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In case you were sleeping
In December, the Fed had $775B worth of Treasury securities. That stock will soon have dwindled to $300B, give or take. The difference, about $475B, represents an investment by the central bank in risky assets of the US financial sector. $475B is an extraordinary sum of money. It is as if the Fed borrowed more than $1500 from every man, woman, and child in the United States, and invested that money on our behalf in Wall Street banks that private financiers were afraid to touch. For bearing all this risk, if things work out well, taxpayers will earn about what they would have earned investing in safe government bonds.
...If the Fed were to blow through the rest of its current stock of Treasuries, it would have invested more than $2500 for every man, woman, and child in America. Public investment in the financial sector would have exceeded the direct costs to date of the Iraq War by a wide margin.
Here is much more; the Interfluidity post focuses in fact on the implications of paying interest on reserves. The sad thing is: if I had my finger on the button, I would not have reversed these loans. Ouch!
Posted by Tyler Cowen on May 12, 2008 at 07:28 AM in Economics | Permalink
Comments
Wait, what policy would you not overturn? And why? This post is confusing. :-(
Posted by: Angry at the Margin at May 12, 2008 7:55:03 AM
The sad thing is how the American people are just sitting there and taking it. The worst government policy of the 2000s is not the war in Iraq - it's the redistribution of wealth in favor of the wealthy and the financial sector.
Posted by: Dirk at May 12, 2008 8:39:09 AM
Wait a second ... isn't it a little unfair to calculate the rate of return on the bailout without trying to come up with some sort of estimate for how much value their is in avoiding a financial breakdown? What if the bailout caused a 60% reduction in the possibility of a deep-seated recession over the next 5 years? Wouldn't the value of that be some astronomical number?
Posted by: khjjk at May 12, 2008 8:46:08 AM
I am in favor of an interest rate corridor as the author called it.
The yield curve is us, it is the spectral output of our production functions, we determine that rate by our policies and out economic plans. The fed has little to say about the result and must follow out lead.
I would prefer that the fed get to an interest rate corridor with a more direct competitive monetary system. But if I have to choose the kind of semi-monopoly we have, I think an interest rate corridor is better than fractional reserves, and we pay in any event.
The advantage of an interest rate corridor is that our economic planning and execution results in a yield we measure, and the reserves we keep are the independent variable.
Posted by: Matt at May 12, 2008 9:00:20 AM
"For bearing all this risk, if things work out well, taxpayers will earn about what they would have earned investing in safe government bonds."
No problem. Just leverage it up, say 30 to 1. Sell the bonds to at high rates to third world countries, then when they go bust they'll never collect.
The problem with this debacle and Iraq and is that there is no real risk of a meltdown and Iraq was never a threat. So, including that "cost avoidance benefit" in the calculations is not accurate.
We already have a housing recession. How exactly would this have caused a broader recession? Counter-party risk, right? Well, I say let 'em roll. Maybe that's because I'm not personally over-leveraged and financially secure, so I'm a little more open to some policy risk.
Posted by: Andrew at May 12, 2008 10:51:02 AM
Ben Bernanke is my favorite hedge fund
manager. Can he manage my retirement account?
Oh wait, he is already doing it.
Posted by: sa at May 12, 2008 11:00:49 AM
Some things can never be precisely quantified, but comparing the long term costs of the so called Fed bailout with the war in Iraq doesn't require much precision. Iraq will cost in the trillions, and the Fed sterilization will cost a fraction of the $500 billion, if not earn a modest profit.
There are a lot of things that can be debated regarding the Fed's actions, but with Iraq, its just a matter of trying to figure out the least harmful way to cut losses, which are enormous.
Posted by: Ziggurat at May 12, 2008 12:29:25 PM
Wait a second ... isn't it a little unfair to calculate the rate of return on the bailout without trying to come up with some sort of estimate for how much value their is in avoiding a financial breakdown?
And isn't unfair to estimate how much value there is in avoiding a financial breakdown without some sort of estimate for how much *destruction* of value there is in sending the message that no matter what you do as a large financial institution, you will get bailed out?
Think about it.
Posted by: Person at May 12, 2008 2:12:25 PM
I am curious, how can I find an accurate list of the major shareholders of the Federal Reserve? Thanks!
Posted by: Jake at May 12, 2008 2:14:09 PM
Disingenuous FUD. Commentor khjjk hits it on the nail.
Posted by: Sahil at May 12, 2008 4:31:19 PM
Textbook monetary theory tells us that it doesn't matter what assets the
Fed holds. All that matters, according to the mainstream view, is that
the supply of money not increase relative to money demand. That's one of many
reasons to reject textbook monetary theory and start looking at BOTH
sides of the Fed's balance sheet.
Posted by: Mike Sproul at May 12, 2008 6:30:55 PM
Sahil: I think I tore that nail right out. Did you read my comment?
Mike_Sproul: It certainly matters if the fed's assets -- these junky mortgage-backed securities/collateralized debt obligations -- turn out to be worthless. Can you at least admit that *that* would bring in some inflation?
Btw, it's always perplexed me why you keep bringing up the Real Bills Doctrine, even as you admit that central banks *aren't* increasing their assets in step with the new money...
Posted by: Person at May 12, 2008 6:35:06 PM
I'm not a Fed expert, so here's a question.
Does the Fed always collect the interest and principal on the Treasuries it holds? Will it be treating these new debt assets the same way? If there is a difference in treatment will this be deflationary or inflationary?
Posted by: Andrew at May 13, 2008 6:23:47 AM
