Arnold Kling  

Heretical Thoughts

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James Hamilton writes


The Fed has been trying to sop up the illiquid assets that nobody else wants. But I think what the Fed should be doing is instead acquiring assets of a type that would allow it to quickly reverse its position if a sudden shift in perceptions causes inflation to come in above the intended 3% target.

What a radical idea! Instead of buying "toxic" assets, why not buy good stuff?

We don't know what the toxic assets are worth. We don't know if the more than $7.5 trillion in new government guarantees are going to cost the taxpayer a few billion or a few trillion.

What we do know is that the risk premium on Treasuries is really, really low. We are like the hedge fund of last resort for the world's investors. Hamilton says the hedge fund should buy TIPS and foreign securities (I assume he means foreign government bonds). That's fine. The hedge fund should also buy debt from Freddie Mac and Fannie Mae, because that debt still trades at a risk premium relative to Treasuries, even though taxpayers are already on the hook for it.

The hedge fund should buy good stuff. Let the bad stuff sit and rot, or collect it as part of the process of shutting down failed institutions.

I question whether the whole concept of "rescue" plans is the right thing to do. Just let the failures happen and clean up afterwards. You'll have less of a mess if you do it that way, because you won't have so many zombie banks to try to manage.


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COMMENTS (5 to date)
JSBolton writes:

I wonder if they're going to try loosening capital reuirements, as you suggested, but only for those banks which increase their lending volume, and in proportion as they do so.

Chandra writes:

I am with you here. I like the concept of rescue plan where the government can pump in money, but I don't see a point saving these companies / firms. We can rather use this money to create many other developmental projects that can yield more employment oppurtunities than what these companies could provide.

Ella writes:

If the rescue plan consists of buying good debt or good investments, how is it a rescue? Why would the good ones need rescued?

I'm against any kind of bailout or rescue because the money comes from somewhere, and it was better handled and better allocated in its original somewhere than with the government. I don't understand looking at the Treasury or the Fed as a hedge fund. (And I mean that non-snidely; I'm not an economist, so I'm coming to learn.)

But a hedge fund is a commercial or investment organization, right? People can value it, there is competition to challenge it, and it can succeed or fail to the direct benefit or loss of the people who invest, right? So how is the Treasure/Fed, writ large, a hedge fund? If they make bad decisions, can I opt out? If they were initially not structured as a hedge fund, are they properly organized to fit that role? How does that even work?

MattYoung writes:

Well, if we are socialist, we should try to be profitable socialists.

Larry writes:

Any comments on Lindsey's voluntary 30 year/4% assumable full-recourse mortgage proposal from yesterday? It seems like everybody wins with that one...

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