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Warren Buffett compares US Fed to a hedge fund

economictimes.indiatimes.com

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Re: Warren Buffett compares US Fed to a hedge fund

#31

Post by msandford »

preempalver wrote: post #16
msandford wrote: post #9

Earlier quoted context omitted.

Holding them to term is actually a bit of a joke if you think about it. The Fed is buying bonds. The government is selling them. As long as the Fed keeps buying them, the government can keep selling them. If the Fed holds them to maturity, where will the money come from to pay back the mature bonds? From the government selling even more new bonds which the Fed will have to buy. It's not a Ponzi scheme or a pyramid sc…

The fed is buying bonds on the secondary market i.e not directly bidding and taking down auctions at treasury. This may sound minute but is a huge point. See http://pragcap.com/understanding-quantitative-easing

Yeah I get it, they're not shoving everyone out of the way immediately.

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.

Re: Warren Buffett compares US Fed to a hedge fund

#32

Post by jonnathanson »

jessedhillon wrote: post #13
dxhdr wrote: post #4

Earlier quoted context omitted.

"their underlying value is going up as well" 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.

In the case where those toxic assets are mortgage-backed securities, the underlying is a house -- so we can tell by observing the housing market.

Many of the mortgage-backed securities were so byzantine, so many orders of derivatives removed from the underlying houses, as to be nearly impossible to tie directly to housing. But that's a side point.

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).

Re: Warren Buffett compares US Fed to a hedge fund

#33

Post by yetanotherphd »

patrickg_zill wrote: post #28
yetanotherphd wrote: post #22

Nice clear thinking from Buffet. The ideas are very old, only the implementation is new. 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 phys…

Why do I get the feeling that the "green" in the accounts on this sub-thread, smell like "astroturf"? We get a guy who claims he is an econ PHD (no email, no proof of that). 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 c…

>Why do I get the feeling that the "green" in the accounts on this sub-thread, smell like "astroturf"?

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.

Re: Warren Buffett compares US Fed to a hedge fund

#34

Post by moocowduckquack »

dxhdr wrote: post #7

"'The Fed is the greatest hedge fund in history, ... it's generating $80 billion or $90 billion a year probably' in revenue" 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 ma…

Illiquid bonds are only hard to spend now, but not necessarily unprofitable in the long run, especially if you can buy them cheap.

Re: Warren Buffett compares US Fed to a hedge fund

#35

Post by adventured »

codex wrote: post #25

The Fed is not driven by a profit motive, but rather acts in the best interests of the people of the United States. This makes it as opposite of a hedge fund as you can get. 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.

If the Fed acted in the best interests of the American people, they wouldn't have devalued the dollar by 97% over the last century, and they wouldn't continue funding the extreme fiscal irresponsibility of the US Government (including acting as the perpetual war fund).

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).

Re: Warren Buffett compares US Fed to a hedge fund

#37

Post by Steko »

patrickg_zill wrote: post #27

If any person, non-profit, or regular corporation, ran their business the way the Federal Reserve did, they would be in jail as soon as what they were doing was public knowledge. The only reason we have this ridiculous system in place is because military force.

I miss the good old days when monetary cranks would always come right out and talk about the Rothschilds and 'international bankers' so the average reader knew they were bonkers.

Fiat money won everywhere because it outcompeted the alternatives. Fractional reserve banking too.

Re: Warren Buffett compares US Fed to a hedge fund

#38

Post by abbazabba »

adventured wrote: post #35
codex wrote: post #25

The Fed is not driven by a profit motive, but rather acts in the best interests of the people of the United States. This makes it as opposite of a hedge fund as you can get. 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.

If the Fed acted in the best interests of the American people, they wouldn't have devalued the dollar by 97% over the last century, and they wouldn't continue funding the extreme fiscal irresponsibility of the US Government (including acting as the perpetual war fund). 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…

Why does it matter if the dollar is devalued? A less valuable dollar makes American goods cheaper, and foreign goods more expensive. People in other countries would rather pay for cheap American things, than something made in their home country. That money goes directly to the pockets of Americans.

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?

Re: Warren Buffett compares US Fed to a hedge fund

#39

Post by zeckalpha »

dxhdr wrote: post #7

"'The Fed is the greatest hedge fund in history, ... it's generating $80 billion or $90 billion a year probably' in revenue" 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 ma…

I don't think you know anything about Buffett's investment strategies. If this is the way you think Buffett operates, you should read https://en.wikipedia.org/wiki/The_Intelligent_Investor

Re: Warren Buffett compares US Fed to a hedge fund

#40

Post by patrickg_zill »

Steko wrote: post #37
patrickg_zill wrote: post #27

If any person, non-profit, or regular corporation, ran their business the way the Federal Reserve did, they would be in jail as soon as what they were doing was public knowledge. The only reason we have this ridiculous system in place is because military force.

I miss the good old days when monetary cranks would always come right out and talk about the Rothschilds and 'international bankers' so the average reader knew they were bonkers. Fiat money won everywhere because it outcompeted the alternatives. Fractional reserve banking too.

What part of having a gun pointed at your head, is "outcompeting"?
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