More on Asset Privatization
At EconLib this month I have an article going into more detail about how much in (fairly) liquid assets the government owns. I was actually surprised by some of these numbers, so you might be as well. For example:
International reserve assets. As of June 3, 2011, the Treasury reported international reserve assets of $144.2 billion.2 They include gold, securities and deposits denominated in euros and yen, as well as “IMF reserve position” and “Special Drawing Rights” (SDRs). However, this figure is substantially understated, as the Treasury officially values its 261.5 million troy ounces of gold at a price of $42.2222 dollars each. If we priced the Treasury’s gold holdings at the current market price of about $1,500 an ounce, then the currency reserve assets have a market value closer to $525 billion.
Other financial assets. According to the Federal Reserve, as of the end of the first quarter in 2011, the federal government held $786 billion in “credit-market instruments” (including $138 billion in agency- and GSE-backed securities, as well as $355 billion in student loans). The government also still held $55.4 billion in corporate equities acquired under the TARP.
I still don’t understand why some of the more firebrand “conservative” Republicans in Congress aren’t jumping on this bandwagon. (I don’t even mean, “Because it would save the country!!” I just mean, I happen to think this makes a lot of sense in the current political environment, and I don’t understand why Republicans aren’t picking it up–even if they don’t care one way or the other–just as a way to confound Obama and Geithner’s assertions.)
Because they have no intention of doing the right thing and this is all just a dog and pony show so that people continue to believe there is a difference between republicans and democrats.
Two possibilities:
a) they don’t want to provide Obama with a means to escape spending cuts; and/or
b) while they might support “voluntary” asset sales (i.e., at a time when the state was not under financial duress), I suspect that they would view asset sales now as an unhealthy precedent – i.e., when push comes to shove, the state can in fact be forced to live within its means (and we couldn’t have that, could we?).
They can’t sell the gold. We all know they have none.
Who cares? Nobody really buys physical gold, just pieces of paper claiming some.
Did you ever stop to wonder why Central banks buy and hold gold? It doesn’t have counterparty risk (that paper IOUs will be not be honored in real terms)
PR disaster maybe? Because regardless of which “side” did it, the PR spinsters would portray it in the media as the other party “selling off the country’s assets”, especially if foreigners were buying in on any of it. The masses don’t like their oversimplified view of the concept in which they see their ‘country’ being pawned off to the highest bidder by politicians.
The Fed also holds $1.6 trillion in treasury bonds that it acquired via the QE programs. It could destroy all or part of that, which could keep us below the current debt ceiling for a couple of years.
Greg Mankiw has an exam question on this topic.
http://gregmankiw.blogspot.com/2011/07/good-exam-question.html
Subhi,
I agree with Mankiw as to #1. As to #2, the problem with his answer is that he gets the “compared to what” question wrong. Right now the Fed plans to use its $1.6 trillion worth of bonds to absorb some of the excess reserves banks are sitting on. If it destroys the bonds, then it can achieve the same result by increasing reserve requirements. The consequences Mankiw points to are the same in either case.
Robert Wenzel responded to Mankiw here
http://www.economicpolicyjournal.com/2011/07/harvards-greg-mankiw-with-bad-question.html
What’s amazing about Wenzel’s post is that he never mentions that Mankiw was responding to an article by Dean Baker, rather than to Ron Paul. In fact, all of Wenzel’s arguments about how Mankiw was misinterpreting Paul disappear once you realize he was actually responding not to Paul, but to Baker. So maybe it isn’t really that amazing.
Can you elaborate on what you’re saying here, Blackadder? (I’m not being sarcastic, I think I get what you are saying but please spell it out.)
Right now banks are sitting on a lot of excess reserves. If banks were to lend all that extra money out, this would have undesirable consequences. So part of Bernanke’s exit strategy is that if and when banks start to lend the money, the Fed can sell its bond holdings as a way of sucking the extra money out of the economy.
If the Fed destroys some or all of its bond holdings, then it can’t use them to sop up the extra reserves. However, the Fed could achieve the same goal (keeping the extra money from being lent out) by raising banks reserve requirements. This would transform all or part of the current “excess” reserves into reserves necessary to meet bank’s capital requirements.
Mankiw’s objection to raising reserve requirements is that it is contractionary. He’s right about that. But what he’s overlooking is that the alternative course of action (selling the bonds to sop up extra reserves) is equally contractionary.
Btw, there has been a lot of speculation as to why it is that banks haven’t lent out their excess reserves over the last couple of years. Maybe it’s the interest on reserves program or regime uncertainty, etc.
My initial reaction has always been that this is a form of Ricardian equivalence. Banks know that if they start lending out the excess reserves the Fed will swoop in and suck them back out of the system, so they prefer to hold on to them. However, since I’ve never seen anyone else say this, I have to assume that this idea is obviously wrong somehow, though (as Silas might say) perhaps due to poor nutrition as an infant I am unable to see why.
In the Fed’s Z.1 release, section L.106, line item 4, they’re reporting $1.5B in CD deposits? What on earth? Am I reading that right?