Fed Salaries

This New York Times article is interesting. The author argues that the Fed now looks like a hedge fund, but Fed officials are not paid like hedge fund managers, and it goes from there.

This part is not quite on track:

The main difference between a hedge fund and the Fed is that the Fed effectively creates its own money, so it doesn’t have any borrowing costs, meaning yet more profits.

This is effectively the "creating money out of thin air" argument, which many people are confused about, including Sarah Palin. All financial entities create liabilities out of nothing, and buy assets. That is certainly not a distinguishing feature of the Fed. What makes the Fed different is its monopoly on a particular kind of circulating liability - currency. Otherwise, the Fed is a financial intermediary which issues liabilities - mainly currency and interest-bearing reserves - and holds assets. Why the author of the NYT article thinks the Fed looks like a hedge fund is that it intermediates across maturities, and much more so recently. The average duration of the assets in the Fed's portfolio has lengthened considerably since the financial crisis. Intermediating across maturities is considered risky, just as operating a hedge fund is risky. However, in the case of the Fed, the risk is borne by taxpayers. If short-term interest rates increase, then the Fed's profits fall, so the Fed has less to hand over to the Treasury, which has to make up the difference.

There are also some things in the NYT article about Fed salaries, which are certainly low relative to hedge fund salaries. Further, Fed salaries of top officials in the Fed can be lower than academic salaries. Ben Bernanke was probably earning more at Princeton than he is in Washington.

Here's a useful point:

Even so, people in private industry argue that you have to pay top dollar to get the best people and that the market demands it.

We even see this argument being made by the federal government. The regulator who oversees Fannie Mae and Freddie Mac, Edward J. DeMarco, has asserted that he had to pay the top six executives at Fannie and Freddie more than $35 million in combined pay over 2009 and 2010. He said that to do otherwise would be “irresponsible” because it would fail to retain and attract the appropriate people. Yet, the Fannie and Freddie executives are arguably doing even less sophisticated work than the Federal Reserve employees do.

Why these executives should be paid more than Mr. Bernanke and his colleagues defies reason. This is government work now.

Indeed.