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The key distinction is that the Fed is trading the new money for high-quality collateral. The original owners of the collateral will return the Fed's money with
by ipnon 7y ago
The key distinction is that the Fed is trading the new money for high-quality collateral. The original owners of the collateral will return the Fed's money within weeks of months in exchange for the return of the collateral.
- cryptica 7y agoNo matter how you look at it, somebody who is not the Fed benefits from this. If market participants didn't think that they will benefit financially from this, they would not participate. This kind of "zero-sum temporary money" theory doesn't add up. The situation is exactly as kylebenzle inferred; the Fed is injecting new fiat money into the economy and it's going straight into the pockets of rich financial institutions which add no value whatsoever to the economy or society.
- lbotos 7y ago> the Fed is injecting new fiat money into the economy and it's going straight into the pockets of rich financial institutions which add no value whatsoever to the economy or society. Financial institutions control who gets levered money (loans). They provide a huge value to an economy and society in a fractional reserve banking system. You are upset about the Fed, when you should be upset about the government who controls fiscal policy. The government can provide tax holidays and other benefits more directly to people, as is their role, not the Fed.
- cryptica 7y agoI don't agree that bank loans add any value to our modern fiat-based economy. It's possible that loans may have added economic value when money was based on a limited resource such as gold, but that economy was an entirely different beast from what we have today. Fiat is not simply a switch that one can flick off and on without anticipating negative flow-on effects; and yet that's exactly how governments have treated it when they abolished the gold standard whilst continuing to support an archaic system of debt and credit. Since the fiat system was introduced, house prices have skyrocketed (relative to average salaries) and corporations have gained monopoly positions in the market whilst using lobyists to take control of our governments. Our fiat-based, debt-oriented system has some obvious drawbacks. Both the government and the Fed are to blame; one for designing the whole scheme and the other for implementing it. I'm upset about the idea that the Fed can inject money into the economy based on obscure criteria. From the perspective of an average citizen, who is legally obliged to accept Fed money in exchange for their labor, whatever set of criteria the Fed chooses is going to be inherently inadequate; the mere lack of transparency behind the Fed's operation is by itself sufficient to discredit the validity of the entire operation. Money backed by gold was good money precisely and fundamentally because everyone understood what gold was and where it came from. Now, essentially nobody knows what fiat money is or where it comes from and yet everyone is legally obliged to accept it.
- jonahbenton 7y agoNo. There are all kinds of discontinuities in money but this narrative is just an exhibition of ignorance. Even when "money backed by gold" was a slightly less completely inaccurate fiction than it is now, what people "knew" to be money was many, many, many different things, depending on where they were and what they did for work. Stories like this are like religious narratives, and "money backed by gold" is like the story of the angry god allegedly giving tablets to some dude. It is at BEST an allegory but yall go and read it like it happened.
- OGWhales 7y agoWhat are you talking about? I’d love to see you actually expand on this and explain what you mean instead of just pooping on it and saying people believe in fairy tails.
- jonahbenton 7y agoI'm sorry- I am happy to respond to specific questions from the above but nearly every single sentence is a factual/historical misrepresentation, and the language/terminology ("fiat-based", "backed by gold", "yet everyone legally obliged to accept it") is that of someone who has a particular religious view of money (maybe a "goldbug") that may have its own philosophical consistency but...is...just...completely...ahistorical. Money is a much more interesting topic that goldbugs give it...um...credit for. There is another recent discussion on HN: https://news.ycombinator.com/item?id=22573204 https://news.ycombinator.com/item?id=22573204 that has a lot of pointers to good resources from which to begin the discovery process.
- tomp 7y agoNo, the way this works is this (as I understand it): I'm a bank, I need some cash to operate (people withdrawing money, trading, making payments, etc.), but I have no cash. I have $10B in US Treasury bonds, but - well, they're notionally worth $10B, but nobody want to exchange them for money, because noone else has money to spare (i.e. liquidity crisis). So here comes the Fed, takes my $10B in bonds, gives me $10B of cash so that I can run my business... In a week or so, I need to return $10B in cash, I get my $10B in bonds back ("collateral") and the cycle continues again. The alternative is, the bank collapsing, taking some part of the economy with it.
- gumbo 7y agoGenuine question here. Any data on the typical duration of these loans? How long typically the Fed holds collateral? I remember 2 years ago the market throwing a tantrum because of the fed unwinding it balance sheet. Doesn’t that mean that typical loans are never repaid and the Fed just let the bonds mature?
- tomp 7y agoI think the "unwinding" was Fed stopping QE, which is slightly different - they were buying bonds on the market (not as emergency liquidity) to prop up asset prices (buy bonds -> reduce interest rate -> investors seek other sources of returns -> buy stocks -> stock prices go up... same with real estate). Bonds mature (literally disappear), so if you want to keep propping up asset prices, you must keep buying new bonds as the ones you own mature. The Fed was doing that for a while, then tried to slowly stop, ween the market off the cheap money (because if the patient is supposed to be healthy, s/he should be able to survive and thrive without drugs). Trump threw a tantrum (I guess he knew/suspected that Fed was the only/main thing propping up asset prices, without Fed the market would crash/stop increasing, which isn't good for elections because politicians always get the blame), the markets weren't happy either (basically NIMBY - you're invested so you want to keep the value of your assets as high as possible).
- gumbo 7y agoGot it thanks. Still, any data on how long a typical repo loans is?