RE: Money velocity defined
Money velocity is the value added by the economy per year in nominal terms — GDP including inflation, or nominal GDP — divided by the money supply. When there is a lot of money being created and the economy expands sluggishly, as was the case for most of the post-financial crisis era, money velocity falls. Essentially, it is the rate that money circulates. However, it is fair to say it is a “dependent variable”. Based on the trillions of dollars the Fed has created since the virus crisis, and are still in the system, should velocity accelerate, inflation will become an even bigger problem. There is evidence this was happening in early 2022.
RE: The government’s equity kicker via the TARP
As was done with the Chrysler bail-out of the early 1980s, the federal government received warrants on their common stock from the banks and insurance companies it was rescuing from collapse. These were essentially long-term call options, giving the Treasury the right to purchase shares at an exceedingly low “strike” or exercise price. If, for example, Bank XYZ was trading at $10 (likely down from $50 months earlier due to the panic), the government had the option to acquire shares at that price on a multi-year basis. Once the crisis had passed, a powerful rally in financial stocks ensued, providing the federal government with immense windfall profits.
RE: Maestro Alan Greenspan’s fall from grace
Mr. Greenspan had ruled the Fed from right before the Crash of 1987 until 2006; not coincidentally, nearly all of the Great Moderation’s lifecycle. Almost fortunately for his reputation, the Maestro had the good sense to retire the year before the wheels came off the sub-prime mortgage market which would prove to be the death-knell of the Great Moderation. “Almost” because it wasn’t early enough to avoid a guilt-by-association reaction from both the media and Congress that would forever tarnish his once impeccable legacy.