debt.
  This is not a free market, prices of the largest units of currency are enforced by laws and please dont kid yourself that people at the FED are not politically biased.  They are not on puppet strings but they are not able to somehow dodge human mistakes we all carry which will have biased them to their origins which is government.

   Timothy Geithner, Obama and Ben B have between them 1 years experience in privately funded businesses and they are not going to bring you anything but what made them successful which is politics, I expect Yellen, etc are similar