Bill Mitchell-en Repeat after me: Central banks can make large losses and who would care(http://bilbo.economicoutlook.net/blog/?p=49228)
(i) Sarrera gusa: Euroguneko Distopiaz
… I was scanning some transcripts from the European Parliament today as part of a project I am embarking on to update my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015). I have had lots of requests (including from publishers) to provide a revised version to take into account events since 2015, include Brexit and the pandemic. So my head is back in transcripts, hansard reports, and other official documents to create the trail of evidence I need to make the continued case against the monetary union and the EU, in general. I report today on a particularly interesting exchange that appeared in November 2020 in the European Parliament…
(ii) Banku zentralaz
For the record – central banks cannot go broke
There seems to be a regular furphy cycle – you know, the repeating rehearsal of fiction inspired by the lies that mainstream economists allow to run rampant in the broader community.
It is a familiar pattern – lie constructed, financial media takes it up, news explodes for a week, an Modern Monetary Theory (MMT) economist points out the fiction, and then some mainstream economist, suffering from attention deficit, tweets that they knew it all along and it is part of mainstream theory anyway.
Then someone points them to what the mainstream teach every day in university programs, or something these economists have written in the past (regularly) or said to the media, and there is some further Tweet about MMT being a cult etc.
For years we have been observing this pattern.
Recently, we have seen the recycling of the ‘central bank will make losses’ myth as part of the mainstream attack on the large bond-buying programs that have allowed government bond yields to remain very low if not negative.
On Monday (February 16, 2022), the European Parliament considered the – ECB Annual Report – which is a regular event that apparently serves as accountability.
On November 19, 2020, the President of the ECB, Madame Lagarde met with the Committee on Economic and Monetary Affairs of the European Parliament.
The – Transcript – of the hearing contains this interchange.
An Italian right-wing MP, Marco Zanni from the Lega Nord, who previously worked for an Italian investment bank. From 2019, Zanni represented the right-wing ‘Identity and Democracy’ group in the European Parliament.
He asked the ECB boss this question:
…. In the past days, someone included the President of the European Parliament in starting to discuss about the possibility to cancel in the future part of the debt purchased by the ECB under its PEPP programme … I would just like to know, technically, what would be the impact of debt cancellation on the ECB and in particular if the related losses could harm ECB capacity in pursuing its monetary policy goals – if it would risk bankruptcy or if a central bank runs under different rules compared to private banks or other private companies? Can you also explain how and why the ECB, as stated several times by the bank itself, can work also with a negative equity? Is the ECB in some way a special institution?
So it was about the issue that if the ECB (or any central bank) makes losses on any assets it holds, including the vast quantity of government bonds many central banks now have in their possession, are they able to continue with negative capital.
I have written detailed analyses of this question in these blog posts (many years ago):
1. The ECB cannot go broke – get over it (May 11, 2012).
2. The US Federal Reserve is on the brink of insolvency (not!) (November 18, 2010).
3. The consolidated government – treasury and central bank (August 20, 2010).
Most recently, I demonstrated that an Australian Broadcasting Commission ‘expert’ journalist was misleading readers by beating up a story that the RBA might go broke.
For that blog post – When ABC journalists mislead the public and spread fiction (January 13, 2022).
Anyway, Madame Lagarde answered the question by claiming that under Article 123 of the Treaty, the ECB could not write off the debt.
Zanni persisted:
I know, as I said, that there are limits in the Treaties, but it could happen in the future that, without formal cancellation of the debt, the ECB could incur losses related to its holdings under the asset purchase programme (APP). So I would like to know, technically, what would happen if those losses were to erode the equity of the ECB and how it is possible that the ECB could run also with negative equity.
Lagarde was then forced to the point of the question:
As the sole issuer of euro-denominated central bank money, the euro system will always be able to generate additional liquidity as needed. So by definition, it will neither go bankrupt nor run out of money. And in addition to that, any financial losses, should they occur, will not impair our ability to seek and maintain price stability. I’m afraid that it’s yet again a fairly simple, straightforward answer, but that’s the reality that we are dealing with, and I don’t speculate on alternative scenarios, because we have a treaty. We are the only issuer, and we are not at risk as a result.
Aside from the institutional references to the Treaty, that statement applies to all central banks that issue a sovereign currency.
They can never go broke and could operate without problems with permanent negative equity.
They are not profit-seeking companies owned by shareholders.
They are part of the currency-issuing governments (or in the special case of the ECB, the currency issuer in a system where the elected governments use the ECB’s currency).
So whenever you read a statement from a commentator that the central bank might make massive losses from its bond-buying programs, roll your eyes, and realise the commentator knows nothing about the topic.
joseba says:
Australian government issues debt, buys most of it itself, and then pays itself interest into the bargain
(http://bilbo.economicoutlook.net/blog/?p=48453)
These are rather extraordinary times indeed. I have been trawling through the Australian public debt data which is spread across the federal sphere and the various states and territories. The official data published by the ABS is always dated (lagging a year or so) and the state-level debt data is actually quite hard to put together – their various ‘debt management’ offices do not make it easy to put a time series together. My interest is in working out the impact of the rather radical shift in usual conservative Reserve Bank of Australia behaviour when the pandemic hit. They started buying government bonds (at all levels) and now own large swathes of public debt. They have also effectively been funding the rather large deficits that the governments in Australia have been running. And interest rates and bond yields remain low after nearly 18 months of this shift.
The RBA begins buying up government debt in large quantities
In March 2020, as it became clear that Australia was going to be caught up in the pandemic and the Federal and state/territory governments announced emergency measures to protect incomes during the lockdowns, the Reserve Bank of Australia deviated from its recent history and introduced a large-scale government bond-buying program.
They provided this ‘explainer’ – Unconventional Monetary Policy – to educate the population on these matters.
Their explanation under the heading “Asset purchases” is largely accurate.
They write:
Asset purchases involve the outright purchase of assets by the central bank from the private sector with the central bank paying for these assets by creating ‘central bank reserves’ (in Australia these are referred to as Exchange Settlement or ES balances). (Some people have referred to this as ‘printing money’, but the central bank does not actually print any banknotes to pay for the asset purchases.)
Go the RBA for politely pointing out that it is the height of ignorance to talk about ‘printing money’ in the context of government bond purchases.
They point out that the goal of these purchases is “to lower interest rates on risk-free assets (such as government bonds) across different terms to maturity of those assets – that is, across the yield curve.”
So instead of targetting just their short-run policy rate that the RBA Board sets each month, asset purchases can “lower a range of interest rates”.
This also puts “downward pressure on bond yields”.
They left out the other important point – for obvious reasons – that this really amounts to one arm of government buying the other arm’s debt, which, in effect, once we cut through all the blather from politicians and RBA officials, is funding the fiscal deficits run by the level of government that have issued the bonds.
In March 2020, the RBA announced a series of ‘non standard’ monetary policy measures – Supporting the Economy and Financial System in Response to COVID-19 – which included asset purchases that targetted the 3-year Australian government bond yield at 0.1 per cent.
Initially, the target yield was set at 0.25 per cent, but then it was lowered in November 2020.
The RBA accomplishes this goal by standing “ready to purchase government bonds … in the secondary market”.
The central bank can control yields easily by increasing demand for the bonds in the secondary market, which as a result of the inverse relationship between yields and prices, drives down yields to the desired target.
It can target any maturity on the yield curve (1-year, 2-year, right out to 30-years) depending on which rates it wants to control.
At the moment it is buying around $A4 billion worth of government bonds per week and is committed to this strategy until at least November 11, 2021.
Here is the impact on the Australian government yield curve of the purchases.
I have provided 4 monthly snapshots – December 2019, March 2020 (when the program began), February 2021 and the most recent data for October 2021.
You can see the dramatic effect on the short-end of the yield curve of the bond-buying program.
The longer-term yields have risen a bit in 2021 as the short-term inflationary risks rose due to supply bottlenecks arising from not only Covid disrupting international shipping etc but also because of the disastrous bushfires in late 2019, early 2020, which has caused the timber shortage.
But in recent months, those risks are abating a little and the long-end of the curve is flattening again.
Public Debt Trends in Australia
When the ECB started buying large quantities of Member State debt after they introduced the Securities Markets Program in May 2010, various Executive Board members were wheeled out to tell us that they were just providing liquidity to the payments system.
It was obviously not that but they continue to play that game.
They were funding Member State fiscal deficits because if they had have left it to the private bond investors alone, the yield on some of the national debt would have gone through the roof, and, given the scale of the crisis, some governments (probably Italy, Greece, Portugal and even Spain) would have found it hard selling any debt.
That means they would have gone broke and the ECB knew that. They knew they stood between keeping the euro system intact or seeing it dissolve in a sequence of national insolvencies.
The scale of the purchases made it obvious that they were acting as fiscal agents in the monetary union as well as the central bank, given that the architects of the common currency deliberately avoided setting up a federal (European) fiscal authority.
In doing so, the central bank became the last stop – despite all their stupid ‘no bailout’ rules.
The RBA has until now not purchased much Australian government debt (either a federal or state/territory level).
In the past, when the government ran a ‘tap system’ of bond issuance (prior to 1983), the government would fix the yield and call on the market dealers to buy up to a desired volume.
If the yield announced was not competitive, then the tender would fall short and the RBA would always step in and fund the difference by taking the Treasury debt itself.
The neoliberal era was marked by the abandonment of this system in favour of the ‘auction’ process, where the private dealers bid the yield and the ‘market’ (auction) sets the final yield.
The RBA has typically not bought much debt during this era.
The change arose because politicians believed the mainstream macroeconomists who erroneously claimed that the old tap system would cause hyperinflation – ‘money printing’ (duh).
Apparently, as we were told at the time, the ‘market knows best’.
But it was more than that.
The government fell prey to special pleading from the financial markets to allow them to exploit higher returns on the risk-free assets – and so an elaborate new dimension in the existing corporate welfare system was added which led to the shift to the auction process.
Well, now, the RBA has broken out of its past mindset and has been buying large swathes of Australian government debt at both national and state level.
They clearly realised that as the fiscal deficits had to rise somewhat substantially to deal with the pandemic, the ‘auction’ system might deliver much higher yields and raise all sorts of political problems.
At the state/territory level, the rising yields could have even threatened solvency, given the state and territory governments use the currency that the federal government issues.
So the bond-buying program began and 18 months later it is still in full swing.
The first graph shows the spectacular increase in non-government wealth held in government bonds since the GFC.
It shows short-term government securities issued in Australia (red) and long-term government securities issued in Australia since 1995 to July 2021 (the data is monthly and is available – HERE).
The data is for the total public sector in Australia (so Federal and State/Territory)
Clearly, there was an steady increase due to the GFC and then the very sharp increase to deal with the pandemic.
The data shows that between February 2020 and July 2021, the total public debt in Australia rose by $A351.7 billion or around 11.5 per cent of the flow of GDP produced since the March-quarter.
A relatively large increase in other words.
The next graph shows the total public sector debt since 2003 (to July 2021) and the Federal debt, which dominates.
But it still remains, that in July 2021, the non-currency issuing states/territories had around $A400 billion in outstanding debt.
Which is one of the reasons the RBA also started buying the ‘semis’, which are treasury bonds issued by the states and territories.
It knew that with the Federal government acting in a penny pinching way – forcing cost-shifts onto the states and territories, who under our constitution bear the major responsibility for health care, that the state deficits would rise quickly.
All states bar Western Australia have recorded large swings towards higher fiscal deficits as they take on major new spending obligations associated with the pandemic.
It would have been much better for the federal government to fund the whole response and save the states and territories from increasing their debt levels.
I will come back to that in closing.
The next graph shows the proportion held by non-residents, which at the end of June 2021 had fallen to 48.8 per cent.
Mainstream commentators who do not understand currencies butt in here and claim that our deficits are being funded by foreigners – the ‘China-keeping-the-US-government-afloat’ myth.
Modern Monetary Theory (MMT) demonstrates that the external deficit countries (such as Australia typically) ‘finance’ the desire of the external surplus nations to accumulate financial assets denominated in the currencies of the deficit countries. If the deficit countries stopped purchasing that desire would be unfulfilled.
Further, to pursue that desire, the surplus countries are willing to net ship resource benefits (goods and services) to the deficit country. What do they get in return? Bits of paper and electronic bank balances.
But the nationality of the holder of Australian government debt is largely irrelevant.
Per se, it doesn’t really matter who holds the debt issued by a government. Foreigners are never ‘funding’ Australian government spending, notwithstanding the fact that the Non-residents (institutions) hold large swathes of Australian Treasury-issued debt.
For a currency-issuing government such as Australia, the funds associated with the debt issuance do not provide the government government with the capacity to spend. That capacity is intrinsic to a currency-issuing government.
Non-residents do not issue the Australian currency but have to purchase debt in that currency.
There are exchange rate implications of foreign nations running external surpluses against Australia and thus accumulating financial claims in Australian dollars, some of which can manifest as Australian government bonds.
But these issues are separate from the solvency-type issues.
Please read my blog posts for a discussion of those implications:
1. Trade and external finance mysteries – Part 1 (May 8, 2018).
2. Trade and finance mysteries – Part 2 (May 9, 2018).
3. A surplus of trade discussions (May 23, 2018).
How much debt has the RBA purchased?
The following graph shows the impact of the RBA’s bond-buying program of its percentage holdings of Australian federal debt.
They now hold 26.6 per cent of all outstanding debt.
At the onset of the pandemic they held 2.2 per cent of all outstanding debt.
In terms of total outstanding public debt in Australia (federal plus states/territories), the RBA now holds 20.8 per cent (July 2021) compared to 1.9 per cent pre-pandemic (February 2021).
Assessment:
1. To achieve that increase in its total share of outstanding federal government debt, given the low base pre-pandemic, the RBA has bought 92.2 per cent of all the debt issued between February 2020 and August 2021.
2. In terms of overall government debt changes (Treasury bonds and semis), the RBA has purchased 68.7 per cent of the total change in debt issued.
3. The impact will be that the Federal government is effectively having its deficits funded by itself and will be paying interest to the RBA, which will then be recycled back to the Treasury in the form of dividends – right pocket/left pocket governmental transfers.
For the states and territories though, they will have to service and repay the debt when it matures with flows to the RBA. And these flows will, in turn, end up, at least partially with the Federal Treasury.
In other words, the federal government is ripping off the states and territories again and no-one is talking about this.
4. As the RBA noted in the Explainer I linked to above:
In addition, investors can use the proceeds they receive from selling their assets to the central bank to purchase other assets. These portfolio adjustments by investors can affect the price of these other assets and the exchange rate.
While, initially, the bond-buying program represents an opportunity for the sellers to alter the mix of their wealth portfolio, it remains that the liquidity the RBA provides the sellers in return for the bond instrument can be used as a speculative fund to pursue other assets – financial or real (such as real estate).
It is impossible to estimate how much has gone in to fuel the ridiculous boom in housing over the last few years, but some of it probably has.
The problems this is now causing younger and lower-paid workers is a direct result of the government maintaining the fiction that it has to issue debt to the primary market in order to spend.
It doesn’t and given that, ultimately, the government just ends up buying its own debt, they could eliminate any negative consequences of the whole charade by abandoning the practice of debt issuance and just instructing the RBA to credit various non-government bank accounts as required to facilitate its spending program.
The crediting is already happening but it would be cleaner without the debt charade.
Conclusion
The debt phobes who are starting to lift their heads above the slime should understand all this.
They will undoubtedly start to mount their ‘grandchildren burden’ stupidity. But with the federal government buying nearly all of its debt itself they should realise there is nothing to say.
joseba says:
When ABC journalists mislead the public and spread fiction
(http://bilbo.economicoutlook.net/blog/?p=49017)
There is a difference between a journalist reporting news about economics and money and a journalist writing an opinion piece. In the first instance, the responsibility of the journalist is to ensure they cover the topic in a balanced way, seeking input from all viewpoints if the topic is controversial, as most topics in economics are. Too often journalists in this situation allow themselves to be used as mouthpieces for specific viewpoints, sometimes because they are coerced by editorial deadlines. Often they just uncritically summarise press releases put out by some group or another and represent the material as fact. In the second case, when a journalist is writing an analytical piece they are holding themselves out as experts. Then they better get it right. Usually, when they are writing about macroeconomics they do not get it right because they merely rehearse mainstream thinking, which most people by now should realise is off the mark. A case in point was a recent Op Ed (represented as analysis) published by the economics reporter at the ABC (January 10, 2022) – How the banks may profit from the taxpayer as COVID quantitative easing winds down. It is full of errors that journalists make when they don’t exactly understand the material they are dealing with. This should have been worked out during the GFC, when these issues arose in the general media. The fact that the same errors are being made more than a decade later doesn’t suggest any learning has taken place.
Update on RBA bond-buying program
I last wrote about this topic in this blog post – Australian government issues debt, buys most of it itself, and then pays itself interest into the bargain (October 7, 2021).
After analysing the trends in the federal debt market I calculated the way in which the Reserve Bank of Australia’s bond-buying program, announced in March 2020 had impacted on that market.
The RBA deviated from its recent history and introduced a large-scale government bond-buying program as part of its pandemic support initiative.
The RBA, itself, sought to disabuse the naive commentators, who claimed the asset purchases were just ‘printing money’.
In its explanatory document – Unconventional Monetary Policy – the RBA wrote:
Asset purchases involve the outright purchase of assets by the central bank from the private sector with the central bank paying for these assets by creating ‘central bank reserves’ (in Australia these are referred to as Exchange Settlement or ES balances). (Some people have referred to this as ‘printing money’, but the central bank does not actually print any banknotes to pay for the asset purchases.)
So, the RBA considers it is the height of ignorance to conclude that its asset-buying program involves ‘money printing’.
While the RBA said its policy was about lowering interest rates on risk-free assets and keeping bond yields low, they left out the other important point – for obvious reasons – that their asset buying program really amounts to one arm of government buying the other arm’s debt, which, in effect, once we cut through all the blather from politicians and RBA officials, is funding the fiscal deficits run by the level of government that have issued the bonds.
The program demonstrated that a central bank can control yields easily by increasing demand for the bonds in the secondary market, which as a result of the inverse relationship between yields and prices, drives down yields to the desired target.
It can target any maturity on the yield curve (1-year, 2-year, etc) depending on which rates it wants to control.
There is no question that a central bank can dominate the bond market if it chooses, which should put to rest all the claims that private bond investors can force higher yields on the debt issued by currency-issuing governments.
They cannot.
The following graph shows the impact of the RBA’s bond-buying program of its percentage holdings of Australian federal debt up until December 2021.
Since March 2020, the Australian government has issued an extra $A274,814,351,095 worth of Treasury bonds.
The RBA has purchased $A234,999,000,000 worth of those extra bonds.
So over the course of the pandemic to date, the RBA has purchased 85.5 per cent of all the extra debt issued by the Australian government.
At the onset of the pandemic the RBA held 2.3 per cent of all outstanding Federal treasury bonds.
By the end of December 2021, they held 31.8 per cent.
They have also purchased significant quantities of debt issued by the states and territories since the pandemic began.
The RBA will go broke myth
The impact will be that the Federal government is effectively having its deficits funded by itself and will be paying interest to the RBA, which will then be recycled back to the Treasury in the form of dividends – right pocket/left pocket governmental transfers.
In terms of the discussion today, the RBA noted in the document I linked to above:
In addition, investors can use the proceeds they receive from selling their assets to the central bank to purchase other assets. These portfolio adjustments by investors can affect the price of these other assets and the exchange rate.
So, while, initially, the bond-buying program represents an opportunity for the sellers to alter the mix of their wealth portfolio, it remains that the liquidity the RBA provides the sellers in return for the bond instrument can be used as a speculative fund to pursue other assets – financial or real (such as real estate).
It is impossible to estimate how much has gone in to fuel the ridiculous boom in housing over the last few years, but some of it probably has.
The problems this is now causing younger and lower-paid workers is a direct result of the government maintaining the fiction that it has to issue debt to the primary market in order to spend.
It doesn’t and given that, ultimately, the government just ends up buying its own debt, they could eliminate any negative consequences of the whole charade by abandoning the practice of debt issuance and just instructing the RBA to credit various non-government bank accounts as required to facilitate its spending program.
The crediting is already happening but it would be cleaner without the debt charade.
Now, make sure you understand that there is a difference between some private bond holder selling their bond holdings to the RBA and a commercial bank selling its holdings.
That is where the ABC article cited in the Introduction falls foul.
The journalist (David Taylor) who regularly Tweets sensational headlines that do not reflect the situation, started by claiming that the RBA was “engaging in a money-printing program, also known as quantitative easing”.
As above, if he had actually read the RBA notes on its program, he would realise there was no ‘printing’ going on.
So by using this sensationalist type of language (which is analytically incorrect anyway), the journalist is distorting the readers’ understandings from the outset.
Soon after we encounter the next error:
The process boosts the money supply, drives down interest rates and incentivises the commercial banks to increase their lending.
The program does not increase the capacity of the commercial banks to make loans. I will come back to that soon.
The intent of his ‘analysis’ is to work out who will have “to pay for this program” because according to his assessment:
Everything has a price eventually, it’s only a matter of time.
Portents of doom.
At least he realises that the way the RBA transacts is to “literally punch extra zeros on its computer terminals at its headquarters at Sydney’s Martin Place in order to create money”.
Computers are not printers.
The general point is that all government spending is executed in the same way.
One arm of government (Treasury and Finance) instructs its central bank (the other arm) to “punch” some numbers into computers to facilitate the desired transactions with the non-government sector.
It doesn’t matter whether the government is purchasing pencils for schools or buying its own debt held by banks, people, or itself.
The journalist tells his readers that QE:
It results in the commercial banks having fewer bonds on their books and more cash to lend out (cash received by the RBA) — and an incentive to do so since they’re only earning 0.01 per cent on it at the Reserve Bank.
This is the classic error that people make when they do not understand the accounting arrangements between the central bank and the supervised commercial banks.
I considered these issues in a series of blog posts 13 years ago – when people were starting to wonder what the impacts of the large central bank bond-buying programs would be.
They were scared that the so-called ‘money printing’ interventions from the various central banks early on in the GFC would be inflationary.
The reason they thought that is because they had either been taught that in economics programs at university or because they had been listening to politicians and their crony mainstream economists relentlessly pushing that message in the media.
This set of blog posts was designed back then to set the record straight.
1. Quantitative easing 101 (March 13, 2009).
2. Building bank reserves will not expand credit (December 13, 2009).
3. Building bank reserves is not inflationary (December 14, 2009).
4. Lending is capital – not reserve-constrained (April 5, 2010).
The ABC analysis article falls foul because it thinks bank lending is constrained by the reserves they have in the vault and that quantitative easing solves this shortage by providing those reserves.
So banks are conceived as being ‘desks’ where officials wait for cash to come in in the the form of deposits, which they loan out, profiting from the difference between deposit and loan rates.
But this is a completely incorrect depiction of how banks operate.
Bank lending is not ‘reserve constrained’.
Banks extend loans to any credit worthy customer they can find and then worry about their reserve positions afterwards.
Remember that Each commercial bank has to keep an account – a reserve account – with the central bank.
The role of bank reserves is to facilitate the clearing system for transactions that have cross-bank implications.
So if Bank A creates a loan which simultaneously creates a deposit in its books, the person can either draw down the deposit and spend the cash in a business that banks with Bank A or spend in a business that banks elsewhere, say, Bank B.
In the former case, there is no clearing issue. Bank A simply transfers the deposit funds from the customer to the business.
In the latter case, Bank B will call on Bank A to transfer the funds into the account of its business customer.
Those transfers are what the clearing house is about and there are millions of such transfers being done on a daily basis.
That is what bank reserves are for.
So Banks A and B have accounts at the central bank and the relevant entries are made in those accounts to satisfy the transaction noted above.
The banks never loan out reserves to commercial customers (borrowers).
They sometimes loan out excess reserves to each other to smooth out the clearing system.
If banks are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank through the so-called discount window.
They are reluctant to use the latter facility because it normally carries a penalty (higher interest cost).
The point is that building bank reserves will not increase the bank’s capacity to make loans.
Loans create deposits which generate reserves not the other way around.
The major institutional constraints on bank lending (other than a stream of credit worthy customers) are expressed in the capital adequacy requirements set by the Bank of International Settlements (BIS) which is the central bank to the central bankers.
They relate to asset quality and required capital that the banks must hold.
These requirements manifest in the lending rates that the banks charge customers.
But despite what is taught in mainstream courses in monetary economics, bank lending is never constrained by a lack of reserves.
Which is why MMT economists never considered QE to be an appropriate vehicle for increasing bank lending in order to stimulate the economy.
Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system – that is, crediting their reserve accounts.
Quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell.
It was always obvious that the reason the commercial banks were reluctant to originate loans during the GFC was because they were not convinced there were credit worthy customers on their doorstep.
Further, after years of lax assessment practices in relation to credit-worthiness, the banks tightened their rules once the GFC threatened their solvency.
The ABC article’s focus then shifts to whether the RBA will make a loss on its bond-buying program.
The comparison is made between the support rate the RBA pays on excess reserve balances held by the banks and the yield it gets from the other part of government for its bond holdings.
If the yields fall below the support rate, then apparently we should worry because “it’s conceivable that the Reserve Bank could start recording losses as a result of the narrowing in the spread between what it receives and what it pays”.
And?
The journalist then claims:
The Reserve Bank, like any bank, is a business.
It is not a business like any bank.
It is part of government with an infinite capacity to “punch extra zeros on its computer terminals at its headquarters”.
No other bank has that capacity.
And a private bank is owned by shareholders who require it to have a profit motive or go broke.
The RBA is part of government and its mission is to serve the people of Australia by maintaining financial stability.
The fact that, in an accounting sense, it might have negative capital at some point in time, is irrelevant.
I discussed these ideas in these blog posts (many years ago):
1. The ECB cannot go broke – get over it (May 11, 2012).
2. The US Federal Reserve is on the brink of insolvency (not!) (November 18, 2010).
3. The consolidated government – treasury and central bank (August 20, 2010).
Clearly not understanding central banking, the ABC journalist insists that if the RBA records negative capital:
… the government would have to use taxpayers’ funds to recapitalise the bank.
You, the taxpayer, would begin paying for the fallout of the RBA’s money-printing program.
Like those zeros that were punched in to computer terminals!
Conclusion
As a taxpayer, I would not be paying anything to the RBA to adjust some numbers in its balance sheet upwards.
I would know that the Treasurer would instruct the RBA to ‘punch’ some numbers in to satisfy the accounting relations.
End of story.
The logic of this article is so misleading that it becomes dangerous input to the public debate.