Actually I do think Cochrane wants to eliminate "actual banking". And I agree. Why do fixed value liabilities need to backed by floating value assets? This isn't some law of nature. Banks would be able to issue deposits backed by reserves. These would be used to make payments. To finance their asset portfolio (mortgages, loans, etc.) they would issue floating value securities (primarily equity and risky debt).
I disagree somewhat with the term "public would tolerate the government sitting back while booms and busts take place".
The public doesn't have a clue. In the vaguest sense sudden downturns cause them to punish incumbents vaguely in the next election, and it would take a pretty sustained and sharp downturn for that to pay important political dividends.
I would say that what really happens is that regulators and lawmakers that would normally oppose such actions "tolerate" them when they are panicked and scared. In general I think if they held their ground they would find that the public forced their hand far less then they forced their own hand.
As I've commented before, I agree with Cochrane's take, at least to the extent that we need to alter the current situation in which the Biden regime stumbled into an implicit 100% guarantee of all bank deposits, in contravention to the plain language of the FDIC's authorization, in an effort to make their cronies and contributors whole in the face of SVB and other recent bank failures. We need to firewall that 100% guarantee away from purely investment accounts. We have huge sectors of money management that operate with government regulation to ensure transparency and some protection from fraud but no guarantee of the money deposited in those vehicles. The claim that 'banking' is a mix of payment processing with speculative investing developed as a reaction to disintermediation during the high inflation of 1970s and 1980s, and was a significant contributor to the S&L collapse. Continuing down the path we've been put on in the last month or so is going to endanger the entire banking system if we don't rein in the guarantees before an explosion of 'zombie banks' drives out solvent and prudent banks, which was an excellent description of the potential situation.
1. You and Cochrane are right that this firewall would draw a line in the sand to stop the implicit guarantee of investment accounts to replace the one that the government erased.
2. Kling is right that it doesn't address the underlying reasons the line keeps getting erased and re-drawn.
3. The fundamental reason there is that both fiscal and monetary policies have been coopted away from an implicit goal of "create economic stability" to an implicit goal of "prevent a reckoning and massive shift in government policy".
4. Now, it's true that "a massive shift in government policy" will create economic instability. But it is potentially a one-time correction that allows us to return to a sustainable steady state with lower baseline risk (and consequently, no real need for changes in regulation). Instead, we continue to try adding more duct tape to keep the status quo going a little longer.
5. In doing so, the mix of unsustainable spending, money creation, and private reactions to these will continue to drive savers into "investments" and will create losses that are politically unacceptable. As Kling says, the line will get redrawn again.
6. The only way to get out of the vicious circle is to muster up the political will to take a punch now instead of taking an unending beatdown later.
If there was a solid narrow banking sector, I am not sure that booms and busts in actual banks (let's call them fat banks) would be such a problem. On the one hand, not being bailed out at the drop of a hat would work somewhat to limit the excesses of risk in the industry, just like in any other. On the other hand, we might not have to care too much if the industry went boom and bust a lot. Most people would have less exposure to its failures, and when it does fail the system we really care about would still be fine.
I suppose an analogy would be fat banking as a very temperamental and unreliable sports car: very fast and exciting when it works, but it tends to break and spend a lot of time not doing anything at all. If that is your only car you have serious problems, as every time it breaks you are missing work, not picking the kids up, all the things you need. It is a big problem and you spend a lot of time worrying about keeping it running. However, if your main car is a narrow bank, boring but eminently reliable, the pressure is off the fat banking mobile to always work. If the fat bank car is up on the lift getting repaired, you can still do everything you need to do, so it doesn't matter as much. It might be less efficient to maintain two cars, but if you want the exciting car you need the reliable one as well to keep up with your obligations.
It seems downright facile to suggest deregulation would be getting the government out of banking if the Federal Reserve still exists and the Federal government is still driving the market as the only producer of safe assets.
From a literal perspective, they are the parts of the system that are most irregular with standard practice and most responsible for the increasing risk in the system.
“Actual banking is when the bank issues liabilities that are riskless and short term (like deposits) while holding assets that are risky and long term (like home mortgages or commercial loans). “
Why is form of banking necessary? Just because people demand to indulge in the fantasy of risk-free returns does not mean that their demands must be placated.
The absolute magnitude and variance of the inflation rate is what drove the real interest rate dramatically negative and made the financial system unstable.
Has the government/central bank (money printer) anywhere ever stopped inflation without making the real interest rate positive? I don't know of any examples.
Inflation expectations years from now from the fed? When I look at 30% raise for the union workers at the schools in LA and all the public unions with their Cola's and fully Cola retirements starting at 55 for cops and fire in LA, it is hard to visualize "expectations" being low enough to have a positive real interest rate. Expectations are not reality. They have to be assuming some things drastically decreasing in cost at a time when obtaining permission to do anything in the real world is becoming regulatory frozen. Moore's law is no longer providing cheaper chips as fast.
As they jump back and forth between various inflation indexes, only including things like food and energy when it goes the way they want, we have to look at what is real and that is the value of my dollars is going down. Taking a short term monthly measure rather than a year to year measure can give zero inflation when the real year to year rate is 7% and my money I saved decades ago will no longer buy me what I want is just a con mans game. Look at the derivative of the rate, we are no longer increasing inflation as fast as we were.
I had particularly in mind the inflation expectations of TIPS traders. They have not been far away from 2.3% CPI (which is the equivalent for the past decade or so of PCE = 2%). Yesterday they were at 2.1%, 5 and 10 years.
Could a lot of TIPS traders be like I was and just purchased them to hold to maturity? In 10 years they will have copied Paul Volcker and made the real interest rate positive, even if it took 20% nominal interest rates. If they don't end the inflation we will be back to the wage/price spiral and possibly the loss of the dollar as a reserve currency (assuming China is wise enough to pick up the pieces with a stable reserve currency for the world).
This may be the reality of the MMT (modern monetary theory) myth that too many of our leaders seemed to believe when it gave them the answers they wanted to believe.
I'll go this far with you. The Treasury really ought to create some intermediate TIPS. {Someone (here?) explained why politically/admiratively the do not, but I still wish for them.}
" Done, zero risk." John Cochrane, like most economists & regulators & auditors, part of the problem.
There is ALWAYS risk, even if it minimal. We need better words and metrics for risk, and comparing risks.
How can you write about SVB and risk and NOT talk about it's duration risk? (because nobody else is talking about it, either -- tho I'm reading and admiring only a few like John here.)
Do you even know what it's duration risk positions were at end of years 2020, 2021, 2022? (If not, why not?)
--
Arnold, you've said duration risk is well understood. Please tell me what the SVB numbers have been over the last couple years. I'm convinced lack of good language to talk about risk has exacerbated all risk related regulatory issues (also with COVID).
"To an economist, no action is really a mistake, it's just an optimal answer to a different question". Very true and the question that the Fed and other regulators seemed to want answered only concerned bank solvency in a recession or some other similar event; no modeling of a stagflation environment, a rising interest rate and how that would affect banks and creditor view of banks for those assets marked to market.
Boy, what an oversight! I would also add that I suspect that bankers taking note of a rising interest rate environment as part of credit analysis probably looked at their borrowers loans and modeled how a rising interest rate would affect creditworthiness; at least once upon a time they did. How bank managers in bank treasury departments did not with regard to bond securities is a bit baffling.
Cochrane seems to just want to see the system be more stable; he knows credit drives economic activity and putting aside fiscal dysfunction ,real growth.
Asset/lLiability mismatch remains the issue as most are now aware of. But banks sell off loans to CLO, CDO, and CMO buyers who do match fund. So, why cannot this be more readily achieved by bank themselves and better safeguard depositors? The gov, as in the past, will always step in to see depositor suffer no loss, so alternatives to what we have at present need to be examined.
In some sense, narrow banking already exists. Narrow banks at present appear in the form of money market mutual funds that hold 100% of their assets in U.S. Treasury obligations or other instruments collateralized by the same (repos). Such MMMFs are highly successful and hold 100's of billions of dollars in assets, if not trillions. As for "actual banks," IMHO, it seems clear that deposit insurance is necessary to maintain liquidity in the monetary system, but that comes with moral hazards as we have seen time and again. That requires some regulation, but the simpler the better. I conclude from this line of thought (but could be proven wrong) that the simplest regulation would be to require actual banks to hold more capital. Since such capital might generate returns that are lower risk and lower reward, it would attract only certain types of investors. But clearly there is a market for such equity, witness the large market for preferred shares and high dividend yielding and/or low-beta common equity.
The FED policies the past 15 years have been destructive to economic stability. They forgot the first rule of holes: When you get in one, stop digging.
"Damaging?" I'd say today's Fed stopped digging and started re-filling pretty soon, March '22 even if they should have stopped in Sept 21. [Though I am somewhat concerned that it is refilling a bit too enthusiastically and may refill beyond ground level.] The Bernanke-Yellen Fed was never digging, but failed to refill the 2008 crisis hole for a decade.
"we show that the combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, ..."
I think I understand what is meant in the generic sense by credit growth and asset price growth but I have no idea how Greenwood et al are measuring either and for sure I don't know how they combine them into one measure. I don't see any discussion of that in their paper. Isn't that something rather important to first verifying their statement is at least factual? Or do we have to take them at their word?
Danish mortgage banks look to me like U.S. mortgage banks. The latter don't hold mortgages either. They just sell them to Freddie and Fannie, which create mortgage securities. The "actual banking" is done by the institutions that buy those mortgage securities. Some of these are actual banks.
For a “consumer-driven” economy (largely dependent these days on derivative markets mechanics), the Danish system you describe would seem much less efficient, leaving lots of room for alternate models fueled by consumer dreams and the professional storytelling within the wider markets made between participants, elected officials, and their mutual servants. Thanks for the link.
Someone buys the Danish mortgage bond. That someone is likely to be a pension fund of some sort. When the housing crisis comes, it isn't a bank that get bailed out any longer, it is the pension fund.
I have no idea why the pension fund would need a bailout. Are losses from a housing crises somehow different than interest rate hikes that cause bonds to lose value? Different from stock market losses?
And yet central banks for 14 years have been bailing out pension funds and stock market losses. We didn't get a $9 trillion dollar Fed balance sheet and $32 trillion dollar federal debt bailing out banks alone.
You'll have to explain your definition of bailout. It clearly isn't the standard one.
Maybe you can start from here. It is true that by growing the Fed balance sheet, holders of bonds saw increased bond values. Is that what you mean by a bailout? "The Fed's purchases reduced the available supply of securities in the market, leading to an increase in the prices of those securities and a reduction in their yields. "
I think the most general way that “bailout” is being used since (at least the S&L days) is when a governement “backstop” is used to financially assist parties that otherwise would have a big financial problem resulting in further downstream (derivative) instability. Most fundamentally, the argument has been that the injured (or yet to be injured) were unwittingly involved in some sophisticated scheme for which they are either not culpable or, would be directly culpable for ineviable downstream collateral damage. In short, it’s insurance paid for by taxpayers, loss of credibility, or through other externalities. I’d like to know if this is not fair, too general or not general enough.
Anyone who sold their US bills and notes and agency bonds to the Fed used the proceeds to buy other financial assets that would have otherwise settled to lower values during and after the Great Financial Crisis. This is called the Fed Put by a lot of pundits, and they are right- the Fed has been putting a bid under all the financial markets since at least 1987. I call this a bailout- what do you call it? I have benefitted from it, greatly- it allowed me to retire at age 45 with what has been, so far, little risk. Every pension plan in the US has benefitted from it by propping up the values of equities and bonds of all types. Bailouts.
Another aspect of “bailout” is that in every case (?), rewards for taking risks were privatized until such time as those risks tipped the boat at which point unrelated parties were asked to assume the loss. Politically, it’s gets murkey when empowered voters (many of whom got mortgages when they could not afford it) blame the lenders for lending them the assets that failed in the first place. Sometimes they are actually called the victims but in the case of the SVB run (where “little old ladies” might have deposits exceeding FDIC limits), technically even these “victims” were expecting profits and should have known better. Thought experiment: Do users of web browsers that get hacked need a public backstop?
Thanks. I suppose that's what I would guess you meant even if you wrote the explanation much more clearly than I could have. It's not exactly wrong but I have a few problems with that viewpoint:
- A bailout implies the entity bailed out was under water or at least in some sort of distress. I'd bet most profits reaped due to the Fed's purchases went to entities not in distress. Like you.
- The Fed made these purchases at market value. Bailout usually implies actions not at market value.
- The Fed's goal was to reduce interest rates, not increasing market value of assets. The benefit to entities in distress was incidental.
That said, it is true that to Fed's purchases were so large they increased market value of many assets but I'm not inclined to call that a bailout.
Actually I do think Cochrane wants to eliminate "actual banking". And I agree. Why do fixed value liabilities need to backed by floating value assets? This isn't some law of nature. Banks would be able to issue deposits backed by reserves. These would be used to make payments. To finance their asset portfolio (mortgages, loans, etc.) they would issue floating value securities (primarily equity and risky debt).
Which they ought even more to do (invest in VR assets) when funding investments with deposits.
I disagree somewhat with the term "public would tolerate the government sitting back while booms and busts take place".
The public doesn't have a clue. In the vaguest sense sudden downturns cause them to punish incumbents vaguely in the next election, and it would take a pretty sustained and sharp downturn for that to pay important political dividends.
I would say that what really happens is that regulators and lawmakers that would normally oppose such actions "tolerate" them when they are panicked and scared. In general I think if they held their ground they would find that the public forced their hand far less then they forced their own hand.
As I've commented before, I agree with Cochrane's take, at least to the extent that we need to alter the current situation in which the Biden regime stumbled into an implicit 100% guarantee of all bank deposits, in contravention to the plain language of the FDIC's authorization, in an effort to make their cronies and contributors whole in the face of SVB and other recent bank failures. We need to firewall that 100% guarantee away from purely investment accounts. We have huge sectors of money management that operate with government regulation to ensure transparency and some protection from fraud but no guarantee of the money deposited in those vehicles. The claim that 'banking' is a mix of payment processing with speculative investing developed as a reaction to disintermediation during the high inflation of 1970s and 1980s, and was a significant contributor to the S&L collapse. Continuing down the path we've been put on in the last month or so is going to endanger the entire banking system if we don't rein in the guarantees before an explosion of 'zombie banks' drives out solvent and prudent banks, which was an excellent description of the potential situation.
Let me put it differently:
1. You and Cochrane are right that this firewall would draw a line in the sand to stop the implicit guarantee of investment accounts to replace the one that the government erased.
2. Kling is right that it doesn't address the underlying reasons the line keeps getting erased and re-drawn.
3. The fundamental reason there is that both fiscal and monetary policies have been coopted away from an implicit goal of "create economic stability" to an implicit goal of "prevent a reckoning and massive shift in government policy".
4. Now, it's true that "a massive shift in government policy" will create economic instability. But it is potentially a one-time correction that allows us to return to a sustainable steady state with lower baseline risk (and consequently, no real need for changes in regulation). Instead, we continue to try adding more duct tape to keep the status quo going a little longer.
5. In doing so, the mix of unsustainable spending, money creation, and private reactions to these will continue to drive savers into "investments" and will create losses that are politically unacceptable. As Kling says, the line will get redrawn again.
6. The only way to get out of the vicious circle is to muster up the political will to take a punch now instead of taking an unending beatdown later.
I love this comment, and heartily agree.
If there was a solid narrow banking sector, I am not sure that booms and busts in actual banks (let's call them fat banks) would be such a problem. On the one hand, not being bailed out at the drop of a hat would work somewhat to limit the excesses of risk in the industry, just like in any other. On the other hand, we might not have to care too much if the industry went boom and bust a lot. Most people would have less exposure to its failures, and when it does fail the system we really care about would still be fine.
I suppose an analogy would be fat banking as a very temperamental and unreliable sports car: very fast and exciting when it works, but it tends to break and spend a lot of time not doing anything at all. If that is your only car you have serious problems, as every time it breaks you are missing work, not picking the kids up, all the things you need. It is a big problem and you spend a lot of time worrying about keeping it running. However, if your main car is a narrow bank, boring but eminently reliable, the pressure is off the fat banking mobile to always work. If the fat bank car is up on the lift getting repaired, you can still do everything you need to do, so it doesn't matter as much. It might be less efficient to maintain two cars, but if you want the exciting car you need the reliable one as well to keep up with your obligations.
It seems downright facile to suggest deregulation would be getting the government out of banking if the Federal Reserve still exists and the Federal government is still driving the market as the only producer of safe assets.
From a literal perspective, they are the parts of the system that are most irregular with standard practice and most responsible for the increasing risk in the system.
A trenchant essay.
Re: "the financial policies that survive are the ones that increase the bureaucrats’ control over the financial sector."
Let's call this *Kling's Law* -- A robust corollary to *Wagner's Law of Increasing State Activity*:
https://en.wikipedia.org/wiki/Wagner%27s_law
PS: I see what you did there, turning the tables on John Cochrane's phrase.
"To an economist, no action is really a mistake, it's just an optimal answer to a different question".
It's a cute statement but doesn't seem all that valuable.
1 - Some questions have little or no importance. There is no value in answering them.
2 - Some actions aren't optimal to any question.
I suppose it could be argued these two statements are different way of saying the same thing.
“Actual banking is when the bank issues liabilities that are riskless and short term (like deposits) while holding assets that are risky and long term (like home mortgages or commercial loans). “
Why is form of banking necessary? Just because people demand to indulge in the fantasy of risk-free returns does not mean that their demands must be placated.
Again, we need to distinguish credit risk from interest rate mismatch risk. A "bank" can do term intermediation with VR instruments.
The absolute magnitude and variance of the inflation rate is what drove the real interest rate dramatically negative and made the financial system unstable.
Has the government/central bank (money printer) anywhere ever stopped inflation without making the real interest rate positive? I don't know of any examples.
It is positive now measure by inflation expectations.
Inflation expectations years from now from the fed? When I look at 30% raise for the union workers at the schools in LA and all the public unions with their Cola's and fully Cola retirements starting at 55 for cops and fire in LA, it is hard to visualize "expectations" being low enough to have a positive real interest rate. Expectations are not reality. They have to be assuming some things drastically decreasing in cost at a time when obtaining permission to do anything in the real world is becoming regulatory frozen. Moore's law is no longer providing cheaper chips as fast.
As they jump back and forth between various inflation indexes, only including things like food and energy when it goes the way they want, we have to look at what is real and that is the value of my dollars is going down. Taking a short term monthly measure rather than a year to year measure can give zero inflation when the real year to year rate is 7% and my money I saved decades ago will no longer buy me what I want is just a con mans game. Look at the derivative of the rate, we are no longer increasing inflation as fast as we were.
I had particularly in mind the inflation expectations of TIPS traders. They have not been far away from 2.3% CPI (which is the equivalent for the past decade or so of PCE = 2%). Yesterday they were at 2.1%, 5 and 10 years.
Could a lot of TIPS traders be like I was and just purchased them to hold to maturity? In 10 years they will have copied Paul Volcker and made the real interest rate positive, even if it took 20% nominal interest rates. If they don't end the inflation we will be back to the wage/price spiral and possibly the loss of the dollar as a reserve currency (assuming China is wise enough to pick up the pieces with a stable reserve currency for the world).
This may be the reality of the MMT (modern monetary theory) myth that too many of our leaders seemed to believe when it gave them the answers they wanted to believe.
I'll go this far with you. The Treasury really ought to create some intermediate TIPS. {Someone (here?) explained why politically/admiratively the do not, but I still wish for them.}
My unpublished comment there:
" Done, zero risk." John Cochrane, like most economists & regulators & auditors, part of the problem.
There is ALWAYS risk, even if it minimal. We need better words and metrics for risk, and comparing risks.
How can you write about SVB and risk and NOT talk about it's duration risk? (because nobody else is talking about it, either -- tho I'm reading and admiring only a few like John here.)
Do you even know what it's duration risk positions were at end of years 2020, 2021, 2022? (If not, why not?)
--
Arnold, you've said duration risk is well understood. Please tell me what the SVB numbers have been over the last couple years. I'm convinced lack of good language to talk about risk has exacerbated all risk related regulatory issues (also with COVID).
"To an economist, no action is really a mistake, it's just an optimal answer to a different question". Very true and the question that the Fed and other regulators seemed to want answered only concerned bank solvency in a recession or some other similar event; no modeling of a stagflation environment, a rising interest rate and how that would affect banks and creditor view of banks for those assets marked to market.
Boy, what an oversight! I would also add that I suspect that bankers taking note of a rising interest rate environment as part of credit analysis probably looked at their borrowers loans and modeled how a rising interest rate would affect creditworthiness; at least once upon a time they did. How bank managers in bank treasury departments did not with regard to bond securities is a bit baffling.
Cochrane seems to just want to see the system be more stable; he knows credit drives economic activity and putting aside fiscal dysfunction ,real growth.
Asset/lLiability mismatch remains the issue as most are now aware of. But banks sell off loans to CLO, CDO, and CMO buyers who do match fund. So, why cannot this be more readily achieved by bank themselves and better safeguard depositors? The gov, as in the past, will always step in to see depositor suffer no loss, so alternatives to what we have at present need to be examined.
In some sense, narrow banking already exists. Narrow banks at present appear in the form of money market mutual funds that hold 100% of their assets in U.S. Treasury obligations or other instruments collateralized by the same (repos). Such MMMFs are highly successful and hold 100's of billions of dollars in assets, if not trillions. As for "actual banks," IMHO, it seems clear that deposit insurance is necessary to maintain liquidity in the monetary system, but that comes with moral hazards as we have seen time and again. That requires some regulation, but the simpler the better. I conclude from this line of thought (but could be proven wrong) that the simplest regulation would be to require actual banks to hold more capital. Since such capital might generate returns that are lower risk and lower reward, it would attract only certain types of investors. But clearly there is a market for such equity, witness the large market for preferred shares and high dividend yielding and/or low-beta common equity.
In an unregulated "banking" system the Fed would still be trying to "stabilize the economy" (keep inflation on target).
"Do or Do Not, There Is No Try"
~Yoda
The FED policies the past 15 years have been destructive to economic stability. They forgot the first rule of holes: When you get in one, stop digging.
"Damaging?" I'd say today's Fed stopped digging and started re-filling pretty soon, March '22 even if they should have stopped in Sept 21. [Though I am somewhat concerned that it is refilling a bit too enthusiastically and may refill beyond ground level.] The Bernanke-Yellen Fed was never digging, but failed to refill the 2008 crisis hole for a decade.
I was focusing on Fed actions, not the outcomes. It could be making efforts to keep inflation on track and fail to do so.
"we show that the combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, ..."
I think I understand what is meant in the generic sense by credit growth and asset price growth but I have no idea how Greenwood et al are measuring either and for sure I don't know how they combine them into one measure. I don't see any discussion of that in their paper. Isn't that something rather important to first verifying their statement is at least factual? Or do we have to take them at their word?
Danish mortgage banks look to me like U.S. mortgage banks. The latter don't hold mortgages either. They just sell them to Freddie and Fannie, which create mortgage securities. The "actual banking" is done by the institutions that buy those mortgage securities. Some of these are actual banks.
For a “consumer-driven” economy (largely dependent these days on derivative markets mechanics), the Danish system you describe would seem much less efficient, leaving lots of room for alternate models fueled by consumer dreams and the professional storytelling within the wider markets made between participants, elected officials, and their mutual servants. Thanks for the link.
Someone buys the Danish mortgage bond. That someone is likely to be a pension fund of some sort. When the housing crisis comes, it isn't a bank that get bailed out any longer, it is the pension fund.
I have no idea why the pension fund would need a bailout. Are losses from a housing crises somehow different than interest rate hikes that cause bonds to lose value? Different from stock market losses?
And yet central banks for 14 years have been bailing out pension funds and stock market losses. We didn't get a $9 trillion dollar Fed balance sheet and $32 trillion dollar federal debt bailing out banks alone.
You'll have to explain your definition of bailout. It clearly isn't the standard one.
Maybe you can start from here. It is true that by growing the Fed balance sheet, holders of bonds saw increased bond values. Is that what you mean by a bailout? "The Fed's purchases reduced the available supply of securities in the market, leading to an increase in the prices of those securities and a reduction in their yields. "
https://www.federalreserve.gov/faqs/what-were-the-federal-reserves-large-scale-asset-purchases.htm
I think the most general way that “bailout” is being used since (at least the S&L days) is when a governement “backstop” is used to financially assist parties that otherwise would have a big financial problem resulting in further downstream (derivative) instability. Most fundamentally, the argument has been that the injured (or yet to be injured) were unwittingly involved in some sophisticated scheme for which they are either not culpable or, would be directly culpable for ineviable downstream collateral damage. In short, it’s insurance paid for by taxpayers, loss of credibility, or through other externalities. I’d like to know if this is not fair, too general or not general enough.
Anyone who sold their US bills and notes and agency bonds to the Fed used the proceeds to buy other financial assets that would have otherwise settled to lower values during and after the Great Financial Crisis. This is called the Fed Put by a lot of pundits, and they are right- the Fed has been putting a bid under all the financial markets since at least 1987. I call this a bailout- what do you call it? I have benefitted from it, greatly- it allowed me to retire at age 45 with what has been, so far, little risk. Every pension plan in the US has benefitted from it by propping up the values of equities and bonds of all types. Bailouts.
Another aspect of “bailout” is that in every case (?), rewards for taking risks were privatized until such time as those risks tipped the boat at which point unrelated parties were asked to assume the loss. Politically, it’s gets murkey when empowered voters (many of whom got mortgages when they could not afford it) blame the lenders for lending them the assets that failed in the first place. Sometimes they are actually called the victims but in the case of the SVB run (where “little old ladies” might have deposits exceeding FDIC limits), technically even these “victims” were expecting profits and should have known better. Thought experiment: Do users of web browsers that get hacked need a public backstop?
Thanks. I suppose that's what I would guess you meant even if you wrote the explanation much more clearly than I could have. It's not exactly wrong but I have a few problems with that viewpoint:
- A bailout implies the entity bailed out was under water or at least in some sort of distress. I'd bet most profits reaped due to the Fed's purchases went to entities not in distress. Like you.
- The Fed made these purchases at market value. Bailout usually implies actions not at market value.
- The Fed's goal was to reduce interest rates, not increasing market value of assets. The benefit to entities in distress was incidental.
That said, it is true that to Fed's purchases were so large they increased market value of many assets but I'm not inclined to call that a bailout.