Fed starts printing press: $1T+ in additional purchases

[charliebrown]

Re: Fed starts printing press: $1T+ in additional purchases

How many of these MBS loans are not going to mature?
They will default therefore they will not be sellable. If that cram-down bill goes through what would be the effect of the price of MBS if judges start writing down principle? Same goes for the securities of AIG, BOA, C etc. who will buy them? and at what price?
If the fed buys an MBS for $100.00 (writes a check that is now money), and the MBS tanks, and then inflation goes up and the fed needs to pull money back in, it would normally sell the MBS back into the market, thus decreasing the amount of money in the market. What if the MBS is now only $50.00?? Then the fed can only pull $50.00 of money out of the economy, the other $50.00 are free to be spent on whatever.

I think that is why the fed traditionally only held t-bills and notes, it has no default risk, and the market is so liquid there will always be sellers and buyers. By keeping the maturity short, the buy and sell price should not vary by much.

In general paying someone back means you have to work, you have to produce something. Just rearranging who owes who what does not extinguish the debt. Just transfers the liablity from one to another.

Once again the smart guys can tell me where I am going wrong.

[Sharky]

Re: Fed starts printing press: $1T+ in additional purchases

The big question is, why won't this work? They can hold on to all the trash for as long as they need, even to maturity. They can resell it into the market if too much inflation starts up. They have a lot of room in raising interest rates to dampen inflation. And they have many other tools to fight inflation. I'm just not seeing why this isn't going to work.

The reason it won't work is because all it's doing is moving the problems into the Fed. The problems aren't gone. The Fed is putting itself at risk, in the same way that the banks are at risk today. No fundamental policies are changing. The debt still exists; the fraud that created much of it still exists, etc.

I've said this before: it looks more and more to me like the endgame will have to be a massive capital injection by the Treasury into the Fed -- TARP writ large. The Fed is basically spending taxpayer dollars without Congressional authorization; they know they'll need a bailout eventually, and that Congress will have no choice but to provide it.

[charliebrown]

Re: Fed starts printing press: $1T+ in additional purchases

Doesnt the federal reserve act or some other legislation specify what assets the fed can buy?

[Truefire]

Re: Fed starts printing press: $1T+ in additional purchases

Does anyone know if the FED purchasing of MBS's were from monetized debt or did they exchange already existing treasuries from the books for those purchases. In short, was all this new money printed or just the 300 billion.

Remember when a billion seemed like a lot (a few months ago), how sickening.

[loweyecue]

Re: Fed starts printing press: $1T+ in additional purchases

I came to this forum on February 10, 2009. I came with the question; were does the Fed get it's money. The answer in one form or another was they just pressed a button, and digitially transfered any amount needed. Please tell I'm wrong. Because why stop here. Just wear out that zero key as EJ mini helecopter showed before.

This is what completely befudles me:confused::confused::confused:

Is the Fed loaning money to the treasury? So the treasury creates a trillion dollars of debt and the Fed prints its way out of it? Is this how this is supposed to work? I am utterly confused by this, will someone please explain this to yet another lowly engineer?

[ASH]

Re: Fed starts printing press: $1T+ in additional purchases

Does anyone know if the FED purchasing of MBS's were from monetized debt or did they exchange already existing treasuries from the books for those purchases. In short, was all this new money printed or just the 300 billion.

Remember when a billion seemed like a lot (a few months ago), how sickening.

Yes -- that money is also being "printed".

[ASH]

Re: Fed starts printing press: $1T+ in additional purchases

This is what completely befudles me:confused::confused::confused:

Is the Fed loaning money to the treasury? So the treasury creates a trillion dollars of debt and the Fed prints its way out of it? Is this how this is supposed to work? I am utterly confused by this, will someone please explain this to yet another lowly engineer?

It works like this:

Step #1: The Treasury sells bonds on the open market. That means the Treasury has borrowed money from "somebody", be it a bank or private individual or foreign government.

Step #2: The Fed buys bonds on the open market, from "somebody". It pays for these bonds by creating reserve credit -- this is the electronic version of "printing money". The net result is that the Fed has created money to loan to the Treasury, although the bonds and money passed through the hands of a third party.

Note, however, that there are a ton of Treasury bonds already out there in the market and the timing sequence implied by numbering the steps #1 and #2 is misleading. Most of what the Fed is "printing" money to purchase are mortgage-backed securities which already exist. You should look at monetization as the Fed manipulating the demand for bonds and the supply of reserves. In normal circumstances, the Fed buys or sells Treasuries to adjust the supply of reserves in the banking system, in order to influence the interest rate that commercial banks will charge each other for overnight loans of those reserves. The Fed can create the reserves with a keystroke by buying Treasuries from the banks, and it can annihilate the reserves by selling Treasuries back to the banks and charging against the reserves. However, the point of the present monetization campaign is to manipulate the demand for bonds rather than the supply of reserves (and possibly to give the Fed ownership of the mortgages, in order to simplify legal authority to write-down loan principal -- one way to discharge the debt that's weighing down the economy). Market demand for mortgage-backed securities is weak (because hey -- lots of people are defaulting on their mortgages), and it is possible that demand for Treasuries might weaken because the Treasury is planning to sell an awful lot this year. The basic process of monetization isn't really any different in this case than what the Fed does routinely to manipulate the supply of bank reserves, but the details are different because the goal is unusual (manipulate demand for bonds rather than supply of reserves), and because the Fed is buying bonds other than Treasuries.

Chris Coles posted this note from the Federal reserve, regarding monetization of MBS, back in January:

" In light of the use of additional tools for implementing monetary policy, the Committee revised the form of the directive to the Open Market Desk of the Federal Reserve Bank of New York. In addition to specifying that it now seeks conditions in reserve markets consistent with federal funds trading in a range of 0 to ¼ percent, the Committee instructed the Desk to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS by the end of the second quarter of 2009. Members agreed that they should not specify the precise timing of these purchases, but that they should leave discretion to the Desk to intervene depending on market and broader economic conditions. The directive also noted that the Manager of the System Open Market Account and the Secretary of the FOMC would keep the Committee informed of developments regarding the System’s balance sheet that could affect the attainment of the Committee’s statutory objectives. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:


“The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable
growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range of 0 to ¼ percent. The Committee directs the Desk to purchase GSE debt and agency-guaranteed MBS during the intermeeting period with the aim of providing support to the mortgage and housing markets. The timing and pace of these purchases should depend on conditions in the markets for such securities and on a broader assessment of conditions in primary mortgage markets and the housing sector. By the end of the second quarter of next year, the Desk is expected to purchase up to $100 billion in housing-related GSE debt and up to $500 billion in agency-guaranteed MBS. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System’s balance sheet that could affect the attainment over time of the Committee’s objectives of maximum employment and price stability.”

Although monetization of bonds is a routine aspect of normal central bank operations, it is dangerous in excess. In particular, if the value monetized is large, if all the Fed does is create money by buying Treasuries and it never sells any to cancel-out the money it created, and if buying by the Fed comes to dominate the market in new Treasury issues, then in net the government is paying for its operation by "printing" money, and you are likely to end up with hyperinflation.

[Sharky]

Re: Fed starts printing press: $1T+ in additional purchases

Is the Fed loaning money to the treasury? So the treasury creates a trillion dollars of debt and the Fed prints its way out of it? Is this how this is supposed to work?

Here's how the system is supposed to work:

1. The Treasury creates a bond
2. The Fed helps orchestrate the sale of the bond to the public and international investors
3. In the aftermarket, the Fed buys and sells bonds through the FOMC. When they buy bonds, they are creating new money. When they sell them, money is destroyed.
4. The Fed's buying and selling of bonds changes the amount of bank reserves in the economy. Since banks can theoretically only create new loans based on their available reserves, the Fed's actions indirectly impact interest rates.

So the Fed doesn't loan money directly to the Treasury, but they do so indirectly. I haven't done the math lately, but a few years ago the Fed owned about 7 or 8% of the National Debt. Money paid to the Fed in interest by the Treasury is rebated back to the Treasury after deducting the Fed's expenses.

The Fed's independent ("private") nature was intended to prevent the government from creating arbitrary amounts of money. The reality of it is that the Fed exists primarily to protect the large banks -- it's basically a banking cartel. The economy, inflation, unemployment, etc, are all secondary. Survival of the large banks is Job One.

[bart]

Re: Fed starts printing press: $1T+ in additional purchases

Regarding the Treasury bonds -- my understanding is that the identity of the seller doesn't particularly matter. The Fed's purchases should create extra demand for the T bonds in the market, allowing the Treasury to raise more money by selling bonds into the market. The Fed normally buys T bonds as part of its routine "open market operations" if they desire to increase the supply of reserves in the system, and thereby lower the overnight lending rate for those reserves. However, since the system is chock full of reserves already (and the overnight rate is right around zero), the point of further monetization is not to manipulate the availability of reserves but rather to provide demand for the bonds that the Treasury needs to issue to finance our big federal deficit, and possibly to manipulate exchange rates and inflation/deflation expectations. That's why this action is being announced as something separate from the routine open market operations that go on all the time. Will it pay for the stimulus? We're talking $300B so far out of a total projected deficit of $1.75T this year, so it'll pay for part of it, but not all. What maturity? Their statement didn't say, but I assume "long" means 10-year and longer.

That's basically it, although I'll quibble with the statement about open market operations and reserves. I think you know it, but just in case and to clarify for others, open market operations have many more purposes than just influencing reserves.

Other nuances - the $300 billion will bring the System Open Market Account balance back to over its prior all time high of $786 billion in mid 2007, and it will also help offset the drop in Treasury purchases by other countries. Lastly, there is no legal limit to how many Treasuries the Fed can buy.

[bart]

Re: Fed starts printing press: $1T+ in additional purchases

US$300 billion isn't huge in the current scheme of things
...

Sort of - but don't forget the fractional reserve multiplier once the credit machine gets rolling again. That's 10-14x...

[*T*]

Re: Fed starts printing press: $1T+ in additional purchases

I call it the death wabble. Anybody that has learned how to ride a bike with no hands (on the handlebars) knows it. Wabble...wabble, wabble, wabble... splat.

It's called a tank slapper. My PhD supervisor studied it.



It's a type of instability.

[WildspitzE]

Re: Fed starts printing press: $1T+ in additional purchases

Sort of - but don't forget the fractional reserve multiplier once the credit machine gets rolling again. That's 10-14x...

Absolutely, check out my follow-up post above. The last sentence and link.

[WildspitzE]

Re: Fed starts printing press: $1T+ in additional purchases

I think that is why the fed traditionally only held t-bills and notes, it has no default risk, and the market is so liquid there will always be sellers and buyers. By keeping the maturity short, the buy and sell price should not vary by much.

Typically they are not trying to paper over losses (onto their b/s), they are executing a monetary policy. To execute such policy by buying and selling securities other than "risk free" (;)) securities would be silly.

Now they're doing both (swapping good assets for bad, and b/c of the way such good assets were created they're affecting monetary policy). The bullets of choice are still these securities. Here's the b/s .... look at the changes in the "asset" composition, coupled with the magical increase (;) x 2).

http://www.cumber.com/home/fed.pdf

(wish I was on my mac so that I could just paste the graph)

[WildspitzE]

Re: Fed starts printing press: $1T+ in additional purchases

It's called a tank slapper. My PhD supervisor studied it.

It's a type of instability.

Man o man, that video elucidates rather quickly.

Tank slapper? I wonder what the etymology is for the term.

Slapping the gas tank left-right-left...?

Thanks, but I like my "death wabble" better though - can use it when it happens to things without a tank...LOL

[bart]

Re: Fed starts printing press: $1T+ in additional purchases

Absolutely, check out my follow-up post above. The last sentence and link.

Cool.

Typically they are not trying to paper over losses (onto their b/s), they are executing a monetary policy. To execute such policy by buying and selling securities other than "risk free" (;)) securities would be silly.

Now they're doing both (swapping good assets for bad, and b/c of the way such good assets were created they're affecting monetary policy). The bullets of choice are still these securities. Here's the b/s .... look at the changes in the "asset" composition, coupled with the magical increase (;) x 2).

http://www.cumber.com/home/fed.pdf

(wish I was on my mac so that I could just paste the graph)

I urge some caution with the Cumberland labeling. While its true that the $268+ billion is indeed MBSs, it also actually directly affects the System Open Market Account Balance which is now approaching the pre crisis peak.