Arnold Kling  

The Speculator of Last Resort

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Business Week reports,


The Treasury purchased $225 billion in government- sponsored-enterprise bonds and made a profit of $25 billion from principal, interest and the sale. Treasury announced in March 2011 it would begin winding down the program through sales of as much as $10 billion of bonds a month.

If you can buy bonds in a crisis and sell them later at a profit, then you might argue that you were acting as a speculator of last resort during a liquidity crisis. However, I think of a liquidity crisis as something temporary, lasting a few weeks at most. If Treasury had been able to wind down the program by 2009, I would absolutely agree that it was a liquidity crisis.

As it is, my guess is that a lot of the profit came from riding the yield curve. Treasury bet against rising long-term interest rates, and won. (You could use economic accounting techniques to back this out before calculating a profit, and if Treasury did so then I am not giving them enough credit.)

To the extent that owners of mortgage bonds were earning a risk premium, I am glad that taxpayers obtained that premium. We were the ones providing the risk guarantee, so we deserved it.


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COMMENTS (2 to date)
RPLong writes:

At the risk of sounding like a hopeless cynic...

1 - If the Treasury places a bet on where the Fed is going to set interest rates, I would not call this "speculation," but rather "collusion."

2 - "We" (the taxpayers) didn't obtain anything.

Kevin writes:

Did the bid/ask narrow while Treasury held these? Did the volumes on the bid and offer deepen? It seems to me those would be better indicators of whether there was really a liquidity problem Treasury might have been alleviating than the length of the holding period.

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