Fed will start buying up Agency MBS

[blazespinnaker]

Obviously this whole interest rate thing is not working at all.

Look for the fed to trying innovative measures, including directly targeting its liquidity measures.

Major moral hazard, but when you think about it, the collateral damage that it does by massive fed funds rate movements is probably a lot worse in this particular situation.

I also think this will mitigate ka-poom to a certain degree. Gold will see major declines.

[krakknisse]

Re: Fed will start buying up Agency MBS

Obviously this whole interest rate thing is not working at all. Look for the fed to trying innovative measures, including directly targeting its liquidity measures. Major moral hazard, but when you think about it, the collateral damage that it does by massive fed funds rate movements is probably a lot worse in this particular situation. I also think this will mitigate ka-poom to a certain degree. Gold will see major declines.

Uuh... sorry if I'm an amateur, but couldn't you see it this way? Agency debt (Fannie/Freddie/Ginnie/Sally) is now part of the broader money supply (M3?). It has declined in value. If it were taken on the books by the Fed at face value, wouldn't that move it "up the chain" in the money supply, becoming narrower like M2? At least the portion of it that is "lost" in terms of mark-to-market? In the extreme, you could see the Fed/Treasury buying these mortgages for physical cash, thus effectively stoking a really inflationary increase in M0 or M1? In short, they are effectively cashing out (M<3) debt (M3) - where does that extra money come from except from M<3? I don't see, in general terms, how a government bail-out with money it doesn't have and hence must be created, can fail to be good for gold? Spell it out with large capital letters if necessary - I'm an amateur.

[blazespinnaker]

Re: Fed will start buying up Agency MBS

It will be good for gold.

But it won't be as good as massive decreases in the fed funds rate, which I believe have been priced in .. and will soon have to be 'priced out' as the market realises that the fed has alternatives to taking an elephant gun to a fruit fly.

[krakknisse]

Re: Fed will start buying up Agency MBS

I'm not sure how much the interest rate decrease has been priced in. There are SOOO many sheeple out there! A friend talked to a journalist in the largest business daily here, and he was absolutely incredibly naive. ("Do you really think that there's going to be a property crash? Nooo... Deposit insurance funds at <2% of total deposits - naah, can't be true... What do you mean, gold? Gold??") How negative can TIPS yields really go? I think even the quants/FIRE employees have a hard time twisting their heads from fiat to actual value.

I think they should talk to their grandfathers. I heard a story: When my country was invaded years ago, a shrewd person rushed out to buy sugar and tea the same morning. The store employee was just happy to get rid of it, even though the employee knew that foreign troops were in the city at that moment. The employee should have known that the store could have sold it at 10x the price just weeks later. Sheeple.:confused:

Real after-tax interest rates locally are already near zero. When ECB finally cuts, don't you think the consumers/sheeple will finally wake up and choose the "no inflation tax" route? I may be biased from reading too many gold bug sites, so I'd be happy to get some opposition.

Try this one for starters:
http://www.google.com/trends?q=inflation

[nathanhulick]

Re: Fed will start buying up Agency MBS

I can only see this as being good for gold and very bad for the US dollar.

If they decide to accept MBS for Treasuries, then they are basically creating money. MBS currently sell at a discount to treasuries. Banks are not selling their MBS or marking them to market, because they would then have to take huge losses on the books.

If the Fed is going to accept these MBS and pretend that they are really AAA rated, then the banks can then sell the Treasuries for what they are pretending the MBS are worth.

Essentially what they are doing is monetizing debt.

[blazespinnaker]

Re: Fed will start buying up Agency MBS

Looks like they did it, kinda. They're going to let MBS used as collateral for repos (I wonder how they're going to value the MBS?)

Plus they're adding these TSLFs (oh more fed acryonyms .. what fun!)

The USD is up, treasury bonds are down, and I bet gold drops today.

[krakknisse]

Re: Fed will start buying up Agency MBS

I can only see this as being good for gold and very bad for the US dollar. If they decide to accept MBS for Treasuries, then they are basically creating money. MBS currently sell at a discount to treasuries. Banks are not selling their MBS or marking them to market, because they would then have to take huge losses on the books. If the Fed is going to accept these MBS and pretend that they are really AAA rated, then the banks can then sell the Treasuries for what they are pretending the MBS are worth. Essentially what they are doing is monetizing debt.

All this Fed $hit (pun intended) has my mind reeling. All new "letter salads" (SIV, CDO, CDPRS, whatever). The following blog does an attempt at explanation and a quick calculation to say that the Fed has just nationalized (sort of) 10% of the US banking system. And it won't say which banks.
http://interfluidity.powerblogs.com/...04920896.shtml

This is one of the reasons I don't dare short or buy puts. Ben Bernanke will come flying in his helicopter and drop a big tub of vaseline on your head, with a stern commandment to "grab your ankles and lean over that barrel". Ouch.

How long can you guys take this? I simply cannot understand that you have the nerve not to buy whatever gold you can get, and run under the bed and hide. Gold is volatile, but shaking it off. That's one of the reasons I came over here - to get some skepticism from "anti-gold-bugs" (being one).

[touchring]

Re: Fed will start buying up Agency MBS

Wait a minute, i'm trying to understand the implications. Pump $200 billion in exchange for worthless MBS?

So, does this mean at one stroke, the America central bank solved the subprime problem?? :confused:

Just allow banks to pledge their worthless MBS to the central bank and exchange it for hard cash? Write off all the losses in one stroke?

Then why did we have to go through all the hardship the last 6 months!!? :p

[jk]

Re: Fed will start buying up Agency MBS

here's an excerpt from a post of mine from 2/12/08, in the "zero bound diaries" thread:

Quote:

Originally Posted by bernanke To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly. However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.

this sounds like the TAF program that the fed has already implemented. The question is what kind of paper they accept as collateral. So far, I gather the fed has been at least a little picky about this, far more so than the ecb which has been accepting abcp for the $500billion they’ve lent out to european banks. this compares tothe $60billion of so in the taf. So the next step here would be for the fed to be less discriminating about the paper it accepts. This would help reliquify the banks which have been forced to take impaired paper back onto their books.

Of course this leaves the fed holding the old maid[s], having become, in effect, the buyer of last resort instead of the lender of last resort. Thus are the losses socialized.

He goes on to discuss the possibility of the fed buying foreign government debt, and the effects of such action on the dollar, noting that this would tread on Treasury Dept toes. And finally he refers to fdr’s devaluation of the dollar against gold.

Overstated conclusion- the taf will be progressively broadened until the all the refuse ends up at the fed.

edit: and we should look for the taf numbers to expand dramatically.

there are now new extensions of the taf, with different acronyms, but the idea is the same. let the fed accumulate the junk so the market doesn't have to price it. the junk can mature in the care of the fed- if/when it goes bad, it will be put back to the banks, but the process will be stretched out and the banks will have time to earn some profits and re-capitalize, and the junk paper will likely have some residual value.

[touchring]

Re: Fed will start buying up Agency MBS

here's an excerpt from a post of mine from 2/12/08, in the "zero bound diaries" thread:



there are now new extensions of the taf, with different acronyms, but the idea is the same. let the fed accumulate the junk so the market doesn't have to price it. the junk can mature in the care of the fed- if/when it goes bad, it will be put back to the banks, but the process will be stretched out and the banks will have time to earn some profits and re-capitalize, and the junk paper will likely have some residual value.

Thks, but back to the same question.

If it were so easy, then why didn't they do this earlier and make us go through all the hardship the last 6 months!!?

[nathanhulick]

Re: Fed will start buying up Agency MBS

Thks, but back to the same question.

If it were so easy, then why didn't they do this earlier and make us go through all the hardship the last 6 months!!?

Well, it would be "easy" for the Fed to make us all millionaires by mailing out checks to everyone, but that doesnt make it a good idea.

To answer your question, though, they didn't solve the subprime problem. Essentially all the Fed is doing is agreeing to trade treasuries to the banks in exchange for these risky securities that the banks cannot sell for what they claim they are worth.

This enables the banks to pretend that they didnt lose all the money that they actually lost by holding those risky securities. It buys the banks time to (hopefully) earn some profits and recapitalize.

[GRG55]

Re: Fed will start buying up Agency MBS

Thks, but back to the same question.

If it were so easy, then why didn't they do this earlier and make us go through all the hardship the last 6 months!!?

When you don't know how many troops your enemy has in reserve, you don't use all your ammunition on the first day of hostilities...

[GRG55]

Re: Fed will start buying up Agency MBS

here's an excerpt from a post of mine from 2/12/08, in the "zero bound diaries" thread:

"...Of course this leaves the fed holding the old maid[s], having become, in effect, the buyer of last resort instead of the lender of last resort. Thus are the losses socialized..."


there are now new extensions of the taf, with different acronyms, but the idea is the same. let the fed accumulate the junk so the market doesn't have to price it. the junk can mature in the care of the fed- if/when it goes bad, it will be put back to the banks, but the process will be stretched out and the banks will have time to earn some profits and re-capitalize, and the junk paper will likely have some residual value.

Essentially the Fed have then become the substitute for a broader version of Treasury's (Paulson's) "private-sector" Super SIV - a parking spot for all sorts of illiquid paper that cannot be marked-to-market, and if marked-to-auditor would further stress the credit system.

[bill]

Re: Fed will start buying up Agency MBS

JK ,this sounds like the TAF program that the fed has already implemented. The question is what kind of paper they accept as collateral. So far, I gather the fed has been at least a little picky about this, far more so than the ecb which has been accepting abcp for the $500billion they’ve lent out to european banks. this compares tothe $60billion of so in the taf. So the next step here would be for the fed to be less discriminating about the paper it accepts. This would help reliquify the banks which have been forced to take impaired paper back onto their books.

Who’s first in line when the fed exchanges treasuries for mortgage securities paper?

http://www.bloomberg.com/apps/news?p...5J0&refer=home

The Fed said it will lend Treasuries for 28-day periods in return for debt including AAA rated mortgage securities sold by Fannie Mae, Freddie Mac and by banks.

What banks?

[Jim Nickerson]

Re: Fed will start buying up Agency MBS

here's an excerpt from a post of mine from 2/12/08, in the "zero bound diaries" thread:



there are now new extensions of the taf, with different acronyms, but the idea is the same. let the fed accumulate the junk so the market doesn't have to price it. the junk can mature in the care of the fed- if/when it goes bad, it will be put back to the banks, but the process will be stretched out and the banks will have time to earn some profits and re-capitalize, and the junk paper will likely have some residual value.

Quite prescient, jk, what are you really, a banker?