For one, when it says "the taxpayers will be eating the losses".. it raises some flags for me. Might just be hyperbole, but it also suggests a possible misunderstanding of the fundamentals of how the Fed operates.
If we are entering a new type of economy (which we have been since 2008), and the Fed is no longer worried about having an ever expanding balance sheet, then we are entering modern money theory territory, which is scary to me because we completely lack the oversight needed.
Translation: "You plebes just don't understand."
Typical Fed policy apologia.
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-pai...
Does this not imply exactly that, the taxpayers will be eating the 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.
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
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.
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.
>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.
> 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?
Critiques that they're doing too much fall completely flat, for me.
Unprecedented levels of Fed intervention hasn't prevented 41 million (and counting) new unemployment filings in just a few months.
This obsessive focus on propping up financial markets without more direct support for Main St is what I mean about lack of political imagination or will.
Congress passed extra unemployment insurance plus other payroll support. The Fed shouldn't duplicate that.
> Fed policy should be to enable full employment after the lockdowns are fully lifted, not now.
This is out of touch. The lockdowns are already lifting and as we will see, you don’t just bring back 41+ million jobs at the drop of a hat.
As long as prices (read: stock and bond markets) are stabilized, many of us don’t care.
Well as I already said above, the Fed isn't doing enough. They aren't stabilizing prices. If they were, the economic recovery would be much quicker.
Also, prices is not the same as stock and bonds. The Fed is perfectly fine with stock or bond drops, as long as they don't cause prices to drop. Stocks dropped over 20% in one day in 1987, but we avoided a recession because the Fed ensured prices remained stable.
The Fed has a dual mandate; employment promotion and inflation management. To the extent that the tools they have, which are limited, are insufficient to adequately promote employment while managing inflation, doing more for employment is what Congress and it's broader power of fiscal poki g setting is for.
Admittedly, Congress—most specifically the Senate—is asleep at the switch, but that's not the Fed’s fault.
It absolutely is the Fed's fault. We are still paying for the sins of the GFC and Fed policy has enabled Congressional dysfunction. Without extremely accommodative Fed policy for the past 10+ years, Congress would be forced to do their job.
But if Congress doesn't want to do it's job, even if the Fed were completely negligent, you have to conclude they would only do enough to relieve the pressure to roughly the point where things are now, if they were even competent enough to not screw that up.
If you want to blame someone other than Congress for Congress's nonfeasance (and “Congress” in the sense includes the President, who plays both a formal and informal role in legislation), maybe blame the people that choose and retain the nonfeasant officers, rather than the Fed for doing its job well enough in the face of the nonfeasance elsewhere that the wheels don't come completely off.
I for one would not like the entire country to descend into violence and madness. I'm willing to pile on debt to avoid anarchy.
The government is the lender of last resort because they can print new money to dilute old money. That's a high risk high reward lending scenario.
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.
The logic here is armchair economics 101: supply and demand. The Fed is propping up demand.
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.
Step 1: Fed conjurs D dollars into existence
Step 2: Fed trades D dollars for a stack of paper
Step 3: Fed trades paper stack for (1-r)D dollars
The net effect is the Fed giving away rD dollars. If the Federal government gives away any dollars, it is taxpayers footing the bill.