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 FORUMS > Economics Forum < refresh >
 Topic Title: Bernanke - taking a profit for tax payers? Created On Wed Jun 10, 09 10:30 AM Topic View: Branch View Threaded (All Messages) Threaded (Single Messages) Linear

BullBear
Senior Member

Posts: 853
Joined: Aug 2007

Wed Jun 10, 09 10:30 AM

Will Bernanke, after rescuing everybody post-lehman, take a profit for taxpayers from his actions and reduce the US public deficit?

I think he will

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The rise of the libertarians

Martinghoul
Senior Member

Posts: 2458
Joined: Jul 2006

Wed Jun 10, 09 11:06 AM

Take a profit? How do you figure that?

Apart from all the other (possibly nefarious) aspects of this TARP malarkey, I wonder if anyone considered that the US banks are repaying arnd 10% less, in REAL terms, than they received. Now don't get me wrong, I am not a conspiracy theorist, but even I am starting to marvel at the way the sucker at the table (i.e. the American taxpayer) got had.

Or are you referring to the Fed's liquidity programs?

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"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."

BullBear
Senior Member

Posts: 853
Joined: Aug 2007

Wed Jun 10, 09 12:41 PM

Both the TARP to Banks and the FED's liquidity programs.

Repaying 10% less in real terms? You mean that they're not repaying at market price (they should!)?
The yields on the preferred shares were very juicy! Why are you saying that they're repaying 10% less in real terms (they are going to exit at historical cost?)?

Anyway, if the value of the assets minus the value of debt (and all the costs associated) is greater after the unwinding of the positions it's a profit. A profit is a profit, it has been made in a short time frame so it's almost vanilla P&L accounting!

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The rise of the libertarians

Martinghoul
Senior Member

Posts: 2458
Joined: Jul 2006

Wed Jun 10, 09 02:00 PM

I mean real, as opposed to nominal terms. Simplistically, they're repaying the loans in devalued dollars, so that, while the nominal amount is the same, its real value has diminished. Make sense?

As to the yield on the preferred shares, it was, by definition, below the mkt, so I am struggling with the notion of this being such a great deal, taken on its own merits. As to the positive externalities and the bigger picture, maybe, but the jury's out on this...

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"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."

Edited: Wed Jun 10, 09 at 02:10 PM by Martinghoul

Senior Member

Posts: 14091
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Wed Jun 10, 09 02:02 PM

Hasn't the Fed lost at least $5 billion on its long-term Treasury purchases? ------------------------- "It often happens that a player carries out a deep and complicated calculation, but fails to spot something elementary right at the first move." -- grandmaster Alexander Kotov --inscribed on gift chess sets given by Amaranth hedge fund.  Reply Quote Top Bottom Martinghoul Senior Member Posts: 2458 Joined: Jul 2006 Wed Jun 10, 09 02:10 PM Quote Originally posted by: Traden4Alpha Hasn't the Fed lost at least$5 billion on its long-term Treasury purchases?

And what about those tasty Maiden Lane and Maiden Lane Part Deux assets? I hear those aren't doing too well...

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"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."

Edited: Wed Jun 10, 09 at 02:10 PM by Martinghoul

BullBear
Senior Member

Posts: 853
Joined: Aug 2007

Wed Jun 10, 09 07:39 PM

Quote

Hasn't the Fed lost at least $5 billion on its long-term Treasury purchases? To fasten the housing bottom! But the treasury has issued plenty of notes at low yields. ------------------------- The rise of the libertarians  Reply Quote Top Bottom BullBear Senior Member Posts: 853 Joined: Aug 2007 Wed Jun 10, 09 07:54 PM Quote Originally posted by: Martinghoul I mean real, as opposed to nominal terms. Simplistically, they're repaying the loans in devalued dollars, so that, while the nominal amount is the same, its real value has diminished. Make sense? As to the yield on the preferred shares, it was, by definition, below the mkt, so I am struggling with the notion of this being such a great deal, taken on its own merits. As to the positive externalities and the bigger picture, maybe, but the jury's out on this... In the last 9 months we had zero inflation and all the loans were denominated in USD with US counterparties (banks)! It's a great deal since it helped to get out of the recession. It's not the FED's purpose to get high profits. yield now < yield start = higher price bought low, unwind high = profit (by definition) For example: If they unwind the TARP now then what was the inflation they've caused? None! I'm sorry to disagree with everybody since the beginning but I reaffirm that to me the FED's actions constitute no risk of hyperinflation to the US economy. Everybody's saying here since Sep09 that the US will face hyperinflation when the risk clearly was deflation. I can't see any hyperinflation coming (unless commodities go into a hyper-speculative bubble with the price not corresponding to the real demand)! Will the US face inflation in this new economic cycle? Sure it will, and that's great. A low inflation figure is what we need. Will commodities bubble? I have no idea. With current economic situation oil above the OPEC targets ($75-$85) is in a bubble mode to me and bubbles burst! [Bubbles are caused by speculators not by real demand] ------------------------- The rise of the libertarians  Reply Quote Top Bottom Traden4Alpha Senior Member Posts: 14091 Joined: Sep 2002 Wed Jun 10, 09 09:18 PM Quote Originally posted by: BullBear Quote Originally posted by: Traden4Alpha Hasn't the Fed lost at least$5 billion on its long-term Treasury purchases?
To fasten the housing bottom!
But the treasury has issued plenty of notes at low yields.
Yes, that's the goal and it worked for a little while. But 10-year rates have now risen substantially, higher mortgage rates have made housing 10% more costly, and mortgage applications have dropped significantly. As big as the Fed is, it can't dictate LT rates to the global bond market.

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"It often happens that a player carries out a deep and complicated calculation, but fails to spot something elementary right at the first move." -- grandmaster Alexander Kotov --inscribed on gift chess sets given by Amaranth hedge fund.

Marine
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Posts: 393
Joined: Jul 2003

Thu Jun 11, 09 08:56 AM

Quote

In the last 9 months we had zero inflation

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"So they've got us surrounded, good! Now we can fire in any direction, those bastards won't get away this time!" - CHESTY PULLER, USMC

Martinghoul
Senior Member

Posts: 2458
Joined: Jul 2006

Thu Jun 11, 09 10:50 AM

Quote

Originally posted by: BullBear

In the last 9 months we had zero inflation and all the loans were denominated in USD with US counterparties (banks)!

Right, you're very confused, BB...

Inflation is an aggregate phenomenon. My comment had nothing to do with inflation. All I said is that the banks are paying back their loans in devalued dollars. Just think of it in simplistic terms. When the banks received the $68bn of funds, they could purchase 100 widgets with that money. Now, with the same$68bn the banks are giving back, the taxpayer can can only buy 90 widgets. Who do you think got the better end of that deal?

Quote

Originally posted by: BullBear

yield now < yield start = higher price
bought low, unwind high = profit (by definition)

But surely you see that you're ignoring the opportunity cost of capital completely here. If the interest I have earned on my loan is lower than the mkt rate, is my profit still a profit?

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"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."

BullBear
Senior Member

Posts: 853
Joined: Aug 2007

Thu Jun 11, 09 11:18 AM

Quote

Quote

Originally posted by: BullBear
Quote

Hasn't the Fed lost at least $5 billion on its long-term Treasury purchases? To fasten the housing bottom! But the treasury has issued plenty of notes at low yields. Yes, that's the goal and it worked for a little while. But 10-year rates have now risen substantially, higher mortgage rates have made housing 10% more costly, and mortgage applications have dropped significantly. As big as the Fed is, it can't dictate LT rates to the global bond market. Prices are much lower for new buyers and to the new generation ---> less debt to the new generation (I'm not that familiar with US demographics. In the EU the age pyramid is quite biased to old people [this is a huge problem for the EU]. The younger the % of people the better.) Both Bernanke and Obama told publicly, over and over again, for people to refinance their mortgages at a fixed rate when interest rates were lower. Those who didn't were sleeping... Yields are still low in a historical basis. The slope of the curve is pricing a recovery in the economy so it's fine. There's a shift in risk aversion. With private money flowing into risky assets the FED will contract its balance sheet. For example when they receive the TARP money from Banks it will be used to contract the FED's balance sheet. People won't delay their housing needs anymore since they face the prospects of a recovery in the economy and higher yields coming in the next couple of years ---> housing market bottom ----> Banks will be fine ----> stabilization in the banking system ----> profit to the FED -----> more liquidity from banks to the real economy -----> lower spreads -----> equilibrium cost of borrowing If global demand doesn't pick up at a nice pace going forward then the price of commodities will correct itself and this panicky hyperinflation chat will stop 4ever. If real demand is picking up a lot in commodities then that's because there will be growth coming, more employment, higher profits, and stocks are undervalued (with the market picking up IRA's will grow and savings invested will go higher). So, the objective of the FED's actions were: - stabilize the banking system - recapitalize banks - make credit flow again - put a floor in the housing market to avoid the cascading effect of deflation - put a floor in the deflation fears that were delaying investment projects which are vital to the economy - prevent bankruptcies that would arise just because of an inefficient banking system and bunker behavior - put a floor in the cascading unemployment rate All of these had to be achieved without hurting the long term prospects of the economy and assuring that they would not overreact so they could exit in proper time. As long as they begin to exit now - but slowly - they'll acomplish all their goals. Of course they cannot achieve miracles. Lots of problems will still exhist in the US Economy that require responsible government actions to fix with time. The recovery - as all recoveries - will start in a slow pace but those who take actions first, innovate, productive and able to generate high quality assets will benefit the most and will be able to get a higher share of the world's growth for their economy. Even a low growth rate is better than deflation and with so much superfluous fat burned in this crisis (housing bubble fixed, companies who had to do it have deleveraged) there are prospects for a sustainable growth rate (but it will take some time like in all recoveries). Of course the markets behave in a very aggressive way with lots of noise before it achieves equilibrium... So, no one can predict market behavior in the short term. I guess we're much better now than some months before the lehman's collapse but financial markets are key to this recovery [at least for those who think this has been a huge and irresponsible financial markets spillover to the real economy]. If financial markets go to a status of total inefficiency like in the last 9-12 months than it's impossible to get a private-led recovery. As long as financial markets keep stable the road to recovery, in 2010, is open. ------------------------- The rise of the libertarians  Reply Quote Top Bottom BullBear Senior Member Posts: 853 Joined: Aug 2007 Thu Jun 11, 09 11:42 AM Quote Originally posted by: Martinghoul Quote Originally posted by: BullBear In the last 9 months we had zero inflation and all the loans were denominated in USD with US counterparties (banks)! Right, you're very confused, BB... Inflation is an aggregate phenomenon. My comment had nothing to do with inflation. All I said is that the banks are paying back their loans in devalued dollars. Just think of it in simplistic terms. When the banks received the$68bn of funds, they could purchase 100 widgets with that money. Now, with the same \$68bn the banks are giving back, the taxpayer can can only buy 90 widgets. Who do you think got the better end of that deal?

Quote

Originally posted by: BullBear

yield now < yield start = higher price
bought low, unwind high = profit (by definition)

But surely you see that you're ignoring the opportunity cost of capital completely here. If the interest I have earned on my loan is lower than the mkt rate, is my profit still a profit?

No, I'm not confused. If you're not speaking in inflation than you're either speaking in foreign exchange rates (and purchase power parity) or in the equilibrium value of assets (that are higher now). Sure, the value of assets went higher. That was the purpose of these policies. They were deflated. So the US global balance sheet (assets side) increased.

In a very narrow perspective, disregarding intangible profits, and as far as I know the money borrowed by banks (preferred's) were locked in at a very high credit spread. Credit spreads are much lower now so banks should pay par + discounted margin. If they pay par then the FED will only get the current accrued interest as P&L (still a profit). If they pay the market price (par + fair value margin) then they will capitalize on the recovery of the assets value. Will the FED choose to be paid at par and get the rest of the money by different ways (higher tax amount)? Maybe!

It's a win-win deal (you're arguing that banks had a better risk-adjusted deal? With a simplistic view, disregarding intangible profits, it's true).

A realized profit is very easy to compute You can argue that it will be a lower profit in risk-adjusted terms but a realized profit is always a profit. And risk is very subjective. Markets were illiquid...

And you're disregarding the intangible profit to the US economy which was the goal of the FED's actions. They're a not a hedge fund so even if they take a small loss but their actions are very productive to the private sector then their goals are accomplished.

The same tax rate on higher private profits would fix any defficit. As long as the private sector is fine and the public sector behaves in a responsible manner there will be a way to fix any defficit in constructive economic measures.

If you're speaking in purchase power parity it seems to me that the EUR/USD is near the level before Lehman's. I don't know what the market will do but the risk is higher to the EUR than to the USD. In terms of purchase power parity either US real estate is depressed or EU real estate is in a bubble. With a high EUR/USD and lower wages here there's a risk of large migratory flows (people and capital) from the EU to the US. Were the world a free a place with no borders and you would be seeing lots of migratory flows.

The ECB policy has been obliterating the younger generation keeping the EUR/USD at an artificial high level, with high IR and preventing the housing bubble to burst; and unemployment rose a lot... All of these without the housing market bubble being solved.

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Try to explain your argument with a real example if these explanation is not enough.

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The rise of the libertarians

Edited: Thu Jun 11, 09 at 11:45 AM by BullBear

Martinghoul
Senior Member

Posts: 2458
Joined: Jul 2006

Thu Jun 11, 09 12:30 PM

BB, I work in finance, so I do share you view that, had the Fed/US Trsy done nothing, things would have been dire indeed... I just don't share your rose-tinted view of how all of this is going to eventually work out. Specifically, when you talk about "fixing the deficit", "win-win deal", I just think you sound terribly naive.

The devil's in the details, i.e. in the exact methods used etc. Again, I would say that I am not a conspiracy theorist, so I don't put fwd theories that the authorities set out with intent to defraud the US taxpayer. However, I do believe that, partly due to them not knowing what they were doing, partly because they opened themselves to manipulation, they have underwritten a wealth transfer that I don't find particularly inspiring.

And yes, I am referring to the value of assets, not PPP, and don't accept your "value of assets on the US global balance sheet increased". Yes, that is true, but it's irrelevant. It's the specific breakdown that matters. My point is that, at first glance, it looks like that the increase on the liability side is all US taxpayers', while the offsetting increase in assets is concentrated in certain specific sectors, with households not seeing a major benefit to their net worth.

As to the risk-adjusted terms of the govt loans, because the govt is a lender of last resort, yet again we can't really address it without looking at the tricky question of what would have happened had they not done it. That's a very subjective topic, which is why I don't want to argue that point at all. I can only point you to a very good summary made by John Paulson during his congressional testimony on why TARP terms were excessively generous for the banks.

Regarding EUR etc, I just don't wish to argue with you as it's also very subjective.

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"Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness."

Edited: Thu Jun 11, 09 at 12:32 PM by Martinghoul

BullBear
Senior Member

Posts: 853
Joined: Aug 2007

Thu Jun 11, 09 02:34 PM

I'll also stop arguing this. Time will tell.

Just 2 remarks:
- "reducing the deficit" by a tiny amount if they unwind the TARP with a profit
- "win-win deal" due to the intangible benefits of their actions on employment and future corporte profits (ant taxes) vs. a deepening crisis if they've failed to act

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The rise of the libertarians

DavidJN
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Posts: 1391
Joined: Jul 2002

Thu Jun 11, 09 04:20 PM

If it was done right there would be an appreciable chance for the US government to eventually recoup taxpayer funds and possibly make money. But what has transpired in America was a panic farce rather than reasoned policy response. The Swedish experience from the 1980's is very instructive but it appears the American government is choosing to ignore what was learned because of their blinkered ideological opposition to government ownership. Instead they somehow think it responsible to throw hundreds of billions of taxpayer dollars into black holes. The public can't even find out where all the money has gone.