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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

#41

Post by gpvos »

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.

So that means they followed the path of least resistance when they introduced it, instead of thinking it through. (Or they did think it through and it was the Rothschilds after all.)

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.

Re: Warren Buffett compares US Fed to a hedge fund

#42

Post by preempalver »

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…

Where is the hyperinflation? Data please

Re: Warren Buffett compares US Fed to a hedge fund

#43

Post by preempalver »

msandford wrote: post #31
preempalver wrote: post #16

Earlier quoted context omitted.

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 inte…

The original comment was to reflect that the Fed is not monetizing the government, which is different than influencing the treasury market. The fed is influencing the market by effecting the "rate" not the "size". Just by influencing the treasury market you cannot make the logic leap that they are creating $ for the government to spend (recklessly?), or forcing the government to create more UST in order to pay back older maturing UST.

Re: Warren Buffett compares US Fed to a hedge fund

#44

Post by preempalver »

dxhdr wrote: post #6
cremnob wrote: post #5

Earlier quoted context omitted.

The Fed can hold them to term. They are under no pressure to sell.

The Fed has no choice but to hold them to term. The Fed's whole game is to continue keeping rates at zero by buying everything under the sun to the tune of $85 billion! per month. Selling, or even slowing the rate of purchasing, would do the opposite and raise rates.

Agree, selling will be problematic. The fed's probably going to use reverse-repo to exit. See http://www.voxeu.org/article/exit-path-implications-collater... and http://ftalphaville.ft.com/2013/08/27/1612763/will-this-be-t...

Re: Warren Buffett compares US Fed to a hedge fund

#45

Post by msandford »

preempalver wrote: post #43
msandford wrote: post #31

Earlier quoted context omitted.

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 inte…

The original comment was to reflect that the Fed is not monetizing the government, which is different than influencing the treasury market. The fed is influencing the market by effecting the "rate" not the "size". Just by influencing the treasury market you cannot make the logic leap that they are creating $ for the government to spend (recklessly?), or forcing the government to create more UST in order to pay back o…

I think I see what you're saying there. I just disagree with it. I would argue that "rate" affects "size" in a real 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.

Re: Warren Buffett compares US Fed to a hedge fund

#46

Post by patrickg_zill »

preempalver wrote: post #42
patrickg_zill wrote: post #28

Earlier quoted context omitted.

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…

Where is the hyperinflation? Data please

http://www.shadowstats.com/alternate_data

Hyperinflation - not here yet. Inflation - much more than officially stated.

Re: Warren Buffett compares US Fed to a hedge fund

#47

Post by preempalver »

msandford wrote: post #45
preempalver wrote: post #43

Earlier quoted context omitted.

The original comment was to reflect that the Fed is not monetizing the government, which is different than influencing the treasury market. The fed is influencing the market by effecting the "rate" not the "size". Just by influencing the treasury market you cannot make the logic leap that they are creating $ for the government to spend (recklessly?), or forcing the government to create more UST in order to pay back o…

I think I see what you're saying there. I just disagree with it. I would argue that "rate" affects "size" in a real 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 effecti…

Ok lets agree to disagree :). Just FYI, 10 Yr Aug UST low yield (best price for bank to buy) was 258bps. Highest rate for Aug was 278bps (highest point at which the fed could have bought). By doing the flip the bank could make a yield of 20bps. It has to front cash for capturing this yield. If it just kept the cash at the fed it would earn a risk-less 25 bps (IOER). The fed is sterilizing the purchase by IOER so it isn't monetizing the debt! This is the fundamental misunderstanding with QE, its just a tool to target the rate. If we were truly monetizing the debt, inflation would be soaring through the roof! I would strongly recommend reading this -> http://pragcap.com/understanding-quantitative-easing

Re: Warren Buffett compares US Fed to a hedge fund

#48

Post by preempalver »

dxhdr wrote: post #6
cremnob wrote: post #5

Earlier quoted context omitted.

The Fed can hold them to term. They are under no pressure to sell.

The Fed has no choice but to hold them to term. The Fed's whole game is to continue keeping rates at zero by buying everything under the sun to the tune of $85 billion! per month. Selling, or even slowing the rate of purchasing, would do the opposite and raise rates.

its here! http://www.newyorkfed.org/markets/opolicy/operating_policy_1...
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