Tuesday, November 25, 2008

The Federal Government as a Hedge Fund

Arnold Kling Explains:
"What we do know is that the risk premium on Treasuries is really, really low. We are like the hedge fund of last resort for the world's investors. Hamilton says the hedge fund should buyTIPS and foreign securities (I assume he means foreign government bonds). That's fine. The hedge fund should also buy debt from Freddie Mac and Fannie Mae, because that debt still trades at a risk premium relative to Treasuries, even though taxpayers are already on the hook for it.

The hedge fund should buy good stuff. Let the bad stuff sit and rot, or collect it as part of the process of shutting down failed institutions."

He was expanding on an idea floated by James Hamilton over at Econbrowser. Anyhow, it has come to pass.


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