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!
Wait, what policy would you not overturn? And why? This post is confusing.
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?
“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.
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.
I am curious, how can I find an accurate list of the major shareholders of the Federal Reserve? Thanks!
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.
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?
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