8 ms·

I've seen this used as a pro-bailout talking point: "the government made a large profit off of the institutions it bailed out." I haven't had the time to evalua

I've seen this used as a pro-bailout talking point: "the government made a large profit off of the institutions it bailed out." I haven't had the time to evaluate it. Is it credible? If so, would it change your view? Or are the valuations non-GAAP or otherwise not transferrable at the same value?

joe_the_user 9y ago
It doesn't matter if the Fed makes a profit. The Fed can print money - the Fed's job is stabilizing the market and the economy, not making money (which it can literally do at a touch of a button). And as a note, the Fed has stabilized markets very well for the last eight years - at the price of speculative distortions to the real economy.
- wallace_f 9y ago
  >The Fed has stabilized markets very well for the last eight years It's very hard to really know this. We can't experiment, and we are a really long way off from accurately simulating the real world mathematically. The most academically accepted hardcover on the Great Depression (A Monetary History...) stated the Fed was most responsible for it. The thing about the Fed is that money represents real goods and services. That's real product of labor that does something useful for someone else. The Fed, at face value, tells us it can pull some levers and create an alchemy where it produces more real value in the economy. That is called magic, or economics, and it doesn't really work. Their actual role is to serve as a nanny state subsidy institution for the big banking empires. There is the Keynesian argument that the Fed needs to mamage aggregate demand, but there's no way to test if that's really true. Personally, I'd much rather take a money supply controlled by a k-percent rule, get rid of the Fed, and make all those "smartest guys in the room" working in finance go do something useful instead.
  - nhaehnle 9y ago
    > It's very hard to really know this. We can't experiment, and we are a really long way off from accurately simulating the real world mathematically. Agreed. > The Fed, at face value, tells us it can pull some levers and create an alchemy where it produces more real value in the economy. Strawman. Nobody relevant actually claims that. What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson. > There is the Keynesian argument that the Fed needs to mamage aggregate demand That's monetarism, not Keynesianism -- the main message of Keynes is for the government to manage aggregate demand via its fiscal policy and budget. Though I grant you that for whatever reason, there's substantial overlap when it comes to what individuals believe. > Personally, I'd much rather take a money supply controlled by a k-percent rule, get rid of the Fed, and make all those "smartest guys in the room" working in finance go do something useful instead. The funny part about statements like this is that the money supply that matters for the real economy is managed by commercial banks anyway. And you do need an institution that acts as a firewall to prevent temporary liquidity issues from turning into full insolvencies via self-fulfilling prophecy (aka bank runs). That institution happens to be the Fed in the US. You can argue about the more political, monetary policy side of things, but having that firewall is really, really critical. Totally agree on the "doing something useful instead" part, though :)
    - rsync 9y ago
      "What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson." I don't know that they have learned that lesson .. My understanding is that the failure of institutional lending in response to QE is still considered "a mystery" by mainstream economists, etc. I personally think that banks are in the same position Apple is in with their x00 Billion dollars hoarded overseas ... they are terrified that the system could come flying apart at any moment and are therefore sitting on cash or reserve assets to protect against this.
      - gozur88 9y ago
        >My understanding is that the failure of institutional lending in response to QE is still considered "a mystery" by mainstream economists, etc. As the Austrian school economists pointed out during the crisis, you can print money, but you can't print borrowers - the banks need qualified borrowers to lend to, and in the middle of a financial crisis there aren't as many. Of course the fed can't allow cascading bank failures, but once the banking system is out of danger pouring in more money won't do much.
    - wallace_f 9y ago
      There is a lot here to discuss and only so much time and space. >That's monetarism, not Keynesianism -- the main message of Keynes is for the government to manage aggregate demand via its fiscal policy and budget. Though I grant you that for whatever reason, there's substantial overlap when it comes to what individuals believe. You are right to say that Keynesians and Keynes himself emphasized fiscal policy, but afaik the traditional monetarist view is actually not to engage in discretionary monetary policy at all. Managing AD was Keynes' whole big deal in his General Theory. Before him the groupthink in academic economics was all circled around labor supply and labor price being out of equillibrium with the market. Then Friedman came along to establish monerarism. He wanted monetary policy along the lines of a k percent rule, and not to try to manage AD (discretionary MP). So no, it's not monerarist, it is in dact Keynesian. >And you do need an institution that acts as a firewall to prevent temporary liquidity issues from turning into full insolvencies via self-fulfilling prophecy (aka bank runs). Economists take this as gospel, but I have never seen evidence of this. I have seen evidence it is not true. I'm with Friedman, fractional reserve banking doesn't create value, just inflation and risk. >Strawman. Nobody relevant actually claims that. What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson. We really disagree here. I even think your comment is strangely tautological, don't you think? You said there is no one who thinks the Fed is trying a game of pulling on some levers and creating more value in the economy, but then you went on to describe the Keynesian argument for how the Fed pulls some levers to magically create value (by stimulating AD). The argument for QE and fiscal policy is the same Keynesian one: by creating easy money, they basically create more AD, which puts to work unemployed, unused resources. So Keynesians argue, those unused resources are now put to work. But what work are they doing? Is it useful work? Are banks just going to hoard cash, and why flood so much easy money into the banks, anyways? I think it's really more simple than that. The Fed is just Wall St's nice insurance policy, and economists are just clever priests who justify the actions of the ruling plutocratic class.
  - neilwilson 9y ago
    "The thing about the Fed is that money represents real goods and services. " It doesn't and never has. There has never been a one to one match between money and stuff. Money is really the emodiment of a human promise, and promises don't always get fulfilled. The one promise that does, is if you don't pony up the correct currency to pay your taxes you go to jail. And that is what drives a currency at root.
    - 0x445442 9y ago
      "There has never been a one to one match between money and stuff." Depends on how you define money. In the case of hard assets like gold there is a one to one match because gold represents energy already spent.
      - cirgue 9y ago
        People want gold not because it took energy to mine, but because other people also want gold. Gold is like any other currency system, except that the process that controls supply is basically stochastic (and there is a small industrial demand for the commodity itself, but this is negligible).
      - smaddox 9y ago
        If you define money as hard assets, you don't understand money. I suggest reading "Debt: the 5000 first years".
    - wallace_f 9y ago
      No, sorry. In every econ textbook exists the academic definition of money: store of value, unit of measure, medium of exchange. What is it an exchange of? What is it storing? What is it measuring? In other words, we use it to help us with exchanging, storing, and measuring real value. This way you don't have to exchange some lines of code for a cow, or store all your wealth in cheese. Maybe you are thinking that I am saying something about money not being a fiat currency, which wasn't the point here.
- rtpg 9y ago
  I think it's more to counter the idea that the bailouts cost money. If bailouts are effectively revenue-neutral there's a whole line of arguments against intervention that disappear. Though of course, like you said, there are distortions
- dmichulke 9y ago
  > the Fed has stabilized markets very well ... > ... at the price of speculative distortions That's really all there is to say and the main argument against Central Banks. PS: A nice analogy would be: They got rid of the hens by burying them in eggs.
- phkahler 9y ago
  >> And as a note, the Fed has stabilized markets very well for the last eight years That's debatable. I'd say they prevented some much needed corrections from happening. The housing bubble is back - prices have recovered to 2006 levels or higher. People are less able to afford things at those prices. Also, home prices vary inversely with interest rates and rates are still near their lows with really only one direction to go.
- santoshalper 9y ago
  The Fed can't print money without devaluing the money already in print. The federal government can make money off a transaction and use it is as additional revenue. Not really arguing "should" here, nor am I arguing that the supposed profits were real. Just pointing out a big difference between the federal government generating revenue and the federal reserve printing more money. If this were not true, then why would would have taxes? The Fed could just print money any time the government needed to spend it.
  - neilwilson 9y ago
    "The Fed can't print money without devaluing the money already in print. " Yes it can. Banks do that all the time. Money grows and shrinks to ensure all the transactions that are worth completing gets completed. It's a dynamic system. "If this were not true, then why would would have taxes?" You have taxes, so you have to create output and hand it over for the currency the taxes are denominated in. That's how output is transferred to the public sector. The public sector then creates the money necessary for you (and everybody else transitively) to pay those tax demands. When government spends it will create the taxation that balances that spend to the penny for any positive transaction. It's a simple geometric progression. Unless somebody in the chain decides not to spend all their income. We call that saving. The maths is straightforward... https://medium.com/modern-money-matters/the-function-of-government-spending-9123e71737c1 https://medium.com/modern-money-matters/the-function-of-gove...
    - dredmorbius 9y ago
      This answer ... misses some critical points, and skews pedantic. The Fed cannot net print money without devaluing what's in circulation. Inflation is literally the fact of more money chasing fewer goods. More money => more inflation. The question then becomes "how might money leave the system?" There are several ways. Taxation, if you subscribe to MMT, is money leaving the system. (Government spending is, as with Fed policy, creating money.) Increasing or decreasing the overall amount of consumer and business debt increases or decreases the money supply. Increasing or decreasing the overall value of financial assets -- stocks, bonds, derivatives, real estate, commodities -- by increasing or decreasing collateral and balance sheets, increases and decreases the money supply. Money going into savings, particularly off-shore accounts (where it's not otherwise available to the financial system) is effectively withdrawn, through the mechanism of reducing the velocity of money. Other factors effecting money velocity do likewise. (This is, essentially, how often a given dollar is transacted.) The more accurate answer would be that: "The Fed can't print money without devaluing the money already in circulations, unless there are offsetting withdrawals to they money supply".
wahern 9y ago
The Federal Reserve != the U.S. Treasury The U.S. Treasury turned a profit on TARP. TARP debits and credits work just like any other government expenditure. A lot of pundits lump TARP with the Federal Reserve's quantitative easing (QE) program. QE was a program where the Federal Reserve itself purchased assets (mortgage securities, bonds, etc). The assets to purchase these were much more akin to printing money, I suppose. And this program was much larger than TARP in dollar value. This asset purchase program has turned a profit for the government because dividends, resales, etc, have exceeded the outlays. The Federal Reserve must, by statute, transfer such profits to the Treasury. I say "I suppose" because _anybody_ can print money. For example, I can give you an IOU in exchange for gold bars. You can then put that IOU on your books as an asset, which in turn allows you to borrow against it, perhaps getting even more gold bars of your own if you can convince others the IOU was worth more than you paid. We got into this mess because the investment banks were, conceptually, printing money by assembling mortgages into securities and then reselling or borrowing against the securities for a price (in retrospect) far greater than the long-term return of the underlying assets. Derivatives markets then multiplied the differential many fold. In all these cases nobody actually prints currency notes; nonetheless, the total dollar value of assets on the books has increased. I don't think it's very useful to equivocate all these financial machinations. Papering over them is precisely how we got into this mess.[1] And while I guess it's fair to say that the Federal Reserve can print money, the implications of that are neither clear nor inevitable. The Federal Reserve has a legal mandate to keep inflation rates low. Often people are trying to allude to the specter of hyperinflation. But it's worth remembering that the hyperinflation in Weimar Germany was very much _intentional_. The Germans pursued hyperinflation to spite the WWI allies, as it allowed them for a time to minimize the effect of war reparations on their domestic economy (if they printed money fast enough, they could purchase foreign currency before the official exchange rates reacted[2]). Eventually it became something that they were, politically, unable to roll back. Hyperinflation in Zimbabwe was a self-fulfilling prophecy, and a symptom of a failed state, similar to the tail end of the Weimar Republic. Note that in both cases these events were fundamentally driven by politics. If the Federal Reserve ever got itself into a situation where it couldn't stop pumping assets into the system, it's almost certain that it would have been preceded by Congress first changing the laws. Currently the Federal Reserve is substantially (though not completely) independent from political forces. In any event, if the Federal Reserve ended up in that sort of situation it would undoubtedly be symptomatic of much larger problems in the country. [1] Thinking they're unnecessary and could be done away with is naive. The book-value of assets will always involve guess work because it requires people to quantify the likelihood of future events based on imperfect information about the present. And there will always be mechanisms that compound errors in this guess work. The way you control systemic risk is through diversity and uncoupling. [2] Ironically, the gold standard made this arbitrage both feasible--it took longer for individual exchange rates to react--and was a central cause--the gold standard caused severe deflation across Europe. Deflation sucks for debtors, and war reparations made Weimar Germany the biggest debtor of them all. Why severe deflation across Europe? It coincided with the apex of the industrial revolution in the U.S. The U.S. was pumping out radios and refrigerators like crazy, and Europeans were buying them up like hot cakes. Because everybody was on the gold standard, and because every central banker refused to readjust their exchange rate with gold, increasing amounts of gold in all the central banks in Europe were credited to the U.S. account balance. That meant less gold per unit of national currency, which meant deflation. The way inflation in the U.S. occurred is that Europeans began purchasing U.S. securities, because each unit of domestic currency purchased increasing amount of American dollars. Likewise, repatriated profits were dumped into the stock market. This is how the gold standard directly precipitated the stock market crash of 1929. Something similar is happening between China and the U.S., except that the U.S. dollar is a floating currency and China is attempting to avoid domestic inflation by preventing the repatriation of assets (that is, China effectively forces producers to invest their profits in U.S. securities). The end result is that deflation is blunted in the U.S., but it's a huge reason why despite QE we haven't seen much inflation.
mathattack 9y ago
It's true. But private investors made much bigger profits. If the Fed struck Warren Buffet's deal, the national debt would be smaller.
bogomipz 9y ago
And let's not forget that the banks made lots of money from the Fed bailout. The Fed paid banks interest on money that the Fed gave them for lending purposes. Instead of lending out the money they were given they let the money just sit. And the Fed paid them interest on that. Essentially the banks made money just for accepting the bailout. See: http://www.zerohedge.com/news/2017-04-18/free-money-fed-pays-banks-22-billion-not-lend http://www.zerohedge.com/news/2017-04-18/free-money-fed-pays... and https://www.washingtonpost.com/news/wonk/wp/2015/12/21/why-the-fed-is-paying-wall-street-banks-billions-of-dollars/ https://www.washingtonpost.com/news/wonk/wp/2015/12/21/why-t...
arthurcolle 9y ago
it is true, but there was a large social cost and broader economic cost that is not properly conveyed in the statement which makes it quite disingenuous

joe_the_user 9y ago

It doesn't matter if the Fed makes a profit. The Fed can print money - the Fed's job is stabilizing the market and the economy, not making money (which it can literally do at a touch of a button). And as a note, the Fed has stabilized markets very well for the last eight years - at the price of speculative distortions to the real economy.

wallace_f 9y ago
>The Fed has stabilized markets very well for the last eight years It's very hard to really know this. We can't experiment, and we are a really long way off from accurately simulating the real world mathematically. The most academically accepted hardcover on the Great Depression (A Monetary History...) stated the Fed was most responsible for it. The thing about the Fed is that money represents real goods and services. That's real product of labor that does something useful for someone else. The Fed, at face value, tells us it can pull some levers and create an alchemy where it produces more real value in the economy. That is called magic, or economics, and it doesn't really work. Their actual role is to serve as a nanny state subsidy institution for the big banking empires. There is the Keynesian argument that the Fed needs to mamage aggregate demand, but there's no way to test if that's really true. Personally, I'd much rather take a money supply controlled by a k-percent rule, get rid of the Fed, and make all those "smartest guys in the room" working in finance go do something useful instead.
- nhaehnle 9y ago
  > It's very hard to really know this. We can't experiment, and we are a really long way off from accurately simulating the real world mathematically. Agreed. > The Fed, at face value, tells us it can pull some levers and create an alchemy where it produces more real value in the economy. Strawman. Nobody relevant actually claims that. What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson. > There is the Keynesian argument that the Fed needs to mamage aggregate demand That's monetarism, not Keynesianism -- the main message of Keynes is for the government to manage aggregate demand via its fiscal policy and budget. Though I grant you that for whatever reason, there's substantial overlap when it comes to what individuals believe. > Personally, I'd much rather take a money supply controlled by a k-percent rule, get rid of the Fed, and make all those "smartest guys in the room" working in finance go do something useful instead. The funny part about statements like this is that the money supply that matters for the real economy is managed by commercial banks anyway. And you do need an institution that acts as a firewall to prevent temporary liquidity issues from turning into full insolvencies via self-fulfilling prophecy (aka bank runs). That institution happens to be the Fed in the US. You can argue about the more political, monetary policy side of things, but having that firewall is really, really critical. Totally agree on the "doing something useful instead" part, though :)
  - rsync 9y ago
    "What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson." I don't know that they have learned that lesson .. My understanding is that the failure of institutional lending in response to QE is still considered "a mystery" by mainstream economists, etc. I personally think that banks are in the same position Apple is in with their x00 Billion dollars hoarded overseas ... they are terrified that the system could come flying apart at any moment and are therefore sitting on cash or reserve assets to protect against this.
    - gozur88 9y ago
      >My understanding is that the failure of institutional lending in response to QE is still considered "a mystery" by mainstream economists, etc. As the Austrian school economists pointed out during the crisis, you can print money, but you can't print borrowers - the banks need qualified borrowers to lend to, and in the middle of a financial crisis there aren't as many. Of course the fed can't allow cascading bank failures, but once the banking system is out of danger pouring in more money won't do much.
  - wallace_f 9y ago
    There is a lot here to discuss and only so much time and space. >That's monetarism, not Keynesianism -- the main message of Keynes is for the government to manage aggregate demand via its fiscal policy and budget. Though I grant you that for whatever reason, there's substantial overlap when it comes to what individuals believe. You are right to say that Keynesians and Keynes himself emphasized fiscal policy, but afaik the traditional monetarist view is actually not to engage in discretionary monetary policy at all. Managing AD was Keynes' whole big deal in his General Theory. Before him the groupthink in academic economics was all circled around labor supply and labor price being out of equillibrium with the market. Then Friedman came along to establish monerarism. He wanted monetary policy along the lines of a k percent rule, and not to try to manage AD (discretionary MP). So no, it's not monerarist, it is in dact Keynesian. >And you do need an institution that acts as a firewall to prevent temporary liquidity issues from turning into full insolvencies via self-fulfilling prophecy (aka bank runs). Economists take this as gospel, but I have never seen evidence of this. I have seen evidence it is not true. I'm with Friedman, fractional reserve banking doesn't create value, just inflation and risk. >Strawman. Nobody relevant actually claims that. What many claimed was that QE would increase lending in the real economy, which would obviously boost the economy (because more real economy lending = more spending = more demand = more economic activity). That hasn't really happened, and I hope economists learned the lesson. We really disagree here. I even think your comment is strangely tautological, don't you think? You said there is no one who thinks the Fed is trying a game of pulling on some levers and creating more value in the economy, but then you went on to describe the Keynesian argument for how the Fed pulls some levers to magically create value (by stimulating AD). The argument for QE and fiscal policy is the same Keynesian one: by creating easy money, they basically create more AD, which puts to work unemployed, unused resources. So Keynesians argue, those unused resources are now put to work. But what work are they doing? Is it useful work? Are banks just going to hoard cash, and why flood so much easy money into the banks, anyways? I think it's really more simple than that. The Fed is just Wall St's nice insurance policy, and economists are just clever priests who justify the actions of the ruling plutocratic class.
- neilwilson 9y ago
  "The thing about the Fed is that money represents real goods and services. " It doesn't and never has. There has never been a one to one match between money and stuff. Money is really the emodiment of a human promise, and promises don't always get fulfilled. The one promise that does, is if you don't pony up the correct currency to pay your taxes you go to jail. And that is what drives a currency at root.
  - 0x445442 9y ago
    "There has never been a one to one match between money and stuff." Depends on how you define money. In the case of hard assets like gold there is a one to one match because gold represents energy already spent.
    - cirgue 9y ago
      People want gold not because it took energy to mine, but because other people also want gold. Gold is like any other currency system, except that the process that controls supply is basically stochastic (and there is a small industrial demand for the commodity itself, but this is negligible).
    - smaddox 9y ago
      If you define money as hard assets, you don't understand money. I suggest reading "Debt: the 5000 first years".
  - wallace_f 9y ago
    No, sorry. In every econ textbook exists the academic definition of money: store of value, unit of measure, medium of exchange. What is it an exchange of? What is it storing? What is it measuring? In other words, we use it to help us with exchanging, storing, and measuring real value. This way you don't have to exchange some lines of code for a cow, or store all your wealth in cheese. Maybe you are thinking that I am saying something about money not being a fiat currency, which wasn't the point here.
rtpg 9y ago
I think it's more to counter the idea that the bailouts cost money. If bailouts are effectively revenue-neutral there's a whole line of arguments against intervention that disappear. Though of course, like you said, there are distortions
dmichulke 9y ago
> the Fed has stabilized markets very well ... > ... at the price of speculative distortions That's really all there is to say and the main argument against Central Banks. PS: A nice analogy would be: They got rid of the hens by burying them in eggs.
phkahler 9y ago
>> And as a note, the Fed has stabilized markets very well for the last eight years That's debatable. I'd say they prevented some much needed corrections from happening. The housing bubble is back - prices have recovered to 2006 levels or higher. People are less able to afford things at those prices. Also, home prices vary inversely with interest rates and rates are still near their lows with really only one direction to go.
santoshalper 9y ago
The Fed can't print money without devaluing the money already in print. The federal government can make money off a transaction and use it is as additional revenue. Not really arguing "should" here, nor am I arguing that the supposed profits were real. Just pointing out a big difference between the federal government generating revenue and the federal reserve printing more money. If this were not true, then why would would have taxes? The Fed could just print money any time the government needed to spend it.
- neilwilson 9y ago
  "The Fed can't print money without devaluing the money already in print. " Yes it can. Banks do that all the time. Money grows and shrinks to ensure all the transactions that are worth completing gets completed. It's a dynamic system. "If this were not true, then why would would have taxes?" You have taxes, so you have to create output and hand it over for the currency the taxes are denominated in. That's how output is transferred to the public sector. The public sector then creates the money necessary for you (and everybody else transitively) to pay those tax demands. When government spends it will create the taxation that balances that spend to the penny for any positive transaction. It's a simple geometric progression. Unless somebody in the chain decides not to spend all their income. We call that saving. The maths is straightforward... https://medium.com/modern-money-matters/the-function-of-government-spending-9123e71737c1 https://medium.com/modern-money-matters/the-function-of-gove...
  - dredmorbius 9y ago
    This answer ... misses some critical points, and skews pedantic. The Fed cannot net print money without devaluing what's in circulation. Inflation is literally the fact of more money chasing fewer goods. More money => more inflation. The question then becomes "how might money leave the system?" There are several ways. Taxation, if you subscribe to MMT, is money leaving the system. (Government spending is, as with Fed policy, creating money.) Increasing or decreasing the overall amount of consumer and business debt increases or decreases the money supply. Increasing or decreasing the overall value of financial assets -- stocks, bonds, derivatives, real estate, commodities -- by increasing or decreasing collateral and balance sheets, increases and decreases the money supply. Money going into savings, particularly off-shore accounts (where it's not otherwise available to the financial system) is effectively withdrawn, through the mechanism of reducing the velocity of money. Other factors effecting money velocity do likewise. (This is, essentially, how often a given dollar is transacted.) The more accurate answer would be that: "The Fed can't print money without devaluing the money already in circulations, unless there are offsetting withdrawals to they money supply".

wahern 9y ago

The Federal Reserve != the U.S. Treasury The U.S. Treasury turned a profit on TARP. TARP debits and credits work just like any other government expenditure. A lot of pundits lump TARP with the Federal Reserve's quantitative easing (QE) program. QE was a program where the Federal Reserve itself purchased assets (mortgage securities, bonds, etc). The assets to purchase these were much more akin to printing money, I suppose. And this program was much larger than TARP in dollar value. This asset purchase program has turned a profit for the government because dividends, resales, etc, have exceeded the outlays. The Federal Reserve must, by statute, transfer such profits to the Treasury. I say "I suppose" because _anybody_ can print money. For example, I can give you an IOU in exchange for gold bars. You can then put that IOU on your books as an asset, which in turn allows you to borrow against it, perhaps getting even more gold bars of your own if you can convince others the IOU was worth more than you paid. We got into this mess because the investment banks were, conceptually, printing money by assembling mortgages into securities and then reselling or borrowing against the securities for a price (in retrospect) far greater than the long-term return of the underlying assets. Derivatives markets then multiplied the differential many fold. In all these cases nobody actually prints currency notes; nonetheless, the total dollar value of assets on the books has increased. I don't think it's very useful to equivocate all these financial machinations. Papering over them is precisely how we got into this mess.[1] And while I guess it's fair to say that the Federal Reserve can print money, the implications of that are neither clear nor inevitable. The Federal Reserve has a legal mandate to keep inflation rates low. Often people are trying to allude to the specter of hyperinflation. But it's worth remembering that the hyperinflation in Weimar Germany was very much _intentional_. The Germans pursued hyperinflation to spite the WWI allies, as it allowed them for a time to minimize the effect of war reparations on their domestic economy (if they printed money fast enough, they could purchase foreign currency before the official exchange rates reacted[2]). Eventually it became something that they were, politically, unable to roll back. Hyperinflation in Zimbabwe was a self-fulfilling prophecy, and a symptom of a failed state, similar to the tail end of the Weimar Republic. Note that in both cases these events were fundamentally driven by politics. If the Federal Reserve ever got itself into a situation where it couldn't stop pumping assets into the system, it's almost certain that it would have been preceded by Congress first changing the laws. Currently the Federal Reserve is substantially (though not completely) independent from political forces. In any event, if the Federal Reserve ended up in that sort of situation it would undoubtedly be symptomatic of much larger problems in the country. [1] Thinking they're unnecessary and could be done away with is naive. The book-value of assets will always involve guess work because it requires people to quantify the likelihood of future events based on imperfect information about the present. And there will always be mechanisms that compound errors in this guess work. The way you control systemic risk is through diversity and uncoupling. [2] Ironically, the gold standard made this arbitrage both feasible--it took longer for individual exchange rates to react--and was a central cause--the gold standard caused severe deflation across Europe. Deflation sucks for debtors, and war reparations made Weimar Germany the biggest debtor of them all. Why severe deflation across Europe? It coincided with the apex of the industrial revolution in the U.S. The U.S. was pumping out radios and refrigerators like crazy, and Europeans were buying them up like hot cakes. Because everybody was on the gold standard, and because every central banker refused to readjust their exchange rate with gold, increasing amounts of gold in all the central banks in Europe were credited to the U.S. account balance. That meant less gold per unit of national currency, which meant deflation. The way inflation in the U.S. occurred is that Europeans began purchasing U.S. securities, because each unit of domestic currency purchased increasing amount of American dollars. Likewise, repatriated profits were dumped into the stock market. This is how the gold standard directly precipitated the stock market crash of 1929. Something similar is happening between China and the U.S., except that the U.S. dollar is a floating currency and China is attempting to avoid domestic inflation by preventing the repatriation of assets (that is, China effectively forces producers to invest their profits in U.S. securities). The end result is that deflation is blunted in the U.S., but it's a huge reason why despite QE we haven't seen much inflation.

mathattack 9y ago

It's true. But private investors made much bigger profits. If the Fed struck Warren Buffet's deal, the national debt would be smaller.

bogomipz 9y ago

And let's not forget that the banks made lots of money from the Fed bailout. The Fed paid banks interest on money that the Fed gave them for lending purposes. Instead of lending out the money they were given they let the money just sit. And the Fed paid them interest on that. Essentially the banks made money just for accepting the bailout. See: http://www.zerohedge.com/news/2017-04-18/free-money-fed-pays-banks-22-billion-not-lend http://www.zerohedge.com/news/2017-04-18/free-money-fed-pays... and https://www.washingtonpost.com/news/wonk/wp/2015/12/21/why-the-fed-is-paying-wall-street-banks-billions-of-dollars/ https://www.washingtonpost.com/news/wonk/wp/2015/12/21/why-t...

arthurcolle 9y ago

it is true, but there was a large social cost and broader economic cost that is not properly conveyed in the statement which makes it quite disingenuous