4 ms·

In retrospect, it rings true. I think I had my eyes opened during 2008 crisis and FED was effectively buying everything thrown at it. I remember thinking how ca

In retrospect, it rings true. I think I had my eyes opened during 2008 crisis and FED was effectively buying everything thrown at it. I remember thinking how can government own its own bonds?

arcticbull 5y ago
> I think I had my eyes opened during 2008 crisis and FED was effectively buying everything thrown at it. They definitely did not. [1] The bailouts were largely loans, ones that were repaid to the US government for a pretty substantial profit, not less. And assets the Fed took on were literally that, assets, which the Fed was profitably unwinding before COVID hit. [1] https://en.wikipedia.org/wiki/Federal_Reserve_responses_to_the_subprime_crisis https://en.wikipedia.org/wiki/Federal_Reserve_responses_to_t...
- A4ET8a8uTh0 5y ago
  Ok. Buy was not an accurate verb here, but just because it was profitable it does not mean FED did not throw money at it. My main point stands.
- pjmorris 5y ago
  On the chart shown at your link, Fed-owned assets go from ~.8T to 2.5T (blue line, assuming the MBS (red line) are part of that.) and then grow as QE takes effect and the Fed buys all manner of things. That .8T was all US Treasuries, no longer true of the expanded balance sheet. If you look at the updated chart (https://fred.stlouisfed.org/series/WSHOSHO https://fred.stlouisfed.org/series/WSHOSHO), whatever you make of it, it doesn't look like much in the way of loans getting repaid. Whatever you want to say about loans being repaid, I think that the 1.5T (conservative number) that the Fed spent buying non-UST assets was then spent by the sellers on raising other asset prices not on paying down loans.
  - arcticbull 5y ago
    The bailouts were via Treasury. [1] QE was via the Fed. I believe, and correct me if I'm wrong, back in 2008 the Fed could only pick up bonds and maybe mortgage backed securities? You can see the Fed unwinding its balance sheet here [2], up until 2020, and in the link you provided. [1] https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/ [2] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
    - pjmorris 5y ago
      If the Treasury lends out ~700B for ~MBS and is repaid ~700B for MBS, and the Fed buys $1-2T (low end of the repayment you mention) in MBS, who is really doing the bailout?
      - arcticbull 5y ago
        Treasury made loans with repayment schedules to specific businesses. The Fed purchased certain kinds of assets to hold temporarily on their balance sheet. They both filled different roles - one was meant to manage inflation and the other to secure the stability and function of the markets. The Fed's dual mandate is to maintain maximum employment and low, predictable inflation rates over medium term. Spotting Ford in a rough patch doesn't fit the mandate.
        pjmorris 5y ago
        > low, predictable inflation rates It seems to me that tripling the monetary base and investing two parts of it in MBS is going to have an inflationary effect on house prices. Am I being obtuse here?
        arcticbull 5y ago
        To be clear, I don't think you're being obtuse at all. Fractional reserve lending means that an increase in the monetary base is a result of lower interest rates - money supply operates on a pull model not a push model. Lower interest rates mean a more expensive house costs the same per month when mortgaged, which in turn increased the outstanding supply and balance of mortgages, hence new money. Lower interest rates increase the price of houses, but to a much lower extent the affordability of those houses - which is more likely to be measured on the monthly cost of a 30 year fixed loan. It will move the goalposts on down payments, however, but down payments are only 2-20% of the cost of the house. In my opinion, however, I believe zoning to be a much bigger contributor to overall affordability.
deleted 5y ago
[deleted]
drdec 5y ago
Social security has been buying government bonds for a lot earlier than 2008.
redis_mlc 5y ago
> I think I had my eyes opened during 2008 crisis and FED was effectively buying everything thrown at it. I haven't looked at the US in detail, but what you wrote is literally true for Japan - the govt. owns around 80% of any capital market there. It's valuable to look at what went wrong in Japan so other countries can avoid that situation. When your own govt. has to buy company paper, it means that paper is not worthwhile for the private sector to buy - that's the worst kind of inflation (or deflation) imaginable. There's a similar but mirror problem of China listing 1,000 companies plus bonds on US capital markets with no intention of ever providing accounting data or making bond holders whole. See the ongoing Evergrande debacle, where only domestic holders get compensated, while over 80% of the bonds were floated internationally (since Chinese institutions wisely didn't want the risk exposure.)

In retrospect, it rings true. I think I had my eyes opened during 2008 crisis and FED was effectively buying everything thrown at it. I remember thinking how can government own its own bonds?

arcticbull 5y ago

> I think I had my eyes opened during 2008 crisis and FED was effectively buying everything thrown at it. They definitely did not. [1] The bailouts were largely loans, ones that were repaid to the US government for a pretty substantial profit, not less. And assets the Fed took on were literally that, assets, which the Fed was profitably unwinding before COVID hit. [1] https://en.wikipedia.org/wiki/Federal_Reserve_responses_to_the_subprime_crisis https://en.wikipedia.org/wiki/Federal_Reserve_responses_to_t...

A4ET8a8uTh0 5y ago
Ok. Buy was not an accurate verb here, but just because it was profitable it does not mean FED did not throw money at it. My main point stands.
pjmorris 5y ago
On the chart shown at your link, Fed-owned assets go from ~.8T to 2.5T (blue line, assuming the MBS (red line) are part of that.) and then grow as QE takes effect and the Fed buys all manner of things. That .8T was all US Treasuries, no longer true of the expanded balance sheet. If you look at the updated chart (https://fred.stlouisfed.org/series/WSHOSHO https://fred.stlouisfed.org/series/WSHOSHO), whatever you make of it, it doesn't look like much in the way of loans getting repaid. Whatever you want to say about loans being repaid, I think that the 1.5T (conservative number) that the Fed spent buying non-UST assets was then spent by the sellers on raising other asset prices not on paying down loans.
- arcticbull 5y ago
  The bailouts were via Treasury. [1] QE was via the Fed. I believe, and correct me if I'm wrong, back in 2008 the Fed could only pick up bonds and maybe mortgage backed securities? You can see the Fed unwinding its balance sheet here [2], up until 2020, and in the link you provided. [1] https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/ [2] https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
  - pjmorris 5y ago
    If the Treasury lends out ~700B for ~MBS and is repaid ~700B for MBS, and the Fed buys $1-2T (low end of the repayment you mention) in MBS, who is really doing the bailout?
    - arcticbull 5y ago
      Treasury made loans with repayment schedules to specific businesses. The Fed purchased certain kinds of assets to hold temporarily on their balance sheet. They both filled different roles - one was meant to manage inflation and the other to secure the stability and function of the markets. The Fed's dual mandate is to maintain maximum employment and low, predictable inflation rates over medium term. Spotting Ford in a rough patch doesn't fit the mandate.
      - pjmorris 5y ago
        > low, predictable inflation rates It seems to me that tripling the monetary base and investing two parts of it in MBS is going to have an inflationary effect on house prices. Am I being obtuse here?
        arcticbull 5y ago
        To be clear, I don't think you're being obtuse at all. Fractional reserve lending means that an increase in the monetary base is a result of lower interest rates - money supply operates on a pull model not a push model. Lower interest rates mean a more expensive house costs the same per month when mortgaged, which in turn increased the outstanding supply and balance of mortgages, hence new money. Lower interest rates increase the price of houses, but to a much lower extent the affordability of those houses - which is more likely to be measured on the monthly cost of a 30 year fixed loan. It will move the goalposts on down payments, however, but down payments are only 2-20% of the cost of the house. In my opinion, however, I believe zoning to be a much bigger contributor to overall affordability.

deleted 5y ago

[deleted]

drdec 5y ago

Social security has been buying government bonds for a lot earlier than 2008.

redis_mlc 5y ago

> I think I had my eyes opened during 2008 crisis and FED was effectively buying everything thrown at it. I haven't looked at the US in detail, but what you wrote is literally true for Japan - the govt. owns around 80% of any capital market there. It's valuable to look at what went wrong in Japan so other countries can avoid that situation. When your own govt. has to buy company paper, it means that paper is not worthwhile for the private sector to buy - that's the worst kind of inflation (or deflation) imaginable. There's a similar but mirror problem of China listing 1,000 companies plus bonds on US capital markets with no intention of ever providing accounting data or making bond holders whole. See the ongoing Evergrande debacle, where only domestic holders get compensated, while over 80% of the bonds were floated internationally (since Chinese institutions wisely didn't want the risk exposure.)