Fed Monetizes 1 Trillion in MBS and Treasuries for 2013

[denner]

The whole "Greenspan Fed" vs the "Bernanke Fed" is also a part of the problem. They may have different ideologies, but they are part of the same institution. Perhaps there is far too much latitude in what they are allowed to tinker with in all of their various attempts to "manage" the economy.

As ktm referred to above with the question of "the real estate market crashed, what were they supposed to do?"...well, that says it all. Piezoe and others have acknowledged that Greenspan deserves much of the blame for his insistence on letting the markets "sort it out", while he kept the pedal to the floor, did nothing to curb in outrageously dangerous lending practices, while housing prices in the "hot markets" went absolutely stratospheric. IMO, and I've stated it many times, the housing bubble was a strategic decision on the part of the Fed to generate employment and keep the credit machine rolling. The tech fallout created that sharp recession in 2001-02, rates were cut to the bone. Manufacturing was already in serious decline, so the only sectors that could be targeted were those related to the FIRE sector. Hence, the easiest path was to create a housing bubble...

Now, we can debate what SHOULD have been done by Bernanke...but someone explain the logic to me of intervening in an obvious bubble, one in which incomes never justified many of the sky high prices that were being paid for real estate. So we decided to throw good money after bad to "stabilize" an otherwise un-fixable situation. (It should also be noted that there are many, many locales that are still trending lower, regardlesss of stability in some of the more desireable markets).

Essentially, we are supposed to believe that the same institution that purposely created an artificial asset bubble in the same institution that should be allowed to fix it. Damn the consequences, don't question their authority, just sit back enjoy your ZIRP for 8 years and let them "manage" the economy.

 

[HopelessTrader]

Quote from denner:

The whole "Greenspan Fed" vs the "Bernanke Fed" is also a part of the problem. They may have different ideologies, but they are part of the same institution. Perhaps there is far too much latitude in what they are allowed to tinker with in all of their various attempts to "manage" the economy.

As ktm referred to above with the question of "the real estate market crashed, what were they supposed to do?"...well, that says it all. Piezoe and others have acknowledged that Greenspan deserves much of the blame for his insistence on letting the markets "sort it out", while he kept the pedal to the floor, did nothing to curb in outrageously dangerous lending practices, while housing prices in the "hot markets" went absolutely stratospheric. IMO, and I've stated it many times, the housing bubble was a strategic decision on the part of the Fed to generate employment and keep the credit machine rolling. The tech fallout created that sharp recession in 2001-02, rates were cut to the bone. Manufacturing was already in serious decline, so the only sectors that could be targeted were those related to the FIRE sector. Hence, the easiest path was to create a housing bubble...

Now, we can debate what SHOULD have been done by Bernanke...but someone explain the logic to me of intervening in an obvious bubble, one in which incomes never justified many of the sky high prices that were being paid for real estate. So we decided to throw good money after bad to "stabilize" an otherwise un-fixable situation. (It should also be noted that there are many, many locales that are still trending lower, regardlesss of stability in some of the more desireable markets).

Essentially, we are supposed to believe that the same institution that purposely created an artificial asset bubble in the same institution that should be allowed to fix it. Damn the consequences, don't question their authority, just sit back enjoy your ZIRP for 8 years and let them "manage" the economy.

It's come down to the same scenario. They will keep long-term rates low. Create demand for MBS. Move the Fannie Freddie loans. Startup a housing bid. Clean up some mess. Ok.. so the big question.. We've driven rates to zero (after inflation and costs). We are likely to keep rates low. In past recessions.. we lower rates. What will we do next time? My guess is the Fed buying assets is just getting warmed up here.. What do you think?

 

[denner]

Quote from HopelessTrader:

It's come down to the same scenario. They will keep long-term rates low. Create demand for MBS. Move the Fannie Freddie loans. Startup a housing bid. Clean up some mess. Ok.. so the big question.. We've driven rates to zero (after inflation and costs). We are likely to keep rates low. In past recessions.. we lower rates. What will be do next time? My guess is the Fed buying assets is just getting warmed up here.. What do you think?

Yes, I think they are just getting warmed up. The "dual mandate" ensures that they have cover for excessive intervention and/or an extremely dovish policy stance. (Also note all of the dovish members of the committee). For the foreseeable future, they can play those opposing positions against one another to rationalize extending ZIRP or continuing down the current path for years to come.

It's a path towards a completely centralized economy.

 

[oldtime]

Quote from HopelessTrader:

It's come down to the same scenario. They will keep long-term rates low. Create demand for MBS. Move the Fannie Freddie loans. Startup a housing bid. Clean up some mess. Ok.. so the big question.. We've driven rates to zero (after inflation and costs). We are likely to keep rates low. In past recessions.. we lower rates. What will be do next time? My guess is the Fed buying assets is just getting warmed up here.. What do you think?

when it's me in my own trading account, and I finally realize that I have guessed wrong at just about every juncture, I go into what I call "slow orderly retreat"

I take some profits every day

But I also take some larger losses

at that point, you are not trying to make money

but you are trying to do "No more harm"

get close to flat, and you can sort it all out "in the mix"

 

[HopelessTrader]

 

[Tsing Tao]

Quote from CT10Gov:

Um.... all that other 'stuff' being MBS, which the fed managed to buy at pretty a hefty discount. Buying a security for cash isn't exactly 'given as cash to banks outright'. If the Fed were a fund, they probably would have been considered as a pretty impressive investor.

That MBS portfolios throws out tons of interest payment and eventual redemption. It will eventually become cash just as the bills/bonds portfolio. So what's the problem?

I still don't understand where you see as the problem for the eventual shrinking of this balance sheet.

(Finally, as someone who traded treasuries for the buy side, your statements on how the buy back works for primary dealers is pretty off).

First, how do you honestly know the quality of anything the Fed purchased from the banks? If you have info on this, I'd be very interested in seeing specific detail, because I've not been able to find it.

Second, regardless to the quality, the Fed still gave the banks money, which they parked (for the most part) in reserves to shore up ugly balance sheets. It was not put into the economy, and could be if banks it think should be. That was the whole point of the argument.

Lastly, please feel free to explain how the buy back works with as specific terms as you wish and give us all an education. I certainly won't object to learning something. If I was wrong, I'll happily own up to it.

 

[Tsing Tao]

Quote from CT10Gov:

I'm sorry, but this sentence doesn't make any sense to me at all. Make money expensive is pretty freaking simple for the Fed, no? In this context, I don't see what the cart is, what the horse is, and why one needs to be in front of the other.

I'll try this once more, if you don't understand it, don't wish to understand it, or don't want to admit you understand it or simply don't agree with it, then I guess we have to agree to disagree.

It's very easy for the Fed to raise rates and make money expensive. We ok so far? The point is there is so much money sitting in bank reserves that if the economy heats up and that gets unleashed, making money expensive doesn't have all that much of an impact until the banks burn through their massive reserves.

 

[Tsing Tao]

Quote from HopelessTrader:

It's come down to the same scenario. They will keep long-term rates low. Create demand for MBS. Move the Fannie Freddie loans. Startup a housing bid. Clean up some mess. Ok.. so the big question.. We've driven rates to zero (after inflation and costs). We are likely to keep rates low. In past recessions.. we lower rates. What will we do next time? My guess is the Fed buying assets is just getting warmed up here.. What do you think?

I agree, I think they're just getting warmed up. Now they're tanking control of the US debt market, almost entirely. When we finance our own debt by printing money and devaluing the currency, well...we'll not be able to stop. Right now it's taking 85B a month just to keep the market where it is, just to get the crappy economic stats we're getting. Just to keep unemployment in the low teens (U6), ...when the Fed stops, who fills that void?

 

[Tsing Tao]

Quote from denner:

Yes, I think they are just getting warmed up. The "dual mandate" ensures that they have cover for excessive intervention and/or an extremely dovish policy stance. (Also note all of the dovish members of the committee). For the foreseeable future, they can play those opposing positions against one another to rationalize extending ZIRP or continuing down the current path for years to come.

It's a path towards a completely centralized economy.

The dual mandate is completely absurd. The Fed has no direct control over unemployment, period.

 

[CT10Gov]

(1) For what the Fed holds:

http://www.newyorkfed.org/markets/soma/sysopen_accholdings.html

Look under the 'agency' tab. It's listed by CUSIP. I'm not sure how hard you looked for this, but SOMA holdings have been available since day one.

(2) Bernanke's rationale for QE purchases is also motivated by the 'portfolio channel', which is to make risk-less assets so unattractive in terms of yields that investors put money into risky assets. Not the same the as the bank channel.

(3) On each day that's a buy-back day, the Fed publishes a list of CUSIPs of bonds/bills that it will consider buying. The primary dealers then will put together a quote list after soliciting offers from the buy-side. The fed will then come back with accepted offers. All of this is transparent and published. And finally, the Fed will usually avoid buying newly issued (and therefore very liquid) bonds/notes.

Quote from Tsing Tao:

First, how do you honestly know the quality of anything the Fed purchased from the banks? If you have info on this, I'd be very interested in seeing specific detail, because I've not been able to find it.

Second, regardless to the quality, the Fed still gave the banks money, which they parked (for the most part) in reserves to shore up ugly balance sheets. It was not put into the economy, and could be if banks it should be. That was the whole point of the argument.

Lastly, please feel free to explain how the buy back works with a specific terms as you wish and give us all an education. I certainly won't object to learning something. If I was wrong, I'll happily own up to it.