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Topic Title: Bernanke - taking a profit for tax payers?
Created On Wed Jun 10, 09 10:30 AM

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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

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Martinghoul
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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."

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BullBear
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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

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Martinghoul
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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

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Traden4Alpha
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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?

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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.

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Martinghoul
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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

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BullBear
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Posts: 853
Joined: Aug 2007

Wed Jun 10, 09 07:39 PM

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.

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The rise of the libertarians

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BullBear
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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]

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The rise of the libertarians

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Traden4Alpha
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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.

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Marine
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Thu Jun 11, 09 08:56 AM

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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

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Martinghoul
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Posts: 2458
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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?

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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?

-------------------------
"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."

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BullBear
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Posts: 853
Joined: Aug 2007

Thu Jun 11, 09 11:18 AM

Quote
Originally posted by: Traden4Alpha
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.

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.

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The rise of the libertarians

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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?