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> Interesting to note that the VCs are bailing out the retail users here, instead of the usual flow where taxpayers are on the hook for bailing out too-big-to-f

> Interesting to note that the VCs are bailing out the retail users here, instead of the usual flow where taxpayers are on the hook for bailing out too-big-to-fail WallStreet banks. If you're referring to the 2008 bail-outs, those weren't grants, they were loans and investments. To date, beneficiaries have repaid more than the initial amount netting the government (and hence the people) a significant profit. $109B to date. And the expectation of significantly more to come. Talk about a good investment. [1] Fannie and Freddie alone received $191B and have paid $301B in dividends so far - and all the principal remains outstanding. [1] https://projects.propublica.org/bailout/ https://projects.propublica.org/bailout/

pirate787 5y ago
There were multiple stages of bailouts, including Federal Reserve asset purchases which directly transferred resources from dollar holders to for-profit shareholders and bondholders. The Fed's intervention dwarfed the TARP bailout and is the largely the reason TARP was successful...they moved the economic loss from Treasury to the Fed. https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much-2008-bailouts-really-cost https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much...
- arcticbull 5y ago
  That's not how the Fed works. [edit] (As I replied in a peer comment, increasing the money supply is not debasement or a loss - that is measured from its impact. In the years subsequent to the bailouts inflation hit at some point an annualized -4% before returning to a range of 0-2% going into COVID. Modern economics isn't as simple as "supply up bad.")
- NovemberWhiskey 5y ago
  Your comment doesn't appear to have much to do with the link you have provided; could you add some more context?
MadSudaca 5y ago
Didn’t they have to debase the currency to make those payments?
- arcticbull 5y ago
  An increase in supply is not a debasement. That is measured post-facto based on its impact. Inflation was strongly negative between 2008 and 2010, hitting an annualized -4% in 2009. [1] The Fed was also making good progress unwinding its balance sheet going into 2020, before COVID hit. [1] https://tradingeconomics.com/united-states/inflation-cpi https://tradingeconomics.com/united-states/inflation-cpi
  - RC_ITR 5y ago
    I love all the Austrian Economics (thanks Satoshi!) comments we get in a supposedly data-driven environment. How does this chart [0] show a debasement of any sort? We were in a 'secular demand stagnation crisis' back then! Is everyone here just too young (oh God) to remember 2012? https://fred.stlouisfed.org/graph/fredgraph.png?g=LBU7 https://fred.stlouisfed.org/graph/fredgraph.png?g=LBU7
    - thaumasiotes 5y ago
      > How does this chart [0] show a debasement of any sort? It's the gigantic jump in the blue line almost halfway between 2008 and 2010. A spike in the value of "all assets" is the definition of currency devaluation.
      - RC_ITR 5y ago
        Hey, sorry for not providing more context, the blue line is the Fed's balance sheet and the red line is inflation. Yes, the Fed's balance sheet skyrocketed, but inflation (the value of money vs. goods & services) remained lower than before that line spiked.
        MadSudaca 5y ago
andrepd 5y ago
That's very nice and good. So if I struggle to pay my mortgage, why am I evicted instead of bailed out? It's highly unlikely that I be unemployed for the rest of my life, so I would surely be able to pay back any bailout, with interest to spare. Why do banks struggle and get bailed out, but people struggle and don't? Or looking at it from another point of view: the money spent on bailouts wouldn't be stored under a mattress if it were not spent that way, therefore you cannot compare $109B with $0. You have to compare it, for example, with the money lost from the moral hazard of rewarding the irresponsible behaviour which led to the most destructive recession in 75 years, or to the effect the money would have had it been spent helping the millions of people that lost their jobs or had their homes foreclosed on, etc.
- Dylan16807 5y ago
  The government could have done both, so I don't think we should frame it as competing loans.
- arcticbull 5y ago
  These are all separate responsibilities of different groups. The Fed's charter is to maintain a low, predictable rate of inflation over the medium term and to maximize employment. You (in aggregate) won't have a job if all the employers go bankrupt due to direct investments and contagion. This will directly impact (in aggregate) your ability to make your mortgage payments. Secondarily, regulation of the financial sector to ensure this doesn't happen again isn't JPow's job, it's the job of Congress. Bailing out the institutions does not preclude further regulation to prevent the situation from happening again. And it certainly doesn't preclude creating a meaningful social safety net.
  - kcatskcolbdi 5y ago
    The Federal Reserve is absolutely tasked with regulating the banks[1]. Congress should not be in the business of preventing banks from imploding in on themselves via regulation. Congressional regulations should insulate consumers from predatory financial institution practices. FDIC insurance exists to protect consumers in the event their banks behave irrationally. There should be no backstop for the banks themselves. Even if they wanted to Congressional regulations couldn't keep pace with the speed at which financial instruments of institutional suicide are forged. 1 https://www.federalreserve.gov/supervisionreg/reglisting.htm https://www.federalreserve.gov/supervisionreg/reglisting.htm
joe_the_user 5y ago
Aside from the other considerations, "it was a good investment" stuff is just ridiculous. The general bank isn't in operations to make money - it's in operation to protect the market, the currency and the economy as a whole so whether it makes money is irrelevant to whether these loans were a good idea. But even more, if the Fed basically designates a bank "too big to fail" (as the Fed did) and loans the bank the money it currently needs, the markets can this. And this allows the bank to "print money" itself by issuing bonds - since now the market knows those bonds are effective guaranteed by the Fed and so equal to money. Thus the bank can easily issue enough bonds to repay or over-pay the Fed. But that's not a "see, problem solved!" situation. The theoretical problem of this sort of action is naturally these large entities potentially issue loans and borrow without being disciplined by risk. That might be compensated for by other actions - say preventing them from issuing risky loans. But things still wind-up a bit "distorted". I'd recommend Doug Noland's Credit Bubble Bulletin on the subject.
- arcticbull 5y ago
  > Aside from the other considerations, "it was a good investment" stuff is just ridiculous. The general bank isn't in operations to make money - it's in operation to protect the market, the currency and the economy as a whole so whether it makes money is irrelevant to whether these loans were a good idea. The central bank did not make these investments, Congress did, and so the yields did not accrue to the central bank but to the Treasury. If you've ever met the IRS you know that the job of the Treasury is in fact to accrue revenue. The central bank's charter is to maintain a low, predictable rate of inflation over a medium term and to maintain maximum employment. > The theoretical problem of this sort of action is naturally these large entities potentially issue loans and borrow without being disciplined by risk. I agree, which is why Congress needs to better regulate the sector. However that's Congress' job not the Fed's.
  - joe_the_user 5y ago
    I don't think any of your actually change my point that the project making money is irrelevant to and a distraction from the basic impact of the loans. While one can debate whether just regulation can prevent private investors from engaging in risk, there are other impacts as well. Putting a whole lot of money into bank which invest in "safe assets" like real estate, causes the relative price of those assets to increase. This distorts the economy - that disproportionate rent and real estate price increases over the last ten and twenty years are arguably a product of Fed largess. And these have been a disaster for anyone not being buoyed by the risings - the majority of those in lower income categories.
deleted 5y ago
[deleted]
papito 5y ago
I hope this is not an argument for more bailouts. A lot of people walked away with riches while ruining the US economy. "I lost $100 but lookit I just got back $15" is not a win, it's just... less of a loss.
panarky 5y ago
> those weren't grants, they were loans and investments Those loans and investments weren't guaranteed to be paid back, the government took a risk. Assuming risk of loss is a valuable thing that gets traded all the time through futures, options, swaps and other derivatives. Those futures, options and swaps have a cost. The fact that the government gave away that value for free means it was a massive gift to Wall Street banks.
- NovemberWhiskey 5y ago
  I suppose it depends on exactly which program you're looking at, but since you mention Wall Street banks, I assume you're talking about the Capital Purchase Program. I don't think it's reasonable to say that this was given away "for free". If it was "free" then there wouldn't have been any over-recovery at all, would there? In the CPP, the government bought preferred stock in a number of banks (mostly not Wall Street ones, but whatever). That stock could've been worthless if the banks failed, but otherwise the banks were required to pay an annual dividend of 5% through 2013 and 9% thereafter; plus there was a whole host of supervision of their activities, including limitations on their ability to pay ordinary dividends.
  - panarky 5y ago
    The government paid far more for the preferred stock than the fair market value. 100% of the difference between the fair market value and the actual price paid was a gift to Wall Street banks that was never paid back.
    - NovemberWhiskey 5y ago
      Nonsense. Most investments carry an element of risk. The Capital Purchase Program may have looked like a bad investment (negative NPV) at the time, but the record makes it clear it actually paid off. It makes no sense to say "in 2008, the government expected to lose money on the CPP so that's what happened; gift to the banks that was never paid back" and then drop the mic while ignoring what actually happened. For example: TARP's Congressional Oversight Panel estimated that the $25bn capital infusion into Wells Fargo represented a subsidy (difference between fair market value of the preferred stock and the amount paid) of about $1.75bn. However, in 2009, Wells Fargo bought back the investment after having paid $1.44bn in dividends. Then, in 2010, the Treasury also sold $840mm in Wells Fargo warrants that were part of the CPP deal. What we thought would happen: lose $1.75bn. What actually happened: made $2.28bn. If that isn't "paying back" from your perspective, could you please suggest what would be?
jerry1979 5y ago
Who uses cash basis accounting? A bit of googling brought me to a paper which points out that even the CBO and the Congressional Oversight Panel independently came to the conclusion that the bailouts subsidized the banks to the tune of over 60 billion dollars [0]. The paper itself puts the value closer to 90 billion. From the article: > Costs on an ex post cash basis were only identified for a subset of the above programs, but it is likely that on that basis the government came out ahead. Hopefully, the reader has been convinced that there is little meaningful information in this fact. [0] https://gcfp.mit.edu/wp-content/uploads/2019/02/BailoutsV12.pdf https://gcfp.mit.edu/wp-content/uploads/2019/02/BailoutsV12....

pirate787 5y ago

There were multiple stages of bailouts, including Federal Reserve asset purchases which directly transferred resources from dollar holders to for-profit shareholders and bondholders. The Fed's intervention dwarfed the TARP bailout and is the largely the reason TARP was successful...they moved the economic loss from Treasury to the Fed. https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much-2008-bailouts-really-cost https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much...

arcticbull 5y ago
That's not how the Fed works. [edit] (As I replied in a peer comment, increasing the money supply is not debasement or a loss - that is measured from its impact. In the years subsequent to the bailouts inflation hit at some point an annualized -4% before returning to a range of 0-2% going into COVID. Modern economics isn't as simple as "supply up bad.")
NovemberWhiskey 5y ago
Your comment doesn't appear to have much to do with the link you have provided; could you add some more context?

MadSudaca 5y ago

Didn’t they have to debase the currency to make those payments?

arcticbull 5y ago
An increase in supply is not a debasement. That is measured post-facto based on its impact. Inflation was strongly negative between 2008 and 2010, hitting an annualized -4% in 2009. [1] The Fed was also making good progress unwinding its balance sheet going into 2020, before COVID hit. [1] https://tradingeconomics.com/united-states/inflation-cpi https://tradingeconomics.com/united-states/inflation-cpi
- RC_ITR 5y ago
  I love all the Austrian Economics (thanks Satoshi!) comments we get in a supposedly data-driven environment. How does this chart [0] show a debasement of any sort? We were in a 'secular demand stagnation crisis' back then! Is everyone here just too young (oh God) to remember 2012? https://fred.stlouisfed.org/graph/fredgraph.png?g=LBU7 https://fred.stlouisfed.org/graph/fredgraph.png?g=LBU7
  - thaumasiotes 5y ago
    > How does this chart [0] show a debasement of any sort? It's the gigantic jump in the blue line almost halfway between 2008 and 2010. A spike in the value of "all assets" is the definition of currency devaluation.
    - RC_ITR 5y ago
      Hey, sorry for not providing more context, the blue line is the Fed's balance sheet and the red line is inflation. Yes, the Fed's balance sheet skyrocketed, but inflation (the value of money vs. goods & services) remained lower than before that line spiked.
      - MadSudaca 5y ago

andrepd 5y ago

That's very nice and good. So if I struggle to pay my mortgage, why am I evicted instead of bailed out? It's highly unlikely that I be unemployed for the rest of my life, so I would surely be able to pay back any bailout, with interest to spare. Why do banks struggle and get bailed out, but people struggle and don't? Or looking at it from another point of view: the money spent on bailouts wouldn't be stored under a mattress if it were not spent that way, therefore you cannot compare $109B with $0. You have to compare it, for example, with the money lost from the moral hazard of rewarding the irresponsible behaviour which led to the most destructive recession in 75 years, or to the effect the money would have had it been spent helping the millions of people that lost their jobs or had their homes foreclosed on, etc.

Dylan16807 5y ago
The government could have done both, so I don't think we should frame it as competing loans.
arcticbull 5y ago
These are all separate responsibilities of different groups. The Fed's charter is to maintain a low, predictable rate of inflation over the medium term and to maximize employment. You (in aggregate) won't have a job if all the employers go bankrupt due to direct investments and contagion. This will directly impact (in aggregate) your ability to make your mortgage payments. Secondarily, regulation of the financial sector to ensure this doesn't happen again isn't JPow's job, it's the job of Congress. Bailing out the institutions does not preclude further regulation to prevent the situation from happening again. And it certainly doesn't preclude creating a meaningful social safety net.
- kcatskcolbdi 5y ago
  The Federal Reserve is absolutely tasked with regulating the banks[1]. Congress should not be in the business of preventing banks from imploding in on themselves via regulation. Congressional regulations should insulate consumers from predatory financial institution practices. FDIC insurance exists to protect consumers in the event their banks behave irrationally. There should be no backstop for the banks themselves. Even if they wanted to Congressional regulations couldn't keep pace with the speed at which financial instruments of institutional suicide are forged. 1 https://www.federalreserve.gov/supervisionreg/reglisting.htm https://www.federalreserve.gov/supervisionreg/reglisting.htm

joe_the_user 5y ago

Aside from the other considerations, "it was a good investment" stuff is just ridiculous. The general bank isn't in operations to make money - it's in operation to protect the market, the currency and the economy as a whole so whether it makes money is irrelevant to whether these loans were a good idea. But even more, if the Fed basically designates a bank "too big to fail" (as the Fed did) and loans the bank the money it currently needs, the markets can this. And this allows the bank to "print money" itself by issuing bonds - since now the market knows those bonds are effective guaranteed by the Fed and so equal to money. Thus the bank can easily issue enough bonds to repay or over-pay the Fed. But that's not a "see, problem solved!" situation. The theoretical problem of this sort of action is naturally these large entities potentially issue loans and borrow without being disciplined by risk. That might be compensated for by other actions - say preventing them from issuing risky loans. But things still wind-up a bit "distorted". I'd recommend Doug Noland's Credit Bubble Bulletin on the subject.

arcticbull 5y ago
> Aside from the other considerations, "it was a good investment" stuff is just ridiculous. The general bank isn't in operations to make money - it's in operation to protect the market, the currency and the economy as a whole so whether it makes money is irrelevant to whether these loans were a good idea. The central bank did not make these investments, Congress did, and so the yields did not accrue to the central bank but to the Treasury. If you've ever met the IRS you know that the job of the Treasury is in fact to accrue revenue. The central bank's charter is to maintain a low, predictable rate of inflation over a medium term and to maintain maximum employment. > The theoretical problem of this sort of action is naturally these large entities potentially issue loans and borrow without being disciplined by risk. I agree, which is why Congress needs to better regulate the sector. However that's Congress' job not the Fed's.
- joe_the_user 5y ago
  I don't think any of your actually change my point that the project making money is irrelevant to and a distraction from the basic impact of the loans. While one can debate whether just regulation can prevent private investors from engaging in risk, there are other impacts as well. Putting a whole lot of money into bank which invest in "safe assets" like real estate, causes the relative price of those assets to increase. This distorts the economy - that disproportionate rent and real estate price increases over the last ten and twenty years are arguably a product of Fed largess. And these have been a disaster for anyone not being buoyed by the risings - the majority of those in lower income categories.

deleted 5y ago

[deleted]

papito 5y ago

I hope this is not an argument for more bailouts. A lot of people walked away with riches while ruining the US economy. "I lost $100 but lookit I just got back $15" is not a win, it's just... less of a loss.

panarky 5y ago

> those weren't grants, they were loans and investments Those loans and investments weren't guaranteed to be paid back, the government took a risk. Assuming risk of loss is a valuable thing that gets traded all the time through futures, options, swaps and other derivatives. Those futures, options and swaps have a cost. The fact that the government gave away that value for free means it was a massive gift to Wall Street banks.

NovemberWhiskey 5y ago
I suppose it depends on exactly which program you're looking at, but since you mention Wall Street banks, I assume you're talking about the Capital Purchase Program. I don't think it's reasonable to say that this was given away "for free". If it was "free" then there wouldn't have been any over-recovery at all, would there? In the CPP, the government bought preferred stock in a number of banks (mostly not Wall Street ones, but whatever). That stock could've been worthless if the banks failed, but otherwise the banks were required to pay an annual dividend of 5% through 2013 and 9% thereafter; plus there was a whole host of supervision of their activities, including limitations on their ability to pay ordinary dividends.
- panarky 5y ago
  The government paid far more for the preferred stock than the fair market value. 100% of the difference between the fair market value and the actual price paid was a gift to Wall Street banks that was never paid back.
  - NovemberWhiskey 5y ago
    Nonsense. Most investments carry an element of risk. The Capital Purchase Program may have looked like a bad investment (negative NPV) at the time, but the record makes it clear it actually paid off. It makes no sense to say "in 2008, the government expected to lose money on the CPP so that's what happened; gift to the banks that was never paid back" and then drop the mic while ignoring what actually happened. For example: TARP's Congressional Oversight Panel estimated that the $25bn capital infusion into Wells Fargo represented a subsidy (difference between fair market value of the preferred stock and the amount paid) of about $1.75bn. However, in 2009, Wells Fargo bought back the investment after having paid $1.44bn in dividends. Then, in 2010, the Treasury also sold $840mm in Wells Fargo warrants that were part of the CPP deal. What we thought would happen: lose $1.75bn. What actually happened: made $2.28bn. If that isn't "paying back" from your perspective, could you please suggest what would be?

jerry1979 5y ago

Who uses cash basis accounting? A bit of googling brought me to a paper which points out that even the CBO and the Congressional Oversight Panel independently came to the conclusion that the bailouts subsidized the banks to the tune of over 60 billion dollars [0]. The paper itself puts the value closer to 90 billion. From the article: > Costs on an ex post cash basis were only identified for a subset of the above programs, but it is likely that on that basis the government came out ahead. Hopefully, the reader has been convinced that there is little meaningful information in this fact. [0] https://gcfp.mit.edu/wp-content/uploads/2019/02/BailoutsV12.pdf https://gcfp.mit.edu/wp-content/uploads/2019/02/BailoutsV12....