[arcticbull]

> Interesting to note that the VCs are bailing out the retail users here, instead of the usual flow where taxpayers are on the hook for bailing out too-big-to-fail WallStreet banks.

If you're referring to the 2008 bail-outs, those weren't grants, they were loans and investments. To date, beneficiaries have repaid more than the initial amount netting the government (and hence the people) a significant profit. $109B to date. And the expectation of significantly more to come. Talk about a good investment. [1]

Fannie and Freddie alone received $191B and have paid $301B in dividends so far - and all the principal remains outstanding.

[1] https://projects.propublica.org/bailout/

[andrepd]

That's very nice and good. So if I struggle to pay my mortgage, why am I evicted instead of bailed out? It's highly unlikely that I be unemployed for the rest of my life, so I would surely be able to pay back any bailout, with interest to spare. Why do banks struggle and get bailed out, but people struggle and don't?

Or looking at it from another point of view: the money spent on bailouts wouldn't be stored under a mattress if it were not spent that way, therefore you cannot compare $109B with $0. You have to compare it, for example, with the money lost from the moral hazard of rewarding the irresponsible behaviour which led to the most destructive recession in 75 years, or to the effect the money would have had it been spent helping the millions of people that lost their jobs or had their homes foreclosed on, etc.

[arcticbull]

These are all separate responsibilities of different groups.

The Fed's charter is to maintain a low, predictable rate of inflation over the medium term and to maximize employment. You (in aggregate) won't have a job if all the employers go bankrupt due to direct investments and contagion. This will directly impact (in aggregate) your ability to make your mortgage payments.

Secondarily, regulation of the financial sector to ensure this doesn't happen again isn't JPow's job, it's the job of Congress.

Bailing out the institutions does not preclude further regulation to prevent the situation from happening again. And it certainly doesn't preclude creating a meaningful social safety net.

[kcatskcolbdi]

The Federal Reserve is absolutely tasked with regulating the banks[1].

Congress should not be in the business of preventing banks from imploding in on themselves via regulation. Congressional regulations should insulate consumers from predatory financial institution practices. FDIC insurance exists to protect consumers in the event their banks behave irrationally. There should be no backstop for the banks themselves. Even if they wanted to Congressional regulations couldn't keep pace with the speed at which financial instruments of institutional suicide are forged.

1 https://www.federalreserve.gov/supervisionreg/reglisting.htm

[MattGaiser]

> It's highly unlikely that I be unemployed for the rest of my life

Unemployed? No. Earn what you did before? Anecdotal, but my parents know a lot of people in their 50s that when laid off, never went anywhere close to their prior salaries.

This was especially true for people who couldn't get their current job with their credentials. Plenty of senior people in places like factories and warehouses don't have degrees for example. Would they find work again if laid off?

[beebmam]

Were you evicted in the 2008 crisis?

[tim333]

It's kind of a political decision that varies from country as to what extent to bail people out. The UK for example has a "Support for Mortgage Interest" scheme with various terms and conditions. I'm not sure how the politics play out in the US.

[Dylan16807]

The government could have done both, so I don't think we should frame it as competing loans.

[Barrin92]

>why am I evicted instead of bailed out?

probably because you, collectively speaking, kept electing people who didn't pass anti-eviction laws or strengthened tenant rights. Which most countries by the way did put in place during covid at the very least.

[not2b]

Because you didn't owe enough money to tank the world economy if you went broke, mainly. Small debtors have no power, but huge debtors do.

[arcticbull]

I mean small debtors just get to declare bankruptcy and not pay, which is a pretty good power to have. Large debtors have broader obligations to the community.

[throwawayboise]

Yep. If you owe the bank $1,000 that's your problem. If you owe the bank $100M that's the bank's problem.

[wizzwizz4]

So why don't debtors unionise?

[beeboop]

Why do people go to jail and lose all ability to make income, but corporations don't? Corporations should get virtual jail time where they're not allowed to operate for a set period of time and have all their rights stripped away.

[andrepd]

Honestly, I'd settle for jail time for the actual persons making the illegal decisions, rather than virtual jail time for corporations. You know... personal accountability.

Say a factory is poisoning the riverwater, what is more likely to disssuade such actions: penalties to the company (taken in stride as the cost of doing business), or actual jail time and forfeit of assets to the person making the decision and reaping the profits from it?

[beeboop]

The problem is that a company can be a revolving door of people taking the fall for crimes. The better dissuading action is to force the company to shutter operations for a set period of time. It's only fair that such a catastrophic punishment can happen to individuals that it can also happen to businesses that are generally much, much more harmful.

[yupper32]

You don't go to jail if you can't repay your mortgage.

[beeboop]

I meant more in the context of corps only getting fines for illegal activities that actual people would go to jail for

[capitalsigma]

What happens to the employees of that company?

[pirate787]

There were multiple stages of bailouts, including Federal Reserve asset purchases which directly transferred resources from dollar holders to for-profit shareholders and bondholders. The Fed's intervention dwarfed the TARP bailout and is the largely the reason TARP was successful...they moved the economic loss from Treasury to the Fed.

https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much...

[arcticbull]

That's not how the Fed works. [edit] (As I replied in a peer comment, increasing the money supply is not debasement or a loss - that is measured from its impact. In the years subsequent to the bailouts inflation hit at some point an annualized -4% before returning to a range of 0-2% going into COVID.

Modern economics isn't as simple as "supply up bad.")

[NovemberWhiskey]

Your comment doesn't appear to have much to do with the link you have provided; could you add some more context?

[joe_the_user]

Aside from the other considerations, "it was a good investment" stuff is just ridiculous. The general bank isn't in operations to make money - it's in operation to protect the market, the currency and the economy as a whole so whether it makes money is irrelevant to whether these loans were a good idea.

But even more, if the Fed basically designates a bank "too big to fail" (as the Fed did) and loans the bank the money it currently needs, the markets can this. And this allows the bank to "print money" itself by issuing bonds - since now the market knows those bonds are effective guaranteed by the Fed and so equal to money. Thus the bank can easily issue enough bonds to repay or over-pay the Fed. But that's not a "see, problem solved!" situation.

The theoretical problem of this sort of action is naturally these large entities potentially issue loans and borrow without being disciplined by risk. That might be compensated for by other actions - say preventing them from issuing risky loans. But things still wind-up a bit "distorted". I'd recommend Doug Noland's Credit Bubble Bulletin on the subject.

[arcticbull]

> Aside from the other considerations, "it was a good investment" stuff is just ridiculous. The general bank isn't in operations to make money - it's in operation to protect the market, the currency and the economy as a whole so whether it makes money is irrelevant to whether these loans were a good idea.

The central bank did not make these investments, Congress did, and so the yields did not accrue to the central bank but to the Treasury. If you've ever met the IRS you know that the job of the Treasury is in fact to accrue revenue.

The central bank's charter is to maintain a low, predictable rate of inflation over a medium term and to maintain maximum employment.

> The theoretical problem of this sort of action is naturally these large entities potentially issue loans and borrow without being disciplined by risk.

I agree, which is why Congress needs to better regulate the sector. However that's Congress' job not the Fed's.

[joe_the_user]

I don't think any of your actually change my point that the project making money is irrelevant to and a distraction from the basic impact of the loans.

While one can debate whether just regulation can prevent private investors from engaging in risk, there are other impacts as well. Putting a whole lot of money into bank which invest in "safe assets" like real estate, causes the relative price of those assets to increase. This distorts the economy - that disproportionate rent and real estate price increases over the last ten and twenty years are arguably a product of Fed largess. And these have been a disaster for anyone not being buoyed by the risings - the majority of those in lower income categories.

[arcticbull]

Housing is a very different matter, one primarily defined by zoning. Zoning rules in major metros prevented supply from meeting demand by preventing new construction. Zoning rules outside major metros made the average new home 2X bigger. [1] Combined these make houses dramatically more expensive even though the cost per square foot on average, adjusted for inflation, is exactly the same as it has been since the 1970s.

Japan for instance has seen their M2 money supply 3X from 1990 to 2022, while the affordability of a house there hasn't decreased since 1995. [2]

This is due to their federal zoning rules which permit housing construction practically everywhere. [3]

The increase in price of housing is what's driving inflation, not vv imo.

And for what it's worth, I think Glass-Steagall (brought in as part of the post-Great Depression reforms) did a very good job of preventing retail banks from investing in toxic garbage and its repeal in 1999 was IMO a major contributing factor to the crisis in the first place. [4]

[1] https://fee.org/articles/new-homes-today-have-twice-the-squa...

[2] https://fred.stlouisfed.org/series/JPNCPIHOUAINMEI

[3] https://marketurbanism.com/2019/03/19/why-is-japanese-zoning...

[4] https://www.federalreservehistory.org/essays/glass-steagall-...

[joe_the_user]

The increase in price of housing is what's driving inflation, not vv imo.

That's like saying "price increases lead to inflation". Which is true but illuminating.

Limitations on housing construction certainly made homes especially valuable as an investment in places like California. But the vast amount of money-created-out-of-thin-air was what sought this reliable investments. The situation you mention is just related to what I describe, it doesn't refute what I describe.

The main thing is that this inflating of money has a number of noxious qualities, the inflation of housing costs just being one of them. Prices are signals for how resources should be allocated and distorted prices result in distorted allocations of resources. For small example, there's a daft and dangerous plane to restart a fricken gold mine in the little tourist next to my town - with all attendant potential for multiple types of pollution and with gold only getting kind of play because it's a fixed asset with a price driven sky-high by the present money creation process.

[NovemberWhiskey]

>Japan for instance has seen their M2 money supply 3X from 1990 to 2022, while the affordability of a house there hasn't decreased since 1995. This is due to their federal zoning rules which permit housing construction practically everywhere.

I mean I've no doubt that's some sort of a factor, but on the other hand the population of Japan is also almost exactly the same as it was in 1995 whereas the US population has increased by 25% in the same period - I'm not sure I'd so easily rule out demographics as a factor!

[arcticbull]

All that means is that supply met or exceeded demand, which is the point that I'm making - we are precluding supply from meeting demand via artificial supply constraints.

In their case it was a combination of a declining population and zoning rules. However, the decline AFAIK was concentrated outside urban areas. Tokyo grew from 32.5M to 37.5M between 1990 and 2022 without any increase whatsoever in the real dollar price of housing.

[papito]

I hope this is not an argument for more bailouts. A lot of people walked away with riches while ruining the US economy. "I lost $100 but lookit I just got back $15" is not a win, it's just... less of a loss.

[jerry1979]

Who uses cash basis accounting?

A bit of googling brought me to a paper which points out that even the CBO and the Congressional Oversight Panel independently came to the conclusion that the bailouts subsidized the banks to the tune of over 60 billion dollars [0]. The paper itself puts the value closer to 90 billion. From the article:

> Costs on an ex post cash basis were only identified for a subset of the above programs, but it is likely that on that basis the government came out ahead. Hopefully, the reader has been convinced that there is little meaningful information in this fact.

[0] https://gcfp.mit.edu/wp-content/uploads/2019/02/BailoutsV12....

[panarky]

> those weren't grants, they were loans and investments

Those loans and investments weren't guaranteed to be paid back, the government took a risk.

Assuming risk of loss is a valuable thing that gets traded all the time through futures, options, swaps and other derivatives. Those futures, options and swaps have a cost.

The fact that the government gave away that value for free means it was a massive gift to Wall Street banks.

[NovemberWhiskey]

I suppose it depends on exactly which program you're looking at, but since you mention Wall Street banks, I assume you're talking about the Capital Purchase Program.

I don't think it's reasonable to say that this was given away "for free". If it was "free" then there wouldn't have been any over-recovery at all, would there?

In the CPP, the government bought preferred stock in a number of banks (mostly not Wall Street ones, but whatever). That stock could've been worthless if the banks failed, but otherwise the banks were required to pay an annual dividend of 5% through 2013 and 9% thereafter; plus there was a whole host of supervision of their activities, including limitations on their ability to pay ordinary dividends.

[panarky]

The government paid far more for the preferred stock than the fair market value. 100% of the difference between the fair market value and the actual price paid was a gift to Wall Street banks that was never paid back.

[NovemberWhiskey]

Nonsense. Most investments carry an element of risk. The Capital Purchase Program may have looked like a bad investment (negative NPV) at the time, but the record makes it clear it actually paid off.

It makes no sense to say "in 2008, the government expected to lose money on the CPP so that's what happened; gift to the banks that was never paid back" and then drop the mic while ignoring what actually happened.

For example: TARP's Congressional Oversight Panel estimated that the $25bn capital infusion into Wells Fargo represented a subsidy (difference between fair market value of the preferred stock and the amount paid) of about $1.75bn.

However, in 2009, Wells Fargo bought back the investment after having paid $1.44bn in dividends. Then, in 2010, the Treasury also sold $840mm in Wells Fargo warrants that were part of the CPP deal.

What we thought would happen: lose $1.75bn. What actually happened: made $2.28bn. If that isn't "paying back" from your perspective, could you please suggest what would be?

[MadSudaca]

Didn’t they have to debase the currency to make those payments?

[arcticbull]

An increase in supply is not a debasement. That is measured post-facto based on its impact. Inflation was strongly negative between 2008 and 2010, hitting an annualized -4% in 2009. [1] The Fed was also making good progress unwinding its balance sheet going into 2020, before COVID hit.

[1] https://tradingeconomics.com/united-states/inflation-cpi

[RC_ITR]

I love all the Austrian Economics (thanks Satoshi!) comments we get in a supposedly data-driven environment.

How does this chart [0] show a debasement of any sort? We were in a 'secular demand stagnation crisis' back then! Is everyone here just too young (oh God) to remember 2012?

https://fred.stlouisfed.org/graph/fredgraph.png?g=LBU7

[thaumasiotes]

> How does this chart [0] show a debasement of any sort?

It's the gigantic jump in the blue line almost halfway between 2008 and 2010. A spike in the value of "all assets" is the definition of currency devaluation.

[RC_ITR]

Hey, sorry for not providing more context, the blue line is the Fed's balance sheet and the red line is inflation.

Yes, the Fed's balance sheet skyrocketed, but inflation (the value of money vs. goods & services) remained lower than before that line spiked.

[MadSudaca]

So why did they stop growing their balance sheets then?

[mr_spothawk]

> Inflation was strongly negative

It's not clear to me if you're talking about monetary or price inflation.

https://mises.org/library/money-inflation-and-price-inflatio...

> some economists have interpreted price inflation as a desperate method by which the public, suffering from monetary inflation, tries to recoup its command of economic resources by raising prices at least as fast, if not faster, than the government prints new money.

[arcticbull]

Only the long-debunked Austrian school defines inflation as a function of supply alone. The rest of the world moved on to defining inflation in terms of the measured, real-world change in the purchasing power of money - which comes under pressure from a number of different factors that aren't captured by supply.

For instance, supply chain disruptions making basic goods more expensive and increasing competition for them. Or, zoning policy prohibiting construction of new housing sufficient to meet demand in high-growth metro areas raising the cost of housing. Or zoning policies in suburban areas making housing 2x bigger on average now than in the 1970s. [1]

Defining inflation as a function of supply distracts us from the real-world problems causing broad-based increases in price.

[1] https://fee.org/articles/new-homes-today-have-twice-the-squa...

[mr_spothawk]

> long-debunked

lol.

> Defining inflation as a function of supply distracts us from the real-world problems causing broad-based increases in price.

price is a function of supply and demand already. you don't need to redefine inflation unless you're trying to dupe feeble-minded rubes.

[arcticbull]

Purchasing power is a function of a whole ton of things, including supply chains. If goods require more inputs or are less efficient to produce that will increase their price. This in turn decreases the relative purchasing power of a dollar. This can happen due to all sorts of externalities, for instance a tax. Or it can go down due to efficiencies in manufacturing technology or biotech. Or, a massive global pandemic leading to supply chain disruptions can cause prices to go up. Or housing can become more expensive because of zoning rules.

The "supply of currency units" is a fundamentally inadequate measure to capture this. It is too simplistic. Nobody takes it seriously except for a small group of very vocal online crackpots because it is so obviously unfit for purpose. [1]

We re-defined it as our understanding grew. The way we update practically any model in the face of new evidence.

Japan single-handedly demolishes the Austrian model. Their M2 supply grew 3X from 1990 to present but inflation remained 0% measured over thirty two years. Prices did not change from 1990 to 2022. [2, 3]

[1] https://www.pragcap.com/understanding-why-austrian-economics...

[2] https://fred.stlouisfed.org/series/JPNCPIALLMINMEI

[3] https://tradingeconomics.com/japan/money-supply-m2

[thaumasiotes]

> An increase in supply is not a debasement. That is measured post-facto based on its impact.

An increase in supply is always a debasement.

It's true that you might see the following chronology:

1/1/2020: value of the currency measured

6/6/2020: supply of the currency increased

1/1/2021: value of the currency measured; it's higher than it was last year!

But that doesn't mean the issue on 6/6/2020 wasn't a debasement. It definitely was, and the reason it doesn't look that way is your very low-resolution measurement of value. If the supply increase hadn't happened, the value on 1/1/2021 would have been even higher.

[arcticbull]

An increase in supply alone isn't debasement. A higher supply doesn't imply a lower value, because what you do with that new supply matters. If you mint a $10T coin and throw it under your mattress, then you haven't decreased the value of anything even though the supply has increased dramatically.

This is why we measure, and why Austrian economics fell out of favor decades ago.

See Japan for a concrete example. [1, 2] Their M2 money supply is almost 2.5X higher since 1990 but their CPI is dead flat over the same time period. It's actually seriously problematic for them.

[1] https://fred.stlouisfed.org/series/JPNCPIALLMINMEI

[2] https://tradingeconomics.com/japan/money-supply-m2

[thaumasiotes]

> If you mint a $10T coin and throw it under your mattress, then you haven't decreased the value of anything even though the supply has increased dramatically.

How has the supply increased in this scenario? What if, instead of minting the coin, you just tell people that you've done so?

The supply of money has only increased if you're able to spend the putative addition to the money supply.

[arcticbull]

You can tell them all you want, but as Japan shows us, it doesn't actually matter. What matters is what you do with the supply which is why we measure.

[lottin]

I guess you didn't get the memo. The US abandoned the gold standard in the 1930s and with that the US dollar became a fiat currency, i.e. a currency that isn't backed by anything. A fiat currency cannot be debased because it has no "base".

[MadSudaca]

Maybe not to you, but every time the FED prints money, my dollars are worth less. From my POV they’re currently debasing the currency.

[arcticbull]

If you can buy the same amount with them, then they are demonstrably not worth less.

[OscarCunningham]

In 2009 they printed money and dollars were worth more.

[MadSudaca]

So if printing makes dollars worth more, why stop? Or that effect only applied to 2009?

[arcticbull]

Because supply alone is not what defines the value of money. This is the concrete example of why Austrian economics is a wholly insufficient model.