Comments on: $7.8 Trillion and Counting http://baselinescenario.com/2008/11/26/78-trillion-and-counting/ What happened to the global economy and what we can do about it Sat, 21 Nov 2009 02:32:50 +0000 http://wordpress.com/ hourly 1 By: Too Small To Fail | Bear Market Investments http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-2276 Too Small To Fail | Bear Market Investments Fri, 26 Dec 2008 18:37:34 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-2276 [...] bailout increments in the hundreds of billions of dollars, and to periodically reassessing how many trillions have been committed by the Federal Reserve and [...] [...] bailout increments in the hundreds of billions of dollars, and to periodically reassessing how many trillions have been committed by the Federal Reserve and [...]

]]> By: Top Posts « WordPress.com http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-1637 Top Posts « WordPress.com Sun, 30 Nov 2008 00:15:50 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-1637 [...] $7.8 Trillion and Counting The New York Times has an arresting chart on the government’s new financial commitments made during the financial [...] [...] [...] $7.8 Trillion and Counting The New York Times has an arresting chart on the government’s new financial commitments made during the financial [...] [...]

]]> By: James Kwak http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-1629 James Kwak Sat, 29 Nov 2008 15:46:43 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-1629 Paroune: As far as timing is concerned, it depends on the type of commitment. For example, commercial paper purchases are short-term by definition, so the Fed will be constantly getting paid back and, presumably, rolling over its purchases. The real question is when the Fed can get out of the business of buying commercial paper, and there we could be talking about a couple of years. The preferred stock investments have dividends that go up after 3 years, so there is a good chance that banks will buy them out if at all possible at that point. Although Mark makes a good point that if banks are in trouble, there will be sure to be lobbying to relax their obligations. In any case, we are probably talking about years. As to whether or when we will hit an inflationary tipping point, that is anyone's guess. Brad Setser has an <a href="http://blogs.cfr.org/setser/2008/11/26/if-you-only-read-one-thing-on-china-this-fall-%E2%80%A6/" rel="nofollow">often-cited post</a> on China arguing that Chinese demand for US Treasuries will continue to be strong. Paroune: As far as timing is concerned, it depends on the type of commitment. For example, commercial paper purchases are short-term by definition, so the Fed will be constantly getting paid back and, presumably, rolling over its purchases. The real question is when the Fed can get out of the business of buying commercial paper, and there we could be talking about a couple of years. The preferred stock investments have dividends that go up after 3 years, so there is a good chance that banks will buy them out if at all possible at that point. Although Mark makes a good point that if banks are in trouble, there will be sure to be lobbying to relax their obligations. In any case, we are probably talking about years. As to whether or when we will hit an inflationary tipping point, that is anyone’s guess. Brad Setser has an often-cited post on China arguing that Chinese demand for US Treasuries will continue to be strong.

]]> By: James Kwak http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-1627 James Kwak Sat, 29 Nov 2008 15:39:40 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-1627 You're correct, the Fed doesn't have $4.7 trillion lying around. So the Fed will need to finance its investments - for example, its commercial paper purchases - somehow. The most direct means is simply to create money. This generally has an inflationary effect, although how significant that would be right now is anyone's guess. Another route, which the Fed has used a lot recently, is to ask Treasury to issue new bonds (government debt) and deposit the proceeds in its Fed bank account. This does not create inflation (at least not directly), but does increase the debt. You’re correct, the Fed doesn’t have $4.7 trillion lying around. So the Fed will need to finance its investments – for example, its commercial paper purchases – somehow. The most direct means is simply to create money. This generally has an inflationary effect, although how significant that would be right now is anyone’s guess. Another route, which the Fed has used a lot recently, is to ask Treasury to issue new bonds (government debt) and deposit the proceeds in its Fed bank account. This does not create inflation (at least not directly), but does increase the debt.

]]> By: Tom P http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-1616 Tom P Sat, 29 Nov 2008 04:37:46 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-1616 An accounting question - If the Fed is an insurer($3trillion) there is no cash outlay, but if the Fed is an investor($3trillion) or a lender ($1.7 trillion) then it seems there is a real cash outlay. But the Fed doesn't have $4.7 trillion does it? An accounting question – If the Fed is an insurer($3trillion) there is no cash outlay, but if the Fed is an investor($3trillion) or a lender ($1.7 trillion) then it seems there is a real cash outlay. But the Fed doesn’t have $4.7 trillion does it?

]]> By: Mark http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-1598 Mark Thu, 27 Nov 2008 17:20:32 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-1598 You say the government will get most of the money back. But beware the political process. Now that the money is out there, private interests will do their best to keep it. There will be lobbying to forgive the loans, for example, because they "can't afford" to pay them back. You say the government will get most of the money back. But beware the political process. Now that the money is out there, private interests will do their best to keep it. There will be lobbying to forgive the loans, for example, because they “can’t afford” to pay them back.

]]> By: The $7,800,000,000,000.00 Bailout! That’s $7.8 Trillion So Far, Folks! http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-1597 The $7,800,000,000,000.00 Bailout! That’s $7.8 Trillion So Far, Folks! Thu, 27 Nov 2008 16:27:26 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-1597 [...] have faith in that they will make the best decisions with the tools available to them, but understand that there is a great deal of uncertainty [...] [...] have faith in that they will make the best decisions with the tools available to them, but understand that there is a great deal of uncertainty [...]

]]> By: David Pearson http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-1596 David Pearson Thu, 27 Nov 2008 15:47:16 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-1596 Let me summarize your post: assuming that losses are normal, very little of the government's money is at risk. Now let me remind you of some previous, similar precepts held by policy makers and market participants: -Assuming that house prices never go down, there is very little risk of subprime losses. -Assuming that volatility stays low, there is very little risk in derivatives contracts. -Assuming that assets stay uncorrelated, there is very little risk in CDO's. -etc, etc. The point is, we are not facing normal times. The market recognizes this by pricing in tail risk. You, Paulson and Bernanke think there is no tail risk. Fine, except that the latter two can express that view with my (the taxpayer's) money. I'd rather they didn't. Let me summarize your post: assuming that losses are normal, very little of the government’s money is at risk.

Now let me remind you of some previous, similar precepts held by policy makers and market participants:

-Assuming that house prices never go down, there is very little risk of subprime losses.

-Assuming that volatility stays low, there is very little risk in derivatives contracts.

-Assuming that assets stay uncorrelated, there is very little risk in CDO’s.

-etc, etc.

The point is, we are not facing normal times. The market recognizes this by pricing in tail risk. You, Paulson and Bernanke think there is no tail risk. Fine, except that the latter two can express that view with my (the taxpayer’s) money. I’d rather they didn’t.

]]> By: How much should you worry about a $7 trillion bailout? Less than you think. « Make the Next Left http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-1587 How much should you worry about a $7 trillion bailout? Less than you think. « Make the Next Left Wed, 26 Nov 2008 23:57:44 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-1587 [...] is a great article that goes into more detail about this and also links to a New York Times chart showing the actual [...] [...] is a great article that goes into more detail about this and also links to a New York Times chart showing the actual [...]

]]> By: Paroune http://baselinescenario.com/2008/11/26/78-trillion-and-counting/#comment-1584 Paroune Wed, 26 Nov 2008 19:04:45 +0000 http://baselinescenario.wordpress.com/?p=1405#comment-1584 Mr. Kwak - I have a couple of questions for you. If the government has the potential to recover portions of such bailout dollars, when will we begin to see that happen, 18 months, 24 months, 48 months? That being asked, I can assume that the returns will not be anytime soon, at which point I ask, when will the dollar reach an inflationary tipping point. I recognize we are experiencing deflationary pressures; however, in essence the national debt has doubled in 18 months, accelerating issues the former comptroller of the U.S. government warned of 15 to 20 years down the road. I am also beginning to hear numbers for a stimulus in excess of another 600 billion. Are we looking at hyper-inflation? Mr. Kwak – I have a couple of questions for you. If the government has the potential to recover portions of such bailout dollars, when will we begin to see that happen, 18 months, 24 months, 48 months? That being asked, I can assume that the returns will not be anytime soon, at which point I ask, when will the dollar reach an inflationary tipping point. I recognize we are experiencing deflationary pressures; however, in essence the national debt has doubled in 18 months, accelerating issues the former comptroller of the U.S. government warned of 15 to 20 years down the road. I am also beginning to hear numbers for a stimulus in excess of another 600 billion. Are we looking at hyper-inflation?

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