Sheila Bair Makes a Really Awkward Joke About Hyperinflation

Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore.

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

So why not let everyone participate?

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

We can each be INDEBTED to the Fed and use the debts to buy Treasury bonds (this is, indirectly, what we do on a daily basis anyway since it takes debt to the Fed and its member banks to meet our demand for money). Did you read that?! She actually said that.

Granted, this might be her attempt at humor but it's not a very good joke at all. It's fucking serious and she of all people should know that.

AWKWARD.

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Barry Ritholtz and Kid Dynamite have different takes. The Kid wrote this in the comments section of Barry's The Big Picture:

KidDynamite Says:

April 13th, 2012 at 4:45 pm

Barry – it’s funny that you read this piece and thought “I had no idea Shelia Bair had such a wonderfully wicked sense of humor!” because I read this piece and thought “wow, I had no idea Sheila Bair was so willing to just make up nonsense.”

I’m referring to the claim that is the basis for the rest of her piece – the part where she writes:

“For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.”

That is demonstrably false. And it only takes one chart to show that it’s false:

http://research.stlouisfed.org/fred2/series/EXCRESNS

That’s almost $1.6 TRILLION in excess reserves sitting at the Fed earning 25 bps, NOT being used to buy securities with high yields. In fact, the reason we haven’t had a booming rip roaring recovery is precisely because banks are NOT taking the kind of risks that that the Fed really deep down inside kinda wants them to: they’re NOT lending to anyone and everyone.

Of course, we did try that whole “give everyone a loan” thing already – it resulted in the housing bubble. I woulda thought that Bair would remember that.

note: Europe’s LTRO is different – they are doing what Bair is talking about!