With apologies to the recently departed Tanta of Calculated Risk, who said, “We’re all subprime now,” I add that “We’re all hedge funds now.” After reading this article in the Wall Street Journal, I said, “That logic can justify any action.” Here’s the critical quotation:
The plan the Treasury is considering would encourage banks to issue new mortgages at lower rates by offering to purchase securities underpinning the loans at a price equivalent to the 4.5% rate.
The Treasury would fund the purchases by issuing Treasury debt at 3%, suggesting the government could make a profit on the difference.
One of the major ways that we got into this crisis is that we had a large number of parties willing to buy lower quality assets that they levered up their (then) higher quality balance sheets to buy. Clip a spread and make free money. The US government may repeat this error. To make it absurd, why doesn’t the US Government buy every dodgy asset? It could make money on them, and save money for taxpayers. Well, the money has to come from somewhere, whether from citizens in the US, or foreigners. At some level, those lenders revolt, particularly as they realize the the risks being taken by the US government are increasing, and may compromise their credit interests.
The US government is becoming a hedge fund, and we as taxpayers are becoming mutual owners of the beast. We are all hedge funds now.