Thursday, January 29, 2009
Taxpayers are making money. But are they?
Please read the brilliant post from Warren Mosler's website, then see my comments that follow.
"With the Fed balance sheet at just over $2 trillion and an average coupon of maybe 3% that means they are removing about $60 billion a year of interest income from the non government sectors.
So while I do think lower long term rates serves public purpose, I also recognize the need to cut taxes and/or increase other government spending to reverse the restrictive nature of that policy.
This applies to all Fed rate cuts that remove income from the non government sectors."
The record expansion of the Fed's balance, which was driven by the buying of assets, will result in a windfall profit. Warren Mosler estimates that it could be in the neighborhood of $60 billion, which would be about two or three times what the Fed ordinarily earns in one year.
So, isn't this a huge profit for the taxpayers? After all, the Fed is required by law to turn over all of its profits to the U.S. Treasury (with the exception of what it needs to operate).
All the genius media commentators, lawmakers and economists who complained for so long that the Fed's balance sheet expansion represented a huge "risk to taxpayers" are clueless that the Fed is about to make more money than it ever has.
In other words, taxpayers are getting a huge payday. Right?
Here is where the real irony is. By definition, if the Treasury is receiving this money, it is money that would have been paid out to the public. So the $60 billion profit that the Fed made actually represents a net drain of $60 billion in income that would have gone to the public!
Looking out for taxpayer money, in the end, means that taxpayers really lose.
Don't expect anyone but a very small group of economists to understand this.