A bad ideaPublished in Housing Finance International Journal.The U.S. national housing finance market is uniquely dominated by two government mortgage companies, Fannie Mae and Freddie Mac. They do exactly the same thing, creating mortgage-backed securities that are de facto government-guaranteed. They are both completely dependent on the credit support of the U.S. Treasury, and thus dependent on American taxpayers. Both went broke in 2008, and both were bailed out by the Treasury, which still owns $193 billion of their senior preferred stock, sixteen years later. Both are in an unending conservatorship of a very political government bureaucracy, the Federal Housing Finance Agency. They are in effect a single huge market intervention and subsidy.Fannie/Freddie are truly massive, with

What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Since the sixth century BC reign of Croesus of Lydia, refined gold has served as a monetary store of value. Today, many central banks, including the European Central Bank, the Swiss National Bank, the German Bundesbank, the Bank of France, the Bank of Italy, the Dutch National Bank, the Bank of Japan, the Reserve Bank of India, the People’s Bank of China, and the Monetary Authority of Singapore among others, hold gold as an investment and reserve against their monetary liabilities. It may surprise some that, in contrast, the Federal Reserve owns no gold at all.The original 1913 Federal Reserve Act required the Fed to hold substantial amounts of gold to back its outstanding Federal Reserve Notes and member bank deposits. In 1934, the Roosevelt administration pushed for, and Congress passed,

Can you understand how it can be that the Federal Reserve, the world’s greatest and by far most important central bank, has now lost the astounding sum of $193 billion? If not, you are surely not alone. Since September 2022, the Fed has lost money every month. These unprecedented losses continue, and this fall they will in the aggregate pass $200 billion.The Fed has a powerful mystique, which it works hard at cultivating. It intensely wants to be credible—that is, for you to believe in it (“credo” = I believe), and perhaps you do. The people’s belief is an important source of the Fed’s power, and its power is a key source of the government’s power. We can accurately say that the Fed prints power by printing money. The Fed does not want little things like $200 billion in losses to shake

Published in The New York Sun:Central bankers whistle ‘Dixie’ as mark-to-market losses dramatically shrink the banking system’s economic capital.Whistling a happy tune, the Federal Reserve vice chairman for supervision, Michael Barr, recently testified to Congress that “overall, the banking system remains sound and resilient.” A more candid view of the risks would be less sanguine.Mr. Barr reported that banking “capital ratios increased throughout 2023.” He failed, though, to discuss the mark-to-market losses that have dramatically shrunk the banking system’s economic capital and capital ratios.A recent study of American banks, including analyses of both their securities and fixed rate loans, estimates that the banking system has at least a $1 trillion mark-to-market loss resulting from

This article was originally published by the Federalist Society. The relevant text of the Dodd-Frank Act is clear: “Each year (or quarter of such year) . . . the Board of Governors shall transfer to the [Consumer Financial Protection] Bureau from the combined earnings of the Federal Reserve System, the amount determined by the Director to be reasonably necessary . . . ” (emphasis added).“Earnings” means net profit:“EARNINGS: Profits; net income.” (Encyclopedia of Banking and Finance)“Earnings: Net income for the company during a period.” (Nasdaq financial terms guide)“A company’s earnings are its after-tax net income.” (Investopedia)“Earnings are the amount of money a company has left after subtracting business expenses from revenue. Earnings are also known       as net income or net

This article is adapted from a lecture delivered to the Federalist Society: The Federal Reserve is a fundamental problem for the Constitutional order of the American Republic. How can it be that it considered itself able to unilaterally impose permanent inflation on the country, without legislative debate or approval?The shifting theories believed by central banks are among the most important of macro-economic factors. For example, William McChesney Martin, chairman of the Federal Reserve Board 1951-1970, rightly characterized inflation as “a thief in the night.” In remarkable contrast, the Fed under Ben Bernanke, chairman 2006-2014, explicitly committed itself and the country to inflation forever at the rate of 2% per year, thus assuming that constant inflation should not only be taken

Hold up your hand if you think that the aggregate losses of an organization are an asset of that organization. No hands at all? Absolutely right. Losses are not an asset. That’s accounting 101. Yet the greatest central bank in the world, the Federal Reserve, insists on claiming that its continuing losses, which have accumulated to the staggering sum of $164 billion, are an accounting asset.The Fed seeks to palm off this accounting entry as a “Deferred Asset.” Why does the Fed do this, which perhaps makes it look tricky instead of majestic? Because it does not want to report that it has lost all its $43 billion in capital and now has negative capital. The inevitable arithmetic is plain: start with the Fed’s $43 billion in capital, lose $164 billion, and the capital has inescapably become

In The Price of Time, Edward Chancellor has given us a colorful and provocative review of the history, theory, and the profound effects of interest rates, the price that links the present and the future, which he argues is “the most important price of all.” The history runs from Hammurabi’s Code which in 1750 BC was “largely concerned with the regulation of interest,” and from the first debt cancellation, which was proclaimed by a ruler in ancient Mesopotamia, all the way to our world of pure fiat currencies, the recent Everything Bubble (now deflating) including cryptocurrencies (now crashing), and the effective cancellation of government debt by inflation and negative interest rates.The intellectual and political debates run from the Old Testament to Aristotle to John Locke and John Law,

Published in The Wall Street Journal:Mr. Levy describes the Fed’s permanent problem: It doesn’t and can’t know what the natural rate of interest is. Everyone should pity the members of the Federal Open Market Committee, who must inwardly confess that they can’t know the answers, yet have to play their parts in the Fed melodrama nonetheless.Alex J. PollockSenior fellow, Mises InstituteLake Forest, Ill.Appeared in the March 14, 2024, print edition as ‘Fed Doesn’t Know the Natural Rate of Interest’.

Switzerland’s central bank, the Swiss National Bank (SNB), lost $3.6 billion in 2023,
 after a gigantic loss of $150 billion in 2022. But after booking these losses, and properly subtracting them from its capital, the SNB still had positive capital of over $70 billion.

Although manipulating housing finance is not among the Federal Reserve’s statutory objectives, the U.S. central bank has long been an essential factor in the behavior of mortgage markets, for better or worse, often for worse. 

[This article was first published in the New York Sun.]“Who will guard these guardians?” That poser of Juvenal, satirist of Rome, is an immortal question — nowhere more pertinent, though, than in deciding who should oversee the Federal Reserve.

Recorded at the Mises Institute Supporters Summit in Auburn, Alabama, 12-14 October 2023.
Sponsored by Bob Tancula.

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The Federal Reserve has officially reported a loss of $57 billion for the first six months of 2023. Quite a number! So the “Federal Reserve Banks Combined Quarterly Financial Report as of June 30, 2023” (CQFR)—a little-known document—is especially notable for its red ink. We can anticipate an annual loss of over $100 billion for 2023 and for the losses to continue into 2024. 1
How does a central bank, especially the world’s greatest and most important central bank, lose tens of billions of dollars in six months? An average person, influenced by the mystique of the Fed, might understandably be baffled by this fact.
To understand what is happening, we need to recall that in addition to being a media star as the manipulator of the world’s dominant currency, the Federal Reserve is a bank—well,

In times of banking and financial crises, central banks always intervene. This is not a law of nature, but it is an empirical law of central bank behavior. The Federal Reserve was created 110 years ago specifically to address banking panics by expanding money and credit when needed, by providing what was called in the Federal Reserve Act of 1913 an “elastic currency,” so it could make loans in otherwise illiquid markets, when private institutions can’t or won’t.
The great Victorian banking thinker (as well as private banker) Walter Bagehot proposed that the Bank of England “lend freely” to quell a panic, and the central banks of the world today are all his disciples in this respect. With the post–Bretton Woods, pure-fiat-currency Federal Reserve, the US currency is elastic with a

The Federal Reserve’s new report of its balance sheet shows that in the approximately six months ended March 29 it has racked up a remarkable $44 billion of cumulative operating losses. That exceeds its capital of $42 billion, so the capital of the Federal Reserve System has gone negative to the tune of $2 billion—just in time for April Fools’ Day.
This event would certainly have surprised generations of Fed chairmen, governors, and, we’d have thought, newspapermen. The Fed’s capital will keep getting more negative in April and for some long time to come, at least if interest rates stay at anything like their current level. The Fed in the first quarter of 2023 reported losses running at the rate of $8.7 billion a month.
On an annual basis that would be a loss of over $100 billion.

[Originally published in the Housing Finance International Journal.]
The 21st century, only 23 years old, has already had two giant, international housing bubbles. It makes one doubt that we are getting any smarter with experience.
Among the countries involved in the second bubble, both the U.S. and Canada fully participated in the newest rampant inflation of house prices. Prices this time reached levels far above those of the last boom peak. In the U.S., the S&P/Case-Shiller National House Price Index by mid-2022 had risen to 67% over its 2006 bubble peak (130% over its 2012 trough). In Canada, the Teranet-National Bank House Price Index had soared to 143% over its 2008 peak (168% over its 2009 trough). What the Federal Reserve and the Bank of Canada both wrought with their hyper-low

The Henry Hazlitt Memorial Lecture, March 18, 20221. Many thanks to the Mises Institute and to sponsor Yousif Almoayyed for this opportunity to be with you all today as we consider one of the truly remarkable developments in the history of American central banking, money printing, and credit inflation.

The Federal Reserve now owns $2.6 trillion in mortgages. That means about 24 percent of all outstanding residential mortgages in this whole big country reside in the central bank.

Runaway house price inflation continues to characterize the U.S. market. House prices across the country rose 15.8% on average in October 2021 from the year before. U.S. house prices are far over their 2006 Bubble peak, and remain over the Bubble peak even after adjustment for consumer price inflation. They will keep on rising at the annual rate of 14–16% for the rest of 2021, according to the AEI Housing Center.

With inflation running at over 6 percent and interest rates on savings near zero, the Federal Reserve is delivering a negative 6 percent real (inflation-adjusted) return on trillions of dollars in savings. This is effectively expropriating American savers’ nest eggs at the rate of 6 percent a year. It is not only a problem in 2021, however, but an ongoing monetary policy problem of long standing.