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.
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.
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
Unemployed? No. Earn what you did before? Anecdotal, but my parents know a lot of people in their 50s that when laid off, never went anywhere close to their prior salaries.
This was especially true for people who couldn't get their current job with their credentials. Plenty of senior people in places like factories and warehouses don't have degrees for example. Would they find work again if laid off?
probably because you, collectively speaking, kept electing people who didn't pass anti-eviction laws or strengthened tenant rights. Which most countries by the way did put in place during covid at the very least.
Say a factory is poisoning the riverwater, what is more likely to disssuade such actions: penalties to the company (taken in stride as the cost of doing business), or actual jail time and forfeit of assets to the person making the decision and reaping the profits from it?
https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much...
Modern economics isn't as simple as "supply up bad.")
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.
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.
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.
Japan for instance has seen their M2 money supply 3X from 1990 to 2022, while the affordability of a house there hasn't decreased since 1995. [2]
This is due to their federal zoning rules which permit housing construction practically everywhere. [3]
The increase in price of housing is what's driving inflation, not vv imo.
And for what it's worth, I think Glass-Steagall (brought in as part of the post-Great Depression reforms) did a very good job of preventing retail banks from investing in toxic garbage and its repeal in 1999 was IMO a major contributing factor to the crisis in the first place. [4]
[1] https://fee.org/articles/new-homes-today-have-twice-the-squa...
[2] https://fred.stlouisfed.org/series/JPNCPIHOUAINMEI
[3] https://marketurbanism.com/2019/03/19/why-is-japanese-zoning...
[4] https://www.federalreservehistory.org/essays/glass-steagall-...
That's like saying "price increases lead to inflation". Which is true but illuminating.
Limitations on housing construction certainly made homes especially valuable as an investment in places like California. But the vast amount of money-created-out-of-thin-air was what sought this reliable investments. The situation you mention is just related to what I describe, it doesn't refute what I describe.
The main thing is that this inflating of money has a number of noxious qualities, the inflation of housing costs just being one of them. Prices are signals for how resources should be allocated and distorted prices result in distorted allocations of resources. For small example, there's a daft and dangerous plane to restart a fricken gold mine in the little tourist next to my town - with all attendant potential for multiple types of pollution and with gold only getting kind of play because it's a fixed asset with a price driven sky-high by the present money creation process.
I mean I've no doubt that's some sort of a factor, but on the other hand the population of Japan is also almost exactly the same as it was in 1995 whereas the US population has increased by 25% in the same period - I'm not sure I'd so easily rule out demographics as a factor!
In their case it was a combination of a declining population and zoning rules. However, the decline AFAIK was concentrated outside urban areas. Tokyo grew from 32.5M to 37.5M between 1990 and 2022 without any increase whatsoever in the real dollar price of housing.
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....
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.
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.
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?
[1] https://tradingeconomics.com/united-states/inflation-cpi
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?
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.
Yes, the Fed's balance sheet skyrocketed, but inflation (the value of money vs. goods & services) remained lower than before that line spiked.
EDIT: And just to be very clear to the 2 people who read this comment, maintaining a balance sheet is still market support b/c you still buy treasuries on the open market to offset the principle of your existing treasuries that reach maturity. So stopping the growth of the balance sheet just means you're not accelerating support. Tapering is the thing that you do if you're worried that your balance sheet is 'debasing' the currency.
It's not clear to me if you're talking about monetary or price inflation.
https://mises.org/library/money-inflation-and-price-inflatio...
> some economists have interpreted price inflation as a desperate method by which the public, suffering from monetary inflation, tries to recoup its command of economic resources by raising prices at least as fast, if not faster, than the government prints new money.
For instance, supply chain disruptions making basic goods more expensive and increasing competition for them. Or, zoning policy prohibiting construction of new housing sufficient to meet demand in high-growth metro areas raising the cost of housing. Or zoning policies in suburban areas making housing 2x bigger on average now than in the 1970s. [1]
Defining inflation as a function of supply distracts us from the real-world problems causing broad-based increases in price.
[1] https://fee.org/articles/new-homes-today-have-twice-the-squa...
lol.
> Defining inflation as a function of supply distracts us from the real-world problems causing broad-based increases in price.
price is a function of supply and demand already. you don't need to redefine inflation unless you're trying to dupe feeble-minded rubes.
The "supply of currency units" is a fundamentally inadequate measure to capture this. It is too simplistic. Nobody takes it seriously except for a small group of very vocal online crackpots because it is so obviously unfit for purpose. [1]
We re-defined it as our understanding grew. The way we update practically any model in the face of new evidence.
Japan single-handedly demolishes the Austrian model. Their M2 supply grew 3X from 1990 to present but inflation remained 0% measured over thirty two years. Prices did not change from 1990 to 2022. [2, 3]
[1] https://www.pragcap.com/understanding-why-austrian-economics...
you're again conflating price and monetary inflation. and again mixing in somebody else's prejoratives to flavor your discussion of their topics.
here's a link [1]
> The idea that inflation is anything other than an increase in the supply of money is an intentionally confounding theoretical device with no basis in reality.
If you have 1 burger that you'd pay $10 for, and someone makes a second burger, does that make each one worth $5? No, of course not.
An increase in supply is always a debasement.
It's true that you might see the following chronology:
1/1/2020: value of the currency measured
6/6/2020: supply of the currency increased
1/1/2021: value of the currency measured; it's higher than it was last year!
But that doesn't mean the issue on 6/6/2020 wasn't a debasement. It definitely was, and the reason it doesn't look that way is your very low-resolution measurement of value. If the supply increase hadn't happened, the value on 1/1/2021 would have been even higher.
This is why we measure, and why Austrian economics fell out of favor decades ago.
See Japan for a concrete example. [1, 2] Their M2 money supply is almost 2.5X higher since 1990 but their CPI is dead flat over the same time period. It's actually seriously problematic for them.
How has the supply increased in this scenario? What if, instead of minting the coin, you just tell people that you've done so?
The supply of money has only increased if you're able to spend the putative addition to the money supply.
Are you asking how supply works in my hypothetical, simplified example where the point I'm trying to make is that new supply in isolation doesn't matter - what you do with it does?
Or as you asking how it happens in the real-world example of Japan, where their supply increased from 400000B JPY to 1200000B JPY between 1990 and present, while everything remained the same price? And how this is seriously problematic in their economy?
What matters isn't what you do with "money"; it's what you can do with it.
But there are other things that affect the value of money. Tripling the money supply and seeing the value of money stay constant tells you that something else was pulling the value of the yen up at the same time that additional supply was pulling it down.
This is not true, though, haha.
Which is why the Austrian model, which only takes into account the former, is obviously and woefully incomplete - and has been rejected.
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/