Fed Monetizes 1 Trillion in MBS and Treasuries for 2013

Tsing Tao · Dec 6, 2012

Quote from CT10Gov:

I'm totally confused by this... SOMA is part of the monetary policy. So is hiking rates.... why would one need to combat the other?

Further, again, no more purchase in SOMA is actually contractionary. So, no SOMA purchase + hiking rates will work in the same direction.

Hiking rates is designed to shrink the money supply (or at least put the brakes on the economy). Are we in agreement on this?

QE - purchasing, well, anything from the banks to give them cash in exchange for MBS, etc gives them cash which they have again parked at the Fed. If the Fed raises rates and does nothing else, the cash in reserves can be called on negating the attempt at reducing the money supply until it is burned off. Raising rates, therefore, would have a muted effect while the effects of QE are still alive in the system.

Or do you not agree?

Covertibility · Dec 6, 2012

Quote from achilles28:

And Greece, Spain, Portugal and Italy are figments of the republican "hive mind", invented by Carl Rove. Put down the crack pipe, numbnuts.

From the link you posted:

"The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial â and often irrelevant â constructs that they are.â

LOL tell that to Europe

Don't start threads on topics you clearly know nothing about.

And don't cite articles, ie R&R, that you clearly didn't read.

achilles28 · Dec 6, 2012

Quote from Covertibility:

Don't start threads on topics you clearly know nothing about.

And don't cite articles, ie R&R, that you clearly didn't read.

Sure thing, Champ

CT10Gov · Dec 6, 2012

Quote from Tsing Tao:

Hiking rates is designed to shrink the money supply (or at least put the brakes on the economy). Are we in agreement on this?

QE - purchasing, well, anything from the banks to give them cash in exchange for MBS, etc gives them cash which they have again parked at the Fed. If the Fed raises rates and does nothing else, the cash in reserves can be called on negating the attempt at reducing the money supply until it is burned off. Raising rates, therefore, would have a muted effect while the effects of QE are still alive in the system.

Or do you not agree?

No, I don't agree. The banks don't sell the MBS and treasuries out of their own inventory. They source it from the buy-side (pension funds, money markets, mutual funds, hedge funds). So, when a SOMA purchase is made, the money flows to the end-buyers, who are then (suppose) to use the money to buy risky assets, thereby expanding the credit supply.

Maybe that's where we are not connecting: again to be clear, the Fed do not buy the bank's inventory, but buy through banks as primary dealers from the wider community of investors.

Tsing Tao · Dec 6, 2012

Quote from CT10Gov:

No, I don't agree. The banks don't sell the MBS and treasuries out of their own inventory. They source it from the buy-side (pension funds, money markets, mutual funds, hedge funds). So, when a SOMA purchase is made, the money flows to the end-buyers, who are then (suppose) to use the money to buy risky assets, thereby expanding the credit supply.

Maybe that's where we are not connecting: again to be clear, the Fed do not buy the bank's inventory, but buy through banks as primary dealers from the wider community of investors.

1. So banks like Bank of America have never sold any mortgage backed securities of their own to the Fed?

2.Is the money supply expanded by the open market operation or not?

piezoe · Dec 6, 2012

Quote from CT10Gov:

...I'm not sure what the Fed is doing will work; If it does, it will validate Bernanke's life work on how to deal with a depression. If it doesn't.... well, I hope it does.

But that being said, I do think the VAST majority of popular critique of the Fed is based on complete ignorance of how the Fed works.

Ditto, and well said.

achilles28 · Dec 6, 2012

Quote from Tsing Tao:

Is the money supply expanded by the open market operation or not?

Yes, it is.

Money is created, and used to purchase securities from banks or dealers, which is then credited towards that lenders account at the FED. That money can then be used to satisfy the reserve requirement, and be lent out as a multiple of the original sale value. For instance, at a 10% reserve ratio, if C bank sells 10 million in Treasuries to the FED, and keeps that deposit on account with the FED, it could extend a loan of 100 million in the private credit market.

So the FOMC has the dual action of pushing IR down, while enabling an expansion of the money supply.

CT10Gov · Dec 6, 2012

Quote from Tsing Tao:

1. So banks like Bank of America have never sold any mortgage backed securities of their own to the Fed?

Of course they did (to the extent that BoA and the others had the securities on in their trading inventory). But the VAST majority of assets in SOMA is sold to the Fed from the investor community.

Are you confusing QE/SOMA with TARP? TARP was done by the Treasury, not the Fed.

Quote from Tsing Tao:

2.Is the money supply expanded by the open market operation or not?

Of course. But if there's no open market operation (ie, no more new purchase for SOMA), the money supply starts to shrink from the redemption effect.

achilles28 · Dec 6, 2012

Quote from Tsing Tao:

1. So banks like Bank of America have never sold any mortgage backed securities of their own to the Fed?

Sure, they have. The FED owns nearly 1 Trillion worth of MBS paper. And before Maiden Lane 1, 2 and 3, TARP 1 and 2 were wound down, they owned a shitload of ABS. Most of which was purchased from banks, funds, investors etc. That was the whole point. To detoxify the commercial banking system by shifting toxic assets from the private sector, to the taxpayer (re: the FEDs balance sheet). Not sure about the exact details, but of course the big name banks like C, JPM, GS, BoA sold their shit to the FED. That was the whole point. Whoever said they didn't is confused. I would guess most of it was purchased through the secondary market, although i don't know. And I'm sure there was a shitload of opaque, shady, backroom deals transacted not at arms length. Most of this stuff will never come out.

CT10Gov · Dec 6, 2012

Quote from achilles28:

Sure, they have. The FED owns nearly 1 Trillion worth of MBS paper. And before Maiden Lane 1, 2 and 3, TARP 1 and 2 were wound down, they owned a shitload of ABS. Most of which was purchased from banks, funds, investors etc. That was the whole point. To detoxify the commercial banking system by shifting toxic assets from the private sector, to the taxpayer (re: the FEDs balance sheet). Not sure about the exact details, but of course the big name banks like C, JPM, GS, BoA sold their shit to the FED. That was the whole point. Whoever said they didn't is confused.

TARP == Treasury, not the Fed.

Look at SOMA, guy, and tell me if there's 'toxic' stuff in there. Go ahead.