There is no economic distinction between losses taken by the Fed and those taken by the Treasury, David. The US taxpayers are on the hook either way.

Can you elaborate? I mean, in theory, since the US has monetary sovereignty, taxes are just means of regulating distribution, and not at all needed to fund governmental activities.

We don't exactly know what will happen in the future.. Inflation, yes.. There is only thing we know, inflation will come under the conditions..An then, interest rate will up, and then crisis/ crises will come again in the world.. That's exactly what I know..

@David,

Do you want to debate "Modern Monetary Theory?" 'Cause I don't.

Let's try to keep this simple and stick to accounting: The Fed returns all "profits"  to the US Treasury above a modest and legally specified dividend. Prior to 2008, this payment to the Treasury was about $25 billion annually.  From 2008-2013, it was about $75 bn annually.  (I am going by memory here.)

Any losses that the Fed takes on TARP will be subtracted from this payment to the Treasury.  If the Fed actually takes sufficient losses, the Fed will return nothing and the Treasury will presumably have to subsidize the Fed's operations. (Note that this assumes that the Fed will not take actions specifically to generate revenue for itself.)

So, the Treasury and the Fed essentially have a combined balance sheet. Monetary economists often refer to this concept in their research.

As I understand the idea, adherents of Modern Monetary Theory think that the Fed can costlessly create goods and services -- at least during times of excess capacity -- and so the Fed should create money during recessions and this will have no cost. Personally, I think that MMT draws misleading conclusions from partially true assumptions. I am not a fan.

Assuming that MMT is correct -- an assumption I disagree with --  the Fed should always create money and buy goods and services during recessions. But this has nothing to do with the TARP specifically. MMT simply argues that the Fed can improve welfare by creating money and buying stuff. What the money is spent on -- roads, TARP, bombers, food stamps -- is irrelevant to the idea that the Fed should create money or lose out on a "free lunch."

It can by hair-cutting the nominal value of US bonds in the hands of commercial Banks supported by the program. Since the program was so profitable for uncle Sam I suppose that this is a feasible solution. So it is Possible...

From studies, the government has to determine which policy - monetary or fiscal - is more effective in dealing with an economic problem. Based on that, one agency may exclusively intervene or a combination may be the case. But there is always coordination for maximum effectiveness.

It is interesting and helpful to hear Neely's perspective as a regional Fed official. However, I find that MMT adherents recognize that the things that the government purchases have real costs. For example, if the future finds people in many countries spending their time seeking fuel, they will not be able to work in nursing homes. Or a failure to conduct R&D now may have real costs in the future. On the other hand, higher deficits do not automatically increase the future tax burden in any way, for taxes are set politically, and policy in the US will in all likelihood continue to systematically keep the financial balance of the government sector negative. Moreover, they argue that if deficit spending is used to pay for programs that provide paid work for unemployed people, then these programs are very likely to increase aggregate demand, overall output, and economic growth.

Perhaps Neely has unfortunately gained the impression that a zero resource cost is being claimed by MMTers, based on their relatively optimistic views about the processes that determine the inflation rate, given (1)  the usual slack-resources argument and (2) the hoped-for "buffer-stock" effects of their ELR (employer-of-last-resort) proposal.

I hope that this entry does not lead to the unproductive debate that Neely advises against.

The Fed's discount window is collateralised lending, whereas TARP was an asset purchase program. The Fed would eventually purchase assets through QE but that came years later, as it was too unconventional for 2008-9. Also, Fed purchases are a fiscal operation while Fed purchases are a monetary operation.

@Christopher: "As I understand the idea, adherents of Modern Monetary Theory think that the Fed can costlessly create goods and services"

Well, then you might want to go back to reading about MMT. All that MMT says is that the Treasury (or the Fed, but the fed is usually not in the business of buying anything) can buy any good or hire any service that's for sale in dollars. That doesn't mean "costlessly create".

oh here we go.

The claim that the US government can create money and purchase goods and services priced in dollars is not an interesting claim. Obviously, this is true. This claim does nothing to distinguish modern monetary theory from any other school of thought about how the economy works. 

The place where modern monetary theory gets interesting is where it confuses the ability to make nominal purchases with the ability to make real purchases. Obviously, any Monetary Authority has the ability to make any finite quantity of nominal purchases. However, no monetary authority has the ability to purchase an arbitrarily large quantity of real goods and services.

Now, MMT advocates will immediately disclaim the idea that there is no budget constraint at all. But if that is true, then there is no content to noting that the US government can make an arbitrarily large quantity of nominal purchases.

So,, either MMT advocates make the interesting--but wrong-- claim that the US government has no effective real budget constraint or they make the completely trivial -- but correct -- claim that the US government can create as many nominal dollars as it wishes.

The claim is that, when there is spare capacity in the economy - idle capital, idle workers, idle real resources, mobilizing them with newly issued fiat money is not inflationary... because you're taking up the slack of the economy. And there's no crowding out either... because you're taking up what the private sector won't.

Scott, I am glad that you think that I interpreted the school of thought correctly.

Sorry @Greg Hannsgen, I can't buy "higher deficits do not automatically increase the future tax burden in any way, for taxes are set politically, and policy in the US will in all likelihood continue to systematically keep the financial balance of the government sector negative. Moreover, they argue that if deficit spending is used to pay for programs that provide paid work for unemployed people, then these programs are very likely to increase aggregate demand, overall output, and economic growth."

Two problems: 1) there's no free lunch, so if there is borrowing there will be payment one way or the other, either through losses or inflation or taxes. 2)  Aggregate demand supports growth but isn't growth itself. "Providing paid work for unemployed people" doesn't necessarily foster growth in any manner. It puts people to work, but doesn't say what they do. Getting paid to do pushups isn't growth.

I agree inflation can be the result of sufficiently large deficits. On the other hand, there is no guarantee that possible inflationary effects will completely and exactly offset real gains in capacity utilization, output, and growth, except under implausible “Ricardian” assumptions. Moreover, a complete model of inflation will of course contain multiple variables.

But in conditions of moderate to high unemployment, high deficits do in my view tend to increase the growth rate, though as you point out, there is no guarantee of this outcome in all business-cycle conditions. I mentioned the standard but important slack-resources argument that appears in most versions of Keynesian theory. Think also of skill-deterioration hysteresis and the argument that (innovation-embodying) investment systematically falls behind as a result of weakness during periods of weak aggregate demand. In fact, taking the reasonable step of including capacity utilization in the investment function leads to straightforward results of the latter type. Finally, of course, higher growth improves tax revenues. These latter points on inflation are indeed a matter of degree or a frequency along the spectrum and seem neither necessary nor sufficient for MMT.

I agree with Greg Hannsgen. The crowding out effect is empirically untenable, and the notion of a Ricardian equivalence is theoretically, and empirically, misleading. Moreover, to assume a NAIRU, that is, a natural rate of unemployment, which essentially underpins Peter's argument, is to commit a fallacy of misplaced concreteness. In addition, as I will reiterate, to suggest that debt monetization requires future changes in tax collection is to ignore the tenets of chartalism, let alone the basic foundations of monetary sovereignty.

My argument is that growth is an increase in production possibilities. Re-employing workers is not growth, it's catch up. I agree that you can get people employed. Build a pyramid - but that's not  necessarily growth. We don't need crowding out or NAIRU for this statement. If an economy is going to truly grow, aggregate demand is not the workhorse.

And I still say there's no free lunch. Somewhere, somehow, somebody is going to pay for indebtedness. I don't see how one can avoid it.

I'm open for reading suggestions if you have any.