Warren Buffett compares US Fed to a hedge fund
economictimes.indiatimes.com
economictimes.indiatimes.com
Can you get more asinine than that? Probably? How is this relevant when the Fed is printing $85 BILLION a month to finance ongoing bond purchases? Guys like Buffet must absolutely love the Fed because they have an outlet to offload their illiquid garbage bonds and derivatives.
Imagine if you made a terrible investment that loses most of its value... you're screwed, you have no choice but to suffer, eat the losses, and move on. But wait! The government opens a shop where they'll buy your investment for close to you original principal. You're saved! Amazing. I'd write nonsense articles praising the government too.
It makes total sense for him to keep playing this game, because he benefits so fantastically from it. Everyone else should take what he says for what it is. The agenda is pretty loud and clear.
You can go to the FED site and look at all the bonds they purchased from the financial institutions. Outside of the Maiden Lane's, most of the bonds have increased in value. This was a profitable trade for the FED; liquid cash for bonds well below par.
QE infinity is all about hiding the fact foreigners are exiting treasuries so the fed is the last resort buyer of USG debt. Without the fed backstopping, interest rates paid by the USG on its debt would have to go up which would very quickly crash the system.
Warren is just doing his patriotic duty to kick the can a little further down the road.
Can you back up that claim?
I think Buffet used the term "hedge fund" for dramatic effect rather than strict accuracy (since most of the public sees hedge funds as the epitomy of the investing money making dogma), but you can definitely draw parallels between the Fed's investment decisions and those of a long-only hedge fund (rather than the algo or long-short variety)
How can you tell? These are illiquid bonds that have no market. The Fed could say they're worth anything and there's no way to prove or disprove it. The only way to know is to offer them for sale and obviously that's the opposite to what the Fed is doing.
The real point is that a lot of the mortgages originally packaged into those securities no longer exist, and hell, a fair number of those houses probably no longer exist. Yes, there's a huge supply of housing once again, and real estate is doing well across the country. But mortgages represent specific financial obligations, made in specific slices of time, between specific parties. The mortgages themselves are not fungible, and never could have been. They were bundled into individualized tranches, whose bases have probably evaporated by now. (We must keep in mind that the troublesome MBSes circa 2007-8 comprised subprime mortgages, and most of those subprimes went belly up).
I'm not really sure what you're trying to get at with the last comment. He doesn't know the exact number off the top of his head. The exact amount remitted last year to Treasury is $88.4 billion.
It's not a Ponzi scheme or a pyramid scam but it can't help but be compared to them. It's in a similar boat to Social Security. It has the veneer of legitimacy because "it's the government" but underneath it's a bit unseemly.
*edit: IOER = Interest on excess reserves. See http://synthenomics.blogspot.com/2012/08/interest-on-excess-... for a good explanation
But would the banks have all originated subprime loans had they not been able to repackage them and sell them? By selling the loans they were kept off the bank's balance sheet.
If the Fed is buying up all kinds of bonds and the banks know this, there's nothing preventing them from selling their older bonds which were purchased at a time when interest rates were higher (and thus bond prices were lower) and selling them at a profit to the Fed. They then need to do something with the money, why not buy some new bonds?
Just because the Fed isn't participating in the primary auction doesn't mean that they're not influencing the Treasury market in a huge way.
For example, Greece was getting killed on their bonds: they had to pay 8%, 10%, 12% on them. Which means that in order to raise $10B now you had to promise $20B (or more) at maturity of 10 years. That was because they didn't have a central bank to buy their bonds on the secondary market and effectively reduce the supply, thus driving their price up and the interest rate down.
Here what we're seeing is that the Fed IS buying on the secondary market and the banks are aware of this. That reduces the supply of Treasury bonds (absent the Fed's intervention) which, everything else equal, drives the price up and the interest rate down.
Furthermore since the banks KNOW that the Fed will buy the bonds off of them, potentially at a small profit they don't have any problems going to the auction and buying the bonds to flip to the Fed. If the Fed dried up as a buyer of Treasurys it's entirely likely that the banks would stop buying, the auctions would be less successful and the interest rate on the bonds would go up as the price of the bonds goes down.
So what I'm arguing is that I would agree with you but only if the Fed either 1) didn't buy Treasurys on the secondary market or 2) the Fed couldn't create money to buy Treasurys from the banks who are buying them at auction. Since neither of those conditions is met, I would disagree. I would argue that they're monetizing the debt but indirectly. Just because it's indirect doesn't somehow make it not happen. It just makes it harder to follow.
The only reason we have this ridiculous system in place is because military force.
Fiat money won everywhere because it outcompeted the alternatives. Fractional reserve banking too.
In biological evolution, the competition winner is often a more complex organism. Fiat money is more complex than the gold standard, and apparently won. But in the case of the economy, we should keep things simple enough that a large chunk of the population can still understand it. Otherwise, a small number of very specialized people will have such an information advantage that they can, and will be economically forced to, exploit all the others. I'm not saying that fiat money and fractional reserve banking are a problem, but they need to be regulated rather strongly to prevent problems.
Buffett is tongue-lashing the Fed in public because Buffet's investments won't do well if inflation hits, and he wants the Fed to reabsorb all of the money it has printed before inflation appears.
The primary interest of the Fed is not the best interests of the American people, but rather maintaining the solvency of the US Government at any cost (including destroying the middle class via gradual and persistent currency devaluation) and providing liquidity for the global economy (given the global reserve currency belongs to the Fed in the form of the Federal Reserve Note).
If the dollar is strong, then Americans will buy more goods made in other countries. So when Americans travel around, they will buy more things in those other countries. That money goes directly to the pockets of other countries.
Is that in the best interest of the American people?
I would not want to defend all of the fed's actions, though.
First, the Fed's actions are a mix of fiscal and monetary stimulus. They are not different to Keynes' idea of fiscal stimulus, since they inject money into the economy in cases where even zero interest rates couldn't.
Second, in order for stimulus to work, it must convince people to make long term decisions (such as building physical factories, starting companies, buying durable goods, etc.) and therefore the Fed must commit to a long term stimulus plan. Buffet clearly outlines the Fed's approach to making this commitment.
I know a lot of people on HN are deeply suspicious of mainstream macroeconomics, and that is understandable since even with my training I can't really verify that people in the field are doing things right. However, I will say that there are a large number of countries in the world that are big enough to have their independent macroeconomic policy. So far, no country I'm aware of has chosen not to use the above two principles, which together can be taken as a summary of neo-Keynsian economics. If there really some better way out there I think that some country would have tried it.
Everyone is tied to everyone else, and so there are bigger players and smaller players. If you are a country with an economy that does not do business with other countries (eg you do not import nor do you export), then you probably have more macroeconomic independence.
So if China or Japan try to move independently, they can't, because in order to buy or sell goods to other countries, they have to buy and sell those other countries' currencies. And the business of buying or selling currencies is tied to macroeconomic policy.
I'm not a macro expert, but my understanding is that a country need not be completely autonomous in order to have its own macro policy. Goods cannot flow perfectly between countries, and so macro policy will always have some effect.
The more a country imports and exports, and the smaller the country, the less impact its macro policy will have.
So the reserve bank of China can influence Chinese interest rates and hence have an impact on the Chinese economy. On the other hand the reserve bank of a "small open economy" cannot do much to change interest rates.
Obviously you haven't read Keynes, or you have at least referenced his warning:
^^^ Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. ^^^
(I add: the one man in a million including, apparently, people with PHDs)
Because you are intellectually lazy, and prefer to question people's motives than to engage with the substantive points they make.
>We get a guy who claims he is an econ PHD (no email, no proof of that).
I never claimed to have a PhD (try parsing my username differently), and I have no intention of releasing any private information.
>Obviously you haven't read Keynes, or you have at least referenced his warning: [warning]
Your patronizing tone is unhelpful and completely unjustified. Neo-Keynesianism is the dominant school of thought in academic macroeconomics. It refers to the synthesis of some of the ideas of Keynes with microeconomic theory. Not everything that Keynes ever said is relevant to neo-Keynesianism, and his original works are not usually studied by graduate students in economics.
On the warning itself, he is referring to something very different from the practices of today's reserve banks. Inflation has been below 4.1% for the last 10 years, while he describes a situation where the "real value of the currency fluctuates wildly from month to month". While his warning is not relevant to the current situation, his argument is entirely correct.
That said (and this is not really what Keyne's point was), even steady inflation, adjusted according to economics conditions, does redistribute wealth. Traditionally the fed used open market operations to change interest rates, and I believe that because these are done through the market, economists have assumed the re-distributional effects are not important. The current actions of the Fed are different, since they clearly benefit certain groups, such as the people issuing the bonds that the Fed buys, possibly including Buffet or even myself. But for this very reason, Buffet, the Fed, and almost all economists want this phase to be over as soon as possible.
Hyperinflation - not here yet. Inflation - much more than officially stated.