Finance Basic To Advance Level Knowledge

Lawrence J. White has an interesting article where he considers the optimal size of our financial regulatory structure. He acknowledges that the structure it is "maddenly complex" and that it "easy to make a case for drastic simplification." Larry also notes, however, that there are benefits to having some regulatory diversity. We need to recognize this tradeoff, he contends, when considering the simplification of our financial regulatory system.  To help us better understand this tradeoff, Larry lays out the case for reducing the number of financial regulators: Regulatory decisions could be made faster, especially in a crisis, when policymakers need timely access to sensitive, proprietary information, and must coordinate actions both domestically and internationally. There would be fewer “turf wars” that can delay decisions. There would be less duplication and redundancy and less need for coordination among separate regulatory agencies... Regulatory costs w...

Who controls the Fed's balance sheet? The answer may seem obvious. The Fed, after all, determines the size of its balance sheet. It also controls what happens to the asset side of its balance sheet. Its power over the liability side, however, is limited. This diminished control arises because the public's demand for currency, bank regulations, and U.S. Treasury cash balances all influence the composition of the Fed's liabilities. 1 These are exogenous forces that have the potential to create some economic bumps on the road ahead as the Fed normalizes the size of its balance sheet.  So far, though, little attention has been paid to these liability-side issues. Most focus has been given to the asset side of the Fed's balance sheet. This focus, in my view, is misguided. I see the real dangers lurking on the liability side of the Fed's balance sheet--the very side where the Fed has less control.  This post, then, is attempt to direct some attention to th...

So I was looking at the Fed's 2016 annual report and was able to construct the following chart: Several observations from this figure. First, the sharp growth in the Fed's income is unsurprising as it is a natural consequence of the Fed's QE programs. These large scale asset purchase programs expanded the Fed's assets from around $900 billion in late 2008 to $4.5 trillion today. Moreover, the Fed's portfolio has changed from being mostly short-term treasury securities to one of long-term treasury and agency securities. In addition, the Fed also started paying interest on excess reserves (IOER) to banks during this time. Together, these two developments have effectively turned the Fed into the largest fixed-income hedge fund in the world. Hence, the surge in the Fed's income.  Second, the Fed's net expenses have also grown rapidly since 2008. Fed officials will point to new financial regulations they have to enforce as the main culprit, but there...