05 Mar 2015

At This Point, I’m Pretty Sure Rand Paul Doesn’t Know Much Accounting

Banking 7 Comments

OK I was giving him the benefit of the doubt when, in his speech in Des Moines, Rand Paul said “assets” when he meant “equity.” But then for a written piece for Breitbart–which appeared 4 days after the speech, and so presumably Paul and his staff had seen how people on Bloomberg etc. pounced on his misstatement in the speech–Paul (or his aides) wrote this:

The Fed has $4.5 trillion in liabilities and only 57 billion dollars in equity. It is leveraged at 80:1, nearly three times greater than Lehman Brothers when it failed.

Nearly 40 percent of the Fed’s liabilities are said to be mortgage-backed securities – the question needs to be: How many are distressed home loans?

I’m pretty sure he meant to say 40 percent of the Fed’s *assets* are mortgage-backed securities…?

7 Responses to “At This Point, I’m Pretty Sure Rand Paul Doesn’t Know Much Accounting”

  1. Tel says:

    There’s a backwardness to Fed accounting that trips a lot of people over:

    Joe Sixpack: Mortgage is a liability, cash is an asset, we talk about “nett worth” and not “equity” because Joe believes he has no owner.

    Central Bank: Mortgages are assets, cash is a liability (never something they are really liable for, merely an accounting liability) equity is as close to zero as possible, and no one can figure out who is the real owner.

    The first useful lesson I got in accounting was the idea of holding the book up to a mirror and seeing the other side of it. Weird at first glance, but if you think about it, financial instruments must surely work that way… they don’t create wealth, by design they are intended to balance.

  2. Max says:

    The MBS are all guaranteed by government agencies (Fannie Mae, Freddie Mac, and Ginnie Mae). The credit risk is not located at the Fed.

  3. Keshav Srinivasan says:

    Bob, Rand Paul was asked by Glenn Beck about this assets vs. liabilities thing, and here is what he said:

    “GLENN: They said in your op-ed, you claimed that The Fed has $4.5 trillion in liabilities, not assets, and $57 billion in equity. Donald Kohn, the former vice chair said, ‘There’s essentially no credit risk on the Federal Reserve’s balance sheet right now. I don’t know of any institution in the United States that is subject to more oversight than The Fed.’

    SENATOR PAUL: When they say there’s no credit risk, they created four and a half trillion dollars to buy these bad mortgages. So is there no risk in creating it? If it’s a great thing — they brag they made 500 billion or whatever they made in interest over the last 10 years. Well, if it’s good, why not create more money? So if they bought 400 trillion dollars’ worth of asset by printing up money or by computer entry, why not create, oh, I don’t know, 9 trillion worth, and they can double their so-called profit. See, it’s like the emperor has no clothes when people finally discover, yeah, they have a profit, but their profit is made by creating money out of thin air, or creating a computer entry and buying stuff.”

  4. Yancey Ward says:

    I am not only sure Paul doesn’t understand accounting, but that 99.9% of the population doesn’t understand it either- and that includes the political class as a whole, and probably economists, too.

  5. khodge says:

    It doesn’t bother me that a politician is sloppy with his terminology…even as a practicing finance guy of many years I fall into the habit of not choosing my words carefully/correctly.

    Of course, as a presidential candidate, it would probably be a good thing to have a finance guy on his staff who reviews these blogs but, by the same token, he has to use his resources carefully. I’d prefer a president who does that to one who keeps throwing money at problems in hopes that they’ll go away.

  6. ax123man says:

    Paul speaks as a populist like all politicians. He could care less if economists call him out. In Keshavs response above when Paul was answering to Glenn Beck (and ultimately Donald Kohn) he wasn’t speaking to either, but to Becks listeners. No politician has any chance of getting elected by speaking the truth according to the experts. First, there’s no human who can know all those truths and second the truth from experts will likely make the general public nervous and/or angry.

    (reason number 854 why politics as a concept can’t work)

  7. Gamble says:

    I think Rand purposely transposed liability and asset when referring to distressed home loans.

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