Balance Sheet And Income Statement Channels - Federal Reserve: Fill & Download for Free

Central bank policies suppress volatility by changing investors’ risk perception and asset returns (incentives). These changes in outlook are steered by pledges of future policy actions via statements and speeches (“policy guidance”) as well as transactions with financial market participants (“open market operations”).Interest rates change market incentivesLevels of interest rates, more commonly referred to as funding costs, can create powerful market incentives. As rates shift, financial institutions’ return maximizing preferences would help central banks achieve policy goals such as volatility suppression.Mutual funds, hedge funds, pensions, and insurance companies are net lenders (investors) that transforms cash into asset holdings, and they hold the “buy-side” designation. These “buy-side” firms play a key role in translating monetary policies into activities - a process known as “policy transmission.”As safe haven interest rates rise (such as higher Treasury yields), buy-side institutions would be able to take less risk to meet their return objectives. If a company sells shares to the public or issues bonds to institutional investors, the company would need to convince buyers that its securities (equities, debt, or private loans) would create value via:Attractive passive income (higher bond yields or dividends) relative to “risk free” safe haven returnsAttractive price appreciation (higher bond and stock prices) relative to safe haven returnsTherefore, safe haven rates such as Treasury yields are “benchmarks” which all other asset returns are measured against. The “buy-side” will decide whether taking on additional risk, such as buying corporate bonds, would be justified by higher returns (hence the term “risk-adjusted returns”):A corporate bond issued by a struggling company with a yield of 9.85% may seem attractive on an “outright” level, but its risk-adjusted return would be poor if a similar maturity Treasury bond (or German bund) return 9.50% per annumSimilarly, a volatile stock expected to appreciate by 15% in a year, at a time when 12-month T-bills trading at 5% will elicit different response to investors with varying risk toleranceThe above examples demonstrate how higher (credit) risk-free rates discourage risk-taking as investors with plentiful choices become more discerning with their investments.Additionally, leveraged investors that use borrowed funds to invest in assets (such as hedge funds) would have to pay higher rates to fund their investments in a high interest rate environment. They too would become more selective, because an asset with an expected 8% return may only generate 3% when funding costs are considered (in a hypothetical environment with 5% funding cost).Conversely, lower interest rates would create the opposite effect:Insurance company will face an uphill battle at meeting future liabilities if bond yields converge toward (and fall below) zeroPension funds that need to provide fixed income for retirees 30 years from now will be hard pressed to create enough returns if 30-year bond returns 235 bps per yearWhen risk-free returns are low, there is only one option for investors: take more risks:Add less liquid assets (real estate) to the portfolio - a strategy generally known as “sell liquidity” (sellers “pay” buyers with a price concession for willing to take on illiquid assets)Add less creditworthy assets; the proliferation of high yield bond funds under a low interest rate regime is the perfect exampleAdd volatile assets; when interest rates are low enough, desperate pension funds and insurance companies would allocate more cash into equities or private equity fundsNote: The effects on banks (intermediaries) are more nuanced - instead of taking greater risk and making more loans, low (and negative) rates compress bank margins and unintentionally fuel contractions in trade financing.In a perverse twist, as more institutional buyers rush into riskier sectors, the ordinarily risky assets would become less volatile as policy-induced demand absorb limited supply; amid a rapid decline in European interest rates during 3Q 2019, Siemens was able to issue corporate bonds with a negative yield. The new issue, as expected, was decidedly oversubscribed. Investors didn’t really have much option, for even 30-year German yields were trading below zero at the time:Former Fed Governor Stein, an outspoken policymaker who mused over unintended costs of low interest rates, described the “reach for yield” effect as central banks’ “recruitment” channel, with willing buy-side firms acting as accomplices of the central bank:The theory we sketch involves a set of "yield-oriented" investors. We assume that these investors allocate their portfolios between short- and long-term Treasury bonds and, in doing so, put some weight not just on expected holding-period returns, but also on current income. This preference for current yield could be due to agency or accounting considerations that lead these investors to care about short-term measures of reported performance. A reduction in short-term nominal rates leads them to rebalance their portfolios toward longer-term bonds in an effort to keep their overall yield from declining too much. This, in turn, creates buying pressure that raises the price of the long-term bonds and hence lowers long-term yields and forward rates.Thus, according to this theory, an easing of monetary policy affects long-term real rates not via the usual expectations channel, but rather via what might be termed a "recruitment" channel--by causing an outward shift in the demand curve of yield-oriented investors, thereby inducing these investors to take on more interest rate risk and to push down term premiums.Central bank’s tools to adjust market incentivesThese market dynamics are well-understood by central bank policymakers, and they would manage both short-term interest rates and long-term interest rates with rate cut (or hikes) and quantitative easing (or tightening), respectively:Short-term policy rate can be “anchored” by imposing the new rate on how much depository institutions (chartered banks, etc) would receive (or have to pay in the scenario of negative rates) by parking excess cash at the central bank. This rate does not always uniformly affect the economy, because many European banks have been reluctant to broadly pass negative rates to their depositors. The Federal Reserve has a similar system, but it is augmented by additional programsQuantitative easing is implemented by creating new money on central banks’ ledgers and use them to transact with financial intermediaries (trading units of investment banks). The more long-term bonds they buy, the less bonds would be available on the secondary market, and longer-term interest rates would fall, assuming markets have not fully price-in the effectForward guidance can be used individually or with quantitative easing. Central banks can pledge future rate cut or future expansion in bond purchases, and markets would immediately price-in probabilities of such future outcomes. This would quickly reduce market volatility and lead to asset price appreciation across asset classes (especially the riskier sectors).Furthermore, central banks can also alter the target of their purchases; in the case of ECB, the program also includes buying corporate bonds; as for Bank of Japan, the program also buys equity ETFs (by mid 2019, Bank of Japan was on track to be the top shareholder of most Japanese stocks). Signals of additional direct risky asset purchases would quickly depress volatility as well.Thus, it is only natural that size of central banks’ balance sheet (where QE purchases are warehoused) are correlated with broader risk sentiment:ConclusionIn conclusion, central banks suppress market volatility by using interest rates to steer market incentives; short-term interest rates can be adjusted by deposit rate or interest on excess reserves (IOER), while longer-term interest rates can be influenced by quantitative easing. Forward guidance can be used in both cases to pledge future policy action and pull forward future market reactions.Finally, central banks can also forgo indirect volatility adjustments via incentives (interest rates) and directly purchase risky assets, such as ECB’s corporate bond QE program, and Bank of Japan’s equity ETF purchases.

No as Helicopter money has been discussed and refined for over 4 decades by the worlds leading economists and policy makers. Australia used Helicopter money in 2009 to successfully end a recession. The key is a credible and intentional implementation that is driven by the required need. The simple fact Helicopter money has and can work to manage a national economy.The quoted wiki page for Helicopter money below does a credible job of describing what Helicopter money is and why it works.Helicopter moneyHelicopter money has been proposed as an alternative to Quantitative Easing (QE) when interest rates are close to zero and the economy remains weak or enters recession. Economists have used the term 'helicopter money' to refer to two very different policies. The first set of policies emphasizes the 'permanent' monetization of budget deficits.[1]The second set of policies involves the central bank making direct transfers to the private sector financed with base money, without the direct involvement of fiscal authorities.[2][3]This has also been called a citizens' dividend or a distribution of future seigniorage.[4]The idea was made popular by the American economist Milton Friedman in 1969 and reinforced in contemporary times by recent Federal Reserve chairman Ben Bernanke.Origins[edit]Although very similar concepts have been previously defended by various people including Major Douglas and the Social Credit Movement, Nobel winning economist Milton Friedman is known to be the one who coined the term 'Helicopter Money' in the now famous paper “The Optimum Quantity of Money”, where he included the following parable:Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.Originally used by Friedman to illustrate the effects of monetary policy on inflation and the costs of holding money, rather than an actual policy proposal, the concept has since then been increasingly discussed by economists as a serious alternative to monetary policy instruments such as quantitative easing. According to its proponents, helicopter money would be a more efficient way to increase aggregate demand, especially in a situation of liquidity trap, when central banks have reached the so-called 'zero lower bound'.Friedman himself refers to financing transfer payments with base money as evidence that monetary policy still has power when conventional policies have failed, in his discussion of the Pigou effect, in his 1968 AER Presidential address.[5]Specifically, Friedman argues that "[the] revival of belief in the potency of money policy ... was strongly fostered among economists by the theoretical developments initiated by Haberler but named for Pigou that pointed out a channel - namely changes in wealth - whereby changes in the real quantity of money can affect aggregate demand even if they do not alter interest rates." Friedman is clear that money must be produced "in other ways" than open-market operations, which - like QE - involve "simply substituting money for other assets without changing total wealth." Friedman references a paper by Gottfried Haberler written in 1952, where Haberler says, "Suppose the quantity of money is increased by tax reductions or government transfer payments, and the resulting deficit is financed by borrowing from the central bank or simply printing money".[6]It is noteworthy in light of more recent debates over the separation between monetary and fiscal policy, that Friedman viewed these policies as evidence of the potency of monetary policy. In the same AER address he is highly critical of the timeliness and efficacy of fiscal measures to stabilise demand.The idea of helicopter drops was revived as a serious policy proposals in the early 2000s by economists considering the lessons from Japan. Ben Bernanke famously delivered a speech on preventing deflation in November 2002 as a Federal Reserve Board governor, where he says that Keynes "once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public." In that speech, Bernanke himself says, "a money-financed tax cut is essentially equivalent to Milton Friedman's famous 'helicopter drop' of money." [7]In a footnote to that speech, Bernanke also references an important paper by Gauti Eggertson which emphasises the importance of a commitment from the central bank to keep the money supply at a higher level in the future.[8]The Irish economist, Eric Lonergan, also argued in 2002 in the Financial Times, that central banks consider cash transfers to households as an alternative to further reductions in interest rates, also on the grounds of financial stability.[9]In 2003, Willem Buiter, then chief economist at the European Bank for Reconstruction and Development, revived the concept of helicopter money in a theoretical paper, arguing that base money is not a liability, which provides a more rigorous case for Friedman and Haberler's Pigouvian intuitions.[10]Starting from 2012, economists have also called this idea "quantitative easing for the people."[11][12]Policy response to the global financial crisis[edit]In December 2008, Eric Lonergan and Martin Wolf suggested in the Financial Times that central banks make cash transfers directly to households, financed with base money, to combat the threat of global deflation.[13][14]From around 2012 onwards, some economists began advocating variants of helicopter drops, including 'QE for the people', and a 'debt jubilee' financed with the monetary base.[11]These proposals reflected a sense that conventional policies, including QE, were failing or having many adverse effects - on either financial stability or the distribution of wealth and income. In 2013, the chairman of the UK's Financial Services Authority (FCA), Adair Turner, who had been considered a serious candidate to succeed Mervyn King as Governor of the Bank of England, argued that deficit monetisation is the fastest way to recover from the financial crisis in a speech.[15]Implementation[edit]Although the original definition of helicopter money describes a situation where central banks distribute cash directly to individuals, more modern use of the term refer to other possibilities, such as granting a universal tax rebate to all households, financed by the central bank. This is for example what Australia did in 2009.[16]The use of tax rebates explain why some consider helicopter money as a fiscal stimulus as opposed to a monetary policy tool.Under a strict definition, where helicopter drops are simply transfers from the central bank to the private sector financed with base money a number of economists have argued that they are already occurring.[17]In 2016, the European Central Bank (ECB) launched aTLTRO programme lending money to banks at negative interest rates, which amounts to a transfer to banks. Also the use of differential interest rates on tiered reserves to support commercial banks' profitability in the face of negative interest rates, opens up another source of helicopter drop - albeit intermediated by banks.[18]In the case of the Eurozone, the use of TLTROs is believed by some economists to provide a legal and administratively tractable means of introducing transfers to households. These could be structured via zero coupon, perpetual loans, which all European adult citizens would be eligible to receive. Eligible commercial banks could administer the programme.[19]Controversies[edit]Many economists would argue that helicopter money, in the form of cash transfers to households, should not be seen as a substitute for fiscal policy. Given the government's borrowing costs are extremely low at close to zero interest rates, conventional fiscal stimulus, though tax cuts and infrastructure spending should work. From this perspective, helicopter money is really an insurance policy against failure of fiscal policy for political, legal or institutional reasons.[20]Difference with Quantitative Easing[edit]Quantitative easing (QE), like helicopter money, involves money creation by central banks. Some economists argue that helicopter is different because the money created would be 'permanent' - it is irreversible QE. Others argue that it is really no different to an expansion of fiscal policy combined with increased QE.In contrast, financing transfers to the private sector by creating money has a different effect on the central bank's balance sheet than conventional QE. Under QE, central banks create reserves by purchasing bonds or other financial assets. There is an 'asset swap'. Under Helicopter money, central banks create money and distribute it right away, without tangible counterparts (such as assets) in their balance sheet's liabilities.Implications for central bank balance sheets[edit]One of the main concerns with transfers from the central bank directly to the private sector, is that in contrast to conventional open-market operations the central bank does not have an asset corresponding to the base money created. This has implications for the measured equity of the central bank, because base money is typically treated as a liability, but it could also constrain the central bank's ability to set interest rates in the future. The accounting treatment of central banks' balance sheets is controversial.[21]Most economists now recognise that the 'capital' of the central bank is not really important.[22]What matters is can the expansion of base money be reversed in the future, or are there other means to raise interest rates. Various options have been proposed. Oxford professor, Simon Wren-Lewis has suggested that the government pre-commit to providing the Bank of England with bonds, if needed. The European Central Bank can in fact mandate an increase in its capital, and the introduction of tiered reserves and interest on reserves gives central banks an array of tools to protect their own net income and the demand for reserves.[23]Supporters[edit]Former chairman of the Federal Reserve Ben Bernanke is known to be one of the proponents of helicopter money when he gave a speech in November 2002 arguing, in the case of Japan, that "a money-financed tax cut is essentially equivalent to Milton Friedman's famous 'helicopter drop' of money."[24]In April 2016, Ben Bernanke wrote a blog post arguing that "such programs may be the best available alternative. It would be premature to rule them out."[25]Citigroup Chief Economist Willem Buiter is also known to be a prominent advocate of the concept.[26]Other proponents include Financial Times' Chief Commentator Martin Wolf,[27]Oxford economists John Muellbauer,[12] and Simon Wren-Lewis, Economist Steve Keen, the political economist Mark Blyth of Brown University, Berkeley economics professor and former Treasury advisor, Brad DeLong,[28] UCLA economics professor, Roger Farmer, American macro hedge fund manager Ray Dalio, Irish economist and Fund manager Eric Lonergan,[29]Anatole Kaletsky.[30]Bill Gross, Portfolio Manager of the Janus Global Unconstrained Bond Fund also argues for the implementation of a basic income, funded by helicopter drops.[31][32]Critics[edit]Inflationary effect[edit]In the past the idea had been dismissed because it was thought that it would inevitably lead to hyperinflation.[citation needed]Another range of concerns include the fact that helicopter money would undermine trust in the currency. This concern was particularly voiced by German Economist (and former Chief Economist at the ECB) Otmar Issing in a paper written in 2014.[33]Later in 2016, he declared in an interview: "I think the whole idea of the helicopter money is downright devastating. For this is nothing more than a declaration of bankruptcy of the monetary policy"[34]Legality[edit]Other critics claim helicopter money would be outside of the mandate of central banks, because it is in effect a fiscal policy, not a monetary one.[citation needed]Accountability issues[edit]Bundesbank president Jens Weidmann also voiced opposition against helicopter money, arguing it would "tear gaping holes in central bank balance sheets. Ultimately, it would be down to the euro-area countries, and thus the taxpayer, to shoulder the costs because central banks would be unprofitable for quite some time."[35]In the Eurozone[edit]On March 10, 2016, the idea became increasingly popular in Europe after Mario Draghi the President of the European Central Bank, said in a press conference that he found the concept 'very interesting'.[19][36]This statement was followed by another statement from the ECB's Peter Praet who declared:[37]"Yes, all central banks can do it. You can issue currency and you distribute it to people. That’s helicopter money. Helicopter money is giving to the people part of the net present value of your future seigniorage, the profit you make on the future banknotes. The question is, if and when is it opportune to make recourse to that sort of instrument which is really an extreme sort of instrument."In 2015, a European campaign called "Quantitative Easing for People" was launched[38] and is effectively promoting the concept of Helicopter Money, along with other proposals for 'Green QE' and 'Strategic QE' which are other types of monetary financing operations by central banks involving public investment programmes. The campaign is currently supported by 20 organisations across Europe and more than 100 economists.[39]On June 17th 2016, 18 Members of the European Parliament (including Philippe Lamberts, Paul Tang and Fabio de Masi) signed an open letter[40] calling on the ECB to "provide evidence-based analysis of the potential effects of the alternative proposals mentioned above, and to clarify under which conditions their implementation would be legal." If it doesn't consider alternatives to QE, MEPs fear the ECB would leave itself “unprepared for a deterioration in economic conditions."[41]In Japan[edit]In a meeting with Japanese president Shinzo Abe and Bank of Japan's Haruhiko Kuroda in July 2016 it was widely reported[citation needed] that former Federal Reserve chairman Ben Bernanke advised the policy of monetizing more government debt created to fund infrastructure projects, ostensibly as a way to drop "Helicopter Money" on Japan to stimulate the economy and halt deflation in Japan. Financial markets began to front-run this stimulus effort days before it was announced when accounts of Bernanke's visit to Japan were first reported.

Here are some of the most creative financial fraud pulled off in recent times.Adelphia CommunicationsFounding family collected $3.1 billion in off-balance-sheet loans backed bycompany. Earnings were overstated by capitalization of expenses and hidingdebt.AOL Time WarnerBarter deals and advertisements sold on behalf of others were recorded asrevenue to keep its growth rate high. Sales were also boosted via “roundtrip”deals with advertisers and suppliers.Bristol-Myers SquibbInflated 2001 revenues by $1.5 billion by “channel stuffing,” forcing orgiving inappropriate incentives to wholesalers to accept more inventory thanthey needed, to enable company to meet its 2001 sales targets.CMS EnergyExecuted “round-trip (buy and sell)” trades to artificially boost energy trading volume and revenues.EnronTops the list of biggest US corporate collapses. Company boosted profitsand hid debts totalling over $1 billion over several years by improperlyusing partnerships. It also manipulated the Texas power and Californiaenergy markets and bribed foreign governments to win contracts abroad.Qwest CommunicationsInflated revenues using network capacity “swaps” and improper accountingfor long-term deals. The SEC is investigating whether the company wasaware of his actions, and possible improper use of company funds andrelated-party transactions, as well as improper merger accounting practices.WorldComTo cover losses, top executives overstated earnings by capitalizing $9billion of telecom operating expenses and thus overstating profits and assetsover five quarters beginning 2001. Founder Bernard Ebbers received $400million in off-the-books loans.XeroxOverstated earnings for five years, boosting income by $1.5 billion, bymisapplication of various accounting rules.Adecco International(Switzerland)The world’s largest international employment services company, it was formed inSwitzerland in 1996. The company confirmed existence of weakness in internal control systems and accounting of Adecco staffing operations in certain countries, especially in the U.S. Manipulation involved IT system security, reconciliation of payroll bank accounts, accounts receivable and documentation in revenue recognition. These irregularities forced an indefinite delay in the company’s profit figures, which eventually caused a significant decline in the company’s stock prices in Switzerland and the U.S.; and intervention of the SEC.Ahold NV(Tbe Netherlands)Company is the world’s third largest food retailer and food services group after Wal-Mart and Carrefour. Ahold U.S.A. is the regional office in the U.S. On July 27, 2004,the Dutch parent company announced that the SEC brought charges against four former executives of its U.S. food services operations relating to accounting fraud and conspiracy. U.S. executives were accused by the SEC of orchestrating an accounting fraud that battered the food distributor and its Dutch parent company by inflating the company's earnings by roughly $800 million over a two-year period. The invented cost savings technique recorded fictitious rebates know as “promotional allowances” that never existed, to give the appearance of cost savings, which in turn boosted profits.Executives also faced charges of filing false documents with the SEC.Asea Brown Boveri(Sweden)The Swedish-Swiss firm Asea Brown Boveri was seen as “a paradigm of Europeancapitalism at its best.” In 2002, it suddenly turned into a “Swedish version of Enron.”Company discovered that after CEO Percy Barnevik resigned, he secretly cashed in a $148 million severance package for himself and his successor, Goran Lindahl.Elan (Ireland)A pharmaceutical company listed on Nasdaq. In January 2004, company admittedimproperly using off-balance-sheet vehicles, placing it under SEC investigation. It also suffered a setback on a drug developed to treat Alzheimer's disease. The CFO and Chairman left the company, but were retained as consultants.Global Crossing Ltd.(Bermuda)One of the hottest telecom companies and only five years old, it engaged in “networkcapacity swapping activities” with other carriers to inflate revenues. It then shreddeddocuments related to these accounting practices.Nortel Networks Corp.(Canada)The Canadian company, headquartered in Ontario, is the largest telecom equipmentmaker and provider in North America. Company remained tied up in a long SEC review of its financial results for 2001-2003, and the first-half of 2004, due to materialweaknesses in internal controls. Several top executives were fired as securitiesregulators performed investigations. In 2004, the company delayed restating itsfinancial results for the third time, as it underwent investigations. Former top executives are suspected of committing accounting irregularities, aimed at inflating earnings,which helped make the company the largest telecom equipment supplier. Under investigation is the appropriateness of the company’s reserve accounts, whether there was an intentional inflation of reserves, which would be released to earnings in later years and the company’s questionable bonus program.Parmalat (Italy)Parmalat, a global food and dairy conglomerate, is Italy’s eighth-largest company and the No. 3 provider of dairy (and cookie-maker) in the US. In Dec. 2003, a bank account with Bank of America holding 3.9 billion was revealed not to exist. More than 50 individuals were investigated. They were suspected of committing fraud and falsefinancial accounting, which contributed to the company’s bankruptcy. The companyacknowledged a multi-billion-dollar gap in its balance sheet accounts. Parmalat’s jailed founder estimated the size of deficiency in its finances at $10 billion, and admitted that he shifted $620 million from the company’s coffers to unprofitable travel businesses that were controlled by his family.Royal Dutch/ShellGroupShell, the third largest oil company, is a global group of energy and petrochemicalcompanies, operating in more than 145 countries. In July 2004, the company reported paying a total of $150 million in fines to the SEC and its British counterpart, the Financial Services Authority, following investigations into the company’soverstatement of its oil and gas reserves. Since Jan. 2004, the company was subject to intense criticism and scrutiny when executives made the first of four restatementsrelated to its oil and gas reserves. Shell agreed with Britain’s FSA’s findings that itabused the provisions of the FSM Act. It paid 17 million pounds in fines, the largest the regulator has ever levied. Shell also agreed to an SEC order that finds that the company violated antifraud reporting, record-keeping and internal control provisions of US federal securities laws. The company also was investigated by the US Department of Justice and by Netherlands regulators.Vivendi Universal(France)The SEC accused this Paris-based company of misleading investors in its news releases and financial statements. Management was engaged in misconduct trying to meet earnings goals and intentionally violated certain accounting principles to inflate profits. For 18 months, senior executives refused to acknowledge the company’s liquidity problems and earnings shortfalls. Its former CEO transformed the company from a water utility into a film and media empire but saddled it with huge debts (33 billion), which were difficult to pay. On Dec. 23, 2003, the company agreed to pay $50 million to settle accusations by the SEC and it did not have to revise any financial statements.