Monday, January 18, 2010
Fed as the World's Biggest Carry Trader?
I am not immersed in the data to say whether this is a good description, but it might be. After quoting James Hamilton, Arnold Kling writes:
The Fed is now the world's biggest carry trader. In Hamilton's view, the Fed's huge injection of bank reserves, on which it pays interest, amounts to borrowing from those banks at the short-term rate. It then lends long term in the mortgage securities market.No one knows the future, but it's interesting that some of us have concluded that the Fed's actions are going to blow up and yet we are using different ways of reaching that answer. So either we're all right, and are merely focusing on different angles of the horrendous situation, or we're all nuts and are erroneously reaching the same wrong answer through mutliple invalid chains of reasoning.
This is what the Savings and Loans did back in the good old days. They borrowed money short term at 3 percent and made mortgage loans at 6 percent. It worked really well until the mid-1970's, when interest rates moved up. Those 6 percent mortgages don't look so sweet when short-term money costs 10 percent.
Long-term mortgage rates are now lower than they were in the heyday of the S&Ls. Taxpayers bore some of the cost of the S&L blowup. We stand to bear all of the interest-rate risk that the Fed is taking.
Have a nice day.
Comments:
Definitely going to go with Multiple-Chains-Of-Error Theory on this one, or MCOET for short, future reference (this will undoubtedly come up over and over again as we move further and further down the rabbit hole and question our own sanity more and more often).
Honestly, I'm amazed they've held this jalopy together this long. It'd be poetic if not altogether surprising if they ultimately held the economy along right up to the point that the scientists at the Large Hadron Collider got everything going finally and the economy started melting down just as the world/universe imploded. The question is, which giant sucking sound would be loudest?
Guess we'll have to let god sort that one out when we get there.
Honestly, I'm amazed they've held this jalopy together this long. It'd be poetic if not altogether surprising if they ultimately held the economy along right up to the point that the scientists at the Large Hadron Collider got everything going finally and the economy started melting down just as the world/universe imploded. The question is, which giant sucking sound would be loudest?
Guess we'll have to let god sort that one out when we get there.
Taylor, I think you misunderstood the alternative I presented. I was saying which of the following is true?
(A) We really are poised on the brink of disaster, and the fact that Kling, Roubini, Feldstein, Wenzel, and I all agree--even though our specific arguments are different--just shows that there are multiple paths to a true conclusion.
(B) Everything is fine, the economy will gradually recover. The fact that there are 8 different "proofs" out there of how bad things are, just shows that there are at least 8 idiots.
(A) We really are poised on the brink of disaster, and the fact that Kling, Roubini, Feldstein, Wenzel, and I all agree--even though our specific arguments are different--just shows that there are multiple paths to a true conclusion.
(B) Everything is fine, the economy will gradually recover. The fact that there are 8 different "proofs" out there of how bad things are, just shows that there are at least 8 idiots.
"reaching the same wrong answer through mutliple invalid chains of reasoning"
I like to do this all on my own!
I like to do this all on my own!
Bob,
No, I definitely got it. I guess I forgot my obligatory internet e-sarcasm signal at the end (/sarcasm) to highlight that I found what I was saying to be silly.
Apologies for the confusion.
And btw, here is the anti-spam blog tool I saw on Lila Rajiva's blog, see if it can do you any good: http://akismet.com/
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No, I definitely got it. I guess I forgot my obligatory internet e-sarcasm signal at the end (/sarcasm) to highlight that I found what I was saying to be silly.
Apologies for the confusion.
And btw, here is the anti-spam blog tool I saw on Lila Rajiva's blog, see if it can do you any good: http://akismet.com/
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