The Widowmaker

Moby Ben, or, The Washington Super-Whale: Hedge Fundies, the Federal Reserve, and Bernanke-Hatred by DeLong (May 11, 2013)

Harpooning Ben Bernake by Krugman

Brad DeLong has the best piece I’ve seen on Bernanke rage among the hedge funders. His point is that the hedgies keep thinking of the Fed as if it were a rogue trader driving prices away from their natural value, like JP Morgan’s London Whale, rather than as a central bank trying to achieve full employment and target inflation. Hence their rage at the failure of bond prices to collapse the way they “should”.

I’d riff on this a bit further. I suspect that the hedge fund guys are relying a lot on historical correlations that worked pretty well for decades: mean reversion of yields, correlations with deficits, etc., most of it pretty much model-free. The trouble is that a once-in-three-generations deleveraging shock makes such correlations useless. Cross-national analogies — i.e., Japan — would have been better, but don’t seem to have been applied.

What you should be doing is macro analysis, using something like IS-LM — something like what I did here, almost three years ago. (The forecasts have gotten worse since, so the implied long-term rate would be even lower).

But instead of saying that maybe this macro IS-LM stuff has a point, they’re raging against the man with the beard.

Warren Buffett compares US Fed to a hedge fund (9.21.13)

Billionaire investor Warren Buffett compared the US Federal Reserve to a hedge fund because of the central bank's ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion.

"The Fed is the greatest hedge fund in history," Buffett told students yesterday at Georgetown University in Washington.

It's generating "$80 billion or $90 billion a year probably" in revenue for the US government, he said. "And that wasn't the case a few years back."

The central bank has been buying $85 billion of bonds a month to help the US recover as it emerges from the deepest slump since the Great Depression. Chairman Ben S Bernanke and other Federal policy makers unexpectedly opted this week to sustain that pace of asset purchases instead of tapering it, saying they need to see more signs of lasting improvement in the economy. 

The Fed remitted $88.4 billion to the US Treasury Department last year. The payments have ballooned as the central bank built its balance sheet during the past five years.

The Fed "is under no pressure, none whatsoever to have to deleverage," Buffett said. "So it can pick its time, and if you have somebody wise there -- and I think Bernanke is wise, and I certainly expect his successor to be -- it can be handled. But it is something that's never quite been done on this scale. It will be interesting to watch."

Soros bet against the British hedge fund in the early 90s and won. In the end it helped Great Britain via devaluation.