Did Taxpayers Really ‘Profit’ From Treasury Mortgage Program? – US Business News Blog – CNBC

Did Taxpayers Really ‘Profit’ From Treasury Mortgage Program?

By John Carney

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26 Responses to Did Taxpayers Really ‘Profit’ From Treasury Mortgage Program? – US Business News Blog – CNBC

  1. John O'Connell says:

    The economics is interesting. As for the “liability” in the private sector, it seems that would be mainly a constant, the face value of the mortgages. It may have gone down over time if the homeowners were making payments. Or it may have gone down because some of them defaulted. These MBS were the “toxic” assets, right? That’s why Tsy bought them, and why the banks wanted to offload them. So, if the liability of the private sector stayed in the private sector and it went down, then the traders of the assets lost more than the $25B that the treasury “gained”, by the decrease in book value of the assets that were sold and repurchased.

    Beyond the economics, there is the question of justice. Who is it, specifically, in the private sector, who lost that $25B (or whatever)? Is it not the banksters that created these monstrosities and sold them among themselves? Yes, perhaps the 99% lost $8 apiece of their economy, but is it not satisfying (albeit in a not so admirable way) that the 1% lost the entire $25B or more from their bonus payments?

    Reply

    WARREN MOSLER Reply:

    my proposals probably reduce the financial sector by 90% or more

    Reply

  2. John Carney says:

    Roger,

    Well, Treasury is left with more dollars in its account at the Fed.

    Sure it cannot run out of dollars, etc, etc.

    But there’s no denying that it has an additional $25 billion in its accounts now.

    Reply

    wh10 Reply:

    @John Carney,

    John, if you have the time, would you be able to take a crack at my question? Why is this more like a tax instead of an asset swap? Is it because of the idea that the private sector could have reaped the gain in a counterfactual where it never would have sold and bought from the Treasury and thus lose $25 cash? Thanks!

    Reply

    WARREN MOSLER Reply:

    it was an asset swap- the tsy bot financial assets/mtgs from the economy

    then there was another asset swap- the tsy sold the same mtgs back to the economy.

    and the fed net debited the economy’s account and net credited tsy’s account for $25 billion

    Reply

    MMT Newbie Reply:

    @John Carney,

    Yes, technically its account has $25B more, but as you and I both know, it’s meaningless compared with the balances that currency users maintain in their accounts. So wouldn’t you agree that highlighting that fact needlessly obfuscates the main point here?

    Reply

    WARREN MOSLER Reply:

    the tsy gain might be meaningless, but the economy’s equal loss is entirely meaningful and the point of this discussion.

    financially, a loss for the economy is a loss, whether it’s a trading loss or a tax, either way it’s out that many financial assets vs where it would have been otherwise

    Reply

    WARREN MOSLER Reply:

    and no denying the economy has $25 billion less

    Reply

    Dan Kervick Reply:

    @WARREN MOSLER,

    But doesn’t it all depend on whether or not the Treasury spends $25 billion more than it would have otherwise? If it does, then it’s a wash: the $25 billion is just transferred from some private sector accounts to other private sector accounts.

    If Treasury were permitted unlimited borrowing, it would make no difference. But with the debt ceiling in place, the size of its discretionary spending might depend on whether or not it succeeds in finding substitutes for tax revenues.

    The government as a whole has made a choice to require the Treasury to function like a currency user instead of a currency issuer. So this isn’t much different from when a private sector trader makes a $25 billion profit from securities trading. It just moves the assets around in the private sector. So long as the $25 profit from the trading does not reduce the net government deficit – cause the government to increase its “saving” – then it probably doesn’t matter.

    Reply

    WARREN MOSLER Reply:

    yes, an increase in tsy spending of that much over what it otherwise would have sent makes it a wash in that regard

    pebird Reply:

    @Dan Kervick, But the Treasury does not spend (at least not officially). The question is whether this $25 billion “profit” has any effect on future Congress’ budgets.

    This is where Congress’ lack of monetary understanding creates uncertainty: They might think they have $25 billion more to spend. Or, they might think they have $25 billion more to apply against the deficit.

    The point is that the action of the Treasury removed $25 billion from the economy, and it is impossible to know the effect this will have on future actions of Congress.

    Dan Kervick Reply:

    @Dan Kervick, True enough Pebird, although some of what the Executive Branch spends is discretionary.

  3. wh10 says:

    What’s confusing about this to me is –

    A tax is simply a drain of NFA.

    But in this scenario, MBS was swapped for the 25B. Why isn’t this just an asset swap with no impact on NFA?

    Reply

    wh10 Reply:

    @wh10,

    I guess because if the Tsy didn’t puchase the MBS, then the private sector never would have needed to lose that 25B to the Tsy and still reap the gain the value of the MBS?

    Reply

    wh10 Reply:

    @wh10,

    Warren, I am going to make a convoluted attempt at explaining this with accounting, but I could be getting the accounting wrong. But if you do have a little time to reply, this might help you just give me a simple ‘yes’ or ‘no’ answer.

    first, let’s define a ‘tax’ as a drain of NFA. so the goal here is to establish why this was a drain of NFA to the non govt sector. second, im going to simplify the MBS as just a simple loan.

    If the MBS is valued at $100, then there is a $100 asset and $100 liability associated with it. If its value changes to $200, then the associated asset AND liability change to $200. If the govt buys the MBS asset at $100, it gives the nongovt sector $100 in deposits, just an asset swap, no change in nongovt NFA. When the MBS increases in value to $200, the govt’s MBS asset increases by $200, but the nongovt is stuck with only the liability associated with the MBS – so it’s liabilities go up $100. That’s technically where there is a drain of NFA from the nongovt sector by $100. The nongovt sector can buy it back at $200, but then it is only doing an asset swap. It’s NFA position doesn’t change.

    At the end of the day, by the nongovt not holding the MBS when its value changed, it necessarily took a hit to its NFA position.

    So, technically, even if the Treasury didn’t sell the MBS back to the non govt sector, wouldn’t the NFA position of the nongovt sector still have changed?

    Reply

    WARREN MOSLER Reply:

    so the tsy buys the mtgs and credits the economy 100

    the economy has the same liabilities but instead of that asset, the mtgs,
    it has 100 in it’s fed account.

    and, somewhere, the economy has the same 100 liability created by the asset in the first place as you stated.

    next the mtgs the govt bot appreciate in value from 100 to 200.

    if the govt hadn’t bought the mtgs, and the economy still held them,
    the economy would have had a gain of 100
    liabilities would have remained at 100
    and net worth would have gone up by 100

    but instead the economy has the deposit for its assets which hasn’t appreciated
    so the economy had no gain or loss of net worth.

    in other words, the liability that ‘appreciates’ is net worth

    wh10 Reply:

    @wh10,

    Hm, that throws me for a loop, need to brush up on my accounting and logic.

    We typically say NFA can’t change for the nongovt sector unless the govt sector adds/drains NFA. This seems to be an instance where you are saying NFA would change without govt involvement.

    I was thinking about what I knew and then extrapolating:
    If the mtgs depreciate to 0 because of default, and the banks write it down, that doesnt represent a net loss of NFA to the non govt though, since it’s counterbalanced by the gain of NFA to the mortgagee.

    Why doesn’t that counter balancing effect work in the opposite direction?

    WARREN MOSLER Reply:

    not net financial assets. net worth is a financial asset in this analysis where you are increasing financial assets due to appreciation and unrealized gains.

    wh10 Reply:

    @wh10,

    Heh I can’t tell if you are saying I am partially wrong, especially because you initially said my example was ‘right.’ Maybe this is a definitional thing for me.

    For the economy, if financial assets increase for one player due to unrealized gains on MBS (which is an increase in equity or NFA for that player), isn’t there an offsetting unrealized loss somewhere (which decreases equity or NFA for that player), such that NFA for the economy doesn’t change? You are using the word ‘economy’ and saying it gets a ‘gain’ which increases net worth, but not mentioning it also is experiencing a ‘loss’ also decreasing net worth.

    Which is why I am thinking that if the govt holds the MBS while it appreciates, the nongovt sector still records the unrealized loss to net worth but no unrealized gain (the govt sector records the unrealized gain), and NFA for the nongovt sector declines, even without the sale.

    WARREN MOSLER Reply:

    the value of the asset goes up
    and net worth goes up. net worth is on the liability side of the balance sheet

    wh10 Reply:

    @wh10,

    Equity is also on the right side of the balance sheet. And net worth is equity, not a liability. So if you say net worth goes up for the nongovt sector as a whole, you are saying NFA is going up for the nongovt sector as a whole, since NFA = A – L = E.

    WARREN MOSLER Reply:

    equity is a corporate liability

    WARREN MOSLER Reply:

    right, as I just responded.

    Reply

    WARREN MOSLER Reply:

    say the govt buys anything from the economy for $200 billion.
    that adds $200 billion to the economy, and the thing it bought is removed.
    that could be either a real or financial asset for purposes of this example.
    if it’s a financial asset, net financial assets remain unchanged.

    then, later, it sells that same thing back to the economy for $225 billion.
    that removes $225 billion from the economy.

    the economy has net lost $25 billion, and $ are financial assets.

    however the economy also has the financial assets it sold and then repurchased.
    and yes, they are valued $25 billion higher than when it first sold them.
    but they still would have been $25 billion higher in value even if they hadn’t sold them to the govt and later repurchased them.
    so the economy would have had that ‘appreciation’ of $25 billion either way.

    but the way it went down,
    the economy has what it started with, albeit valued higher,
    but is out the $25 billion in cash to the tsy.

    so the economy is $25 billion worse off than if the govt hadn’t done what it did.

    Reply

    wh10 Reply:

    @WARREN MOSLER,

    Sorry you had to go through the trouble. Thanks so much!

    Do you agree that the nongovt sector is worse off $25B even without the trade as long as it would value the asset $25B higher? (maybe the tsy refuses to sell it back.)

    Reply

  4. roger erickson says:

    Well, it’s progress. Getting a bit better with every practice round. The article almost works, right up to the last line.

    “the … market is left with fewer dollars and the Treasury with more”

    That line destroys the awareness he was expanding for readers. Naive readers will think it very good that the Treasury “has more dollars!” Should have left it with “the private sector is left with fewer dollars.”

    Or at least tried your line that “The Treasury never has nor doesn’t have dollars.”

    Reply

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