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Why is this hyperbole? My understanding is that the Fed has set aside $454 billion of taxpayers’ money via the CARES act to absorb the losses in the bail out pr

Why is this hyperbole? My understanding is that the Fed has set aside $454 billion of taxpayers’ money via the CARES act to absorb the losses in the bail out programs set up by the Fed. And this has more detail, from an earlier article [1] Senator Pat Toomey of Pennsylvania asked Quarles to clarify if the taxpayers’ money ($454 billion handed over by the Treasury to the Fed, which will then be used as equity in Special Purpose Vehicles set up by the Fed and leveraged up to $4.54 trillion to make loans and purchases of toxic assets on Wall Street banks’ balance sheets), is in fact going to be used to absorb losses on what the Fed is taking off the balance sheets on Wall Street. Quarles responded as follows: “The Treasury has the fiduciary responsibility, if you will, to the Congress for the use of the funds that are appropriated to it. So I wouldn’t want to speak for them as to how that equity should be handled. But it is true that in the construction of the 13(3) facilities [Fed’s emergency programs] that use Treasury equity, the Treasury equity is there to insure the Fed, which statutorily cannot take losses, has to be sure that it won’t, is there to insure that that cushion exists for the funding portion of the facility.” Fed Chairman Jerome Powell has already admitted that the $454 billion is to be used to absorb losses that it anticipates it will take. [1] https://wallstreetonparade.com/2020/05/wall-street-banks-paid-11-7-billion-in-dividends-to-investors-this-year-while-taxpayers-must-absorb-454-billion-of-bank-losses/ https://wallstreetonparade.com/2020/05/wall-street-banks-pai... Does this not imply exactly that, the taxpayers will be eating the losses?

ikeboy 6y ago
The fact that $454 billion was set aside to eat losses does not imply that there will be $454 billion of losses, or even that there will be any losses. The Fed is buying bonds at market prices and getting paid interest - the only way they'd lose money is if the bond market as a whole loses money / is overvalued, and specifically is overvalued by more than the interest rate.
- chishaku 6y ago
  The bottom line is that taxpayers are on the hook. Since 2008, we're desensitized to this level of intervention. What will come of it? Who knows? But at least some recognize the risk in such uncharted territory. “Socialising of this risk is fraught with moral hazard” - Daniel Loeb “Today’s trading levels of stocks and bonds reflect ‘thumb on the scale’ valuations driven by persistent and massive government asset purchases and zero percent (or lower!) short-term policy rates, as well as an essentially unlimited tolerance for risk." - Paul Singer
  - ikeboy 6y ago
    It's irresponsible to say the taxpayers are eating losses that hasn't happened yet and may never happen. Taxpayers didn't lose in the TARP bailout, despite similar warnings at the time. And the other side of this is the fact that without any action, the economy will collapse further than it already has, and taxpayers certainly won't be in the black if that happens.
    - chishaku 6y ago
      > It's irresponsible to say the taxpayers are eating losses I didn't say they are eating losses, I said they are on the hook. Give me $1000 from your bank account. Given my recent performance, I can generate some decent return. What do you say? > the economy will collapse further than it already has With all due respect, this is my larger issue. You're not necessarily wrong. But we have no political imagination or will to think beyond what is forced down our throats. Either the Federal Reserve saves us all or we are doomed.
      - ikeboy 6y ago
        I'm critiquing the framing in OP. >But we have no political imagination or will to think beyond what is forced down our throats. Either the Federal Reserve saves us all or we are doomed. I wouldn't view it as saving. The Fed's job is to stabilize prices and employment. If you think a different part of the government should be responsible for that, or if you think we shouldn't stabilize it at all (but then how much money should be printed? Should we abolish monetary policy completely?), then make that argument. But don't criticise the Fed for trying to do its job of ensuring price stability. When something happens that significantly decreases inflation, then the Fed responds by printing more money. It's not somehow "neutral" if the Fed were to ignore that and allow prices to drop.
        chishaku 6y ago
        > The Fed's job is to stabilize prices and employment. > But don't criticise the Fed for trying to do its job of ensuring price stability. By your own analysis, you're missing something here. How's the Fed doing with that mandate? You don't think there's room for criticism?
- loeg 6y ago
  > The Fed is buying bonds at market prices In some trivial sense, sure, but not really; by pouring tons of money into these funds, it is moving the market price. Real market prices are below the levels propped up by the Fed.
  - ikeboy 6y ago
    Somewhat, but to make that argument you'd have to show what percentage they're buying and how prices have moved. I don't think there's evidence of a large effect currently.
    - loeg 6y ago
      That wouldn't be conclusive, as one could readily make the argument that prices would have fallen without the Fed support. The logic here is armchair economics 101: supply and demand. The Fed is propping up demand.
      - ikeboy 6y ago
        Econ 101 distinguishes between buyers with market power and buyers without. You also need to distinguish between the expectations channel and the purchase channel. The Fed announcing it's going to pump money into the economy decreases expectations of a severe ongoing recession, which reduces the probability of default, which raises bond prices.
        loeg 6y ago
        Yep! Some of the price and liquidity impact is the buying and some is just the announcement of buying. Levine had a nice column on it several days ago.

ikeboy 6y ago

The fact that $454 billion was set aside to eat losses does not imply that there will be $454 billion of losses, or even that there will be any losses. The Fed is buying bonds at market prices and getting paid interest - the only way they'd lose money is if the bond market as a whole loses money / is overvalued, and specifically is overvalued by more than the interest rate.

chishaku 6y ago
The bottom line is that taxpayers are on the hook. Since 2008, we're desensitized to this level of intervention. What will come of it? Who knows? But at least some recognize the risk in such uncharted territory. “Socialising of this risk is fraught with moral hazard” - Daniel Loeb “Today’s trading levels of stocks and bonds reflect ‘thumb on the scale’ valuations driven by persistent and massive government asset purchases and zero percent (or lower!) short-term policy rates, as well as an essentially unlimited tolerance for risk." - Paul Singer
- ikeboy 6y ago
  It's irresponsible to say the taxpayers are eating losses that hasn't happened yet and may never happen. Taxpayers didn't lose in the TARP bailout, despite similar warnings at the time. And the other side of this is the fact that without any action, the economy will collapse further than it already has, and taxpayers certainly won't be in the black if that happens.
  - chishaku 6y ago
    > It's irresponsible to say the taxpayers are eating losses I didn't say they are eating losses, I said they are on the hook. Give me $1000 from your bank account. Given my recent performance, I can generate some decent return. What do you say? > the economy will collapse further than it already has With all due respect, this is my larger issue. You're not necessarily wrong. But we have no political imagination or will to think beyond what is forced down our throats. Either the Federal Reserve saves us all or we are doomed.
    - ikeboy 6y ago
      I'm critiquing the framing in OP. >But we have no political imagination or will to think beyond what is forced down our throats. Either the Federal Reserve saves us all or we are doomed. I wouldn't view it as saving. The Fed's job is to stabilize prices and employment. If you think a different part of the government should be responsible for that, or if you think we shouldn't stabilize it at all (but then how much money should be printed? Should we abolish monetary policy completely?), then make that argument. But don't criticise the Fed for trying to do its job of ensuring price stability. When something happens that significantly decreases inflation, then the Fed responds by printing more money. It's not somehow "neutral" if the Fed were to ignore that and allow prices to drop.
      - chishaku 6y ago
        > The Fed's job is to stabilize prices and employment. > But don't criticise the Fed for trying to do its job of ensuring price stability. By your own analysis, you're missing something here. How's the Fed doing with that mandate? You don't think there's room for criticism?
loeg 6y ago
> The Fed is buying bonds at market prices In some trivial sense, sure, but not really; by pouring tons of money into these funds, it is moving the market price. Real market prices are below the levels propped up by the Fed.
- ikeboy 6y ago
  Somewhat, but to make that argument you'd have to show what percentage they're buying and how prices have moved. I don't think there's evidence of a large effect currently.
  - loeg 6y ago
    That wouldn't be conclusive, as one could readily make the argument that prices would have fallen without the Fed support. The logic here is armchair economics 101: supply and demand. The Fed is propping up demand.
    - ikeboy 6y ago
      Econ 101 distinguishes between buyers with market power and buyers without. You also need to distinguish between the expectations channel and the purchase channel. The Fed announcing it's going to pump money into the economy decreases expectations of a severe ongoing recession, which reduces the probability of default, which raises bond prices.
      - loeg 6y ago
        Yep! Some of the price and liquidity impact is the buying and some is just the announcement of buying. Levine had a nice column on it several days ago.