The Fed now owns nearly 1/3 of all U.S. mortgages • Hacker News Board

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#11

Post by isoskeles » Wed, Sep 09, 2020, 5:11 AM UTC

alex_young wrote: post #4

That is interesting, but can someone explain why this is a bad thing?

I think it would generally inflate housing prices. The Fed is a large buyer that can 'print' its own money to purchase these assets, so there isn't much incentive for it to examine the debt that its buying. It buys these mortgage bonds from banks that may also be incentivized not to scrutinize the people they're loaning money to (beyond whatever is required by law in underwriting a mortgage), because they know the Fed will purchase their debt without much question.

Of course, there might be other reasons and counterarguments, this is just my interpretation.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#12

Post by vermilingua » Wed, Sep 09, 2020, 5:13 AM UTC

alex_young wrote: post #4

That is interesting, but can someone explain why this is a bad thing?

IANAE(conomist), but my naive interpretation is this: let’s say the pandemic causes 25% of mortgage holders to become delinquent, a number I don’t think is unreasonable. If the Fed owns a third of all mortgages (and their ownership is a normal distribution of all mortgages, I have no idea if this is true), that’s 25% of $2T that is suddenly at risk.

If the total Fed balance sheet is $7T, that’s 7% of their total assets that could disappear. That seems like a lot to me.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#13

Post by lvs » Wed, Sep 09, 2020, 5:14 AM UTC

There would be no inherent problem with having the Fed hold this much debt, if the tax system then soaked up distortions in how the resulting stimulus was distributed into the economy. That is, if the tax system is structured to pull back currency from unproductive sinks before it yields inflation, then there's no problem with the Fed holding that debt.

A better structure, as others have pointed out, would be to have the Fed just hold the government's debt, so that allocation and taxation can both be managed by the government. At the moment, the Fed and Treasury (via Congress) are both competing to play an allocating role in the economy at the same time, with no real coordination or plan.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#14

Post by JackFr » Wed, Sep 09, 2020, 5:24 AM UTC

remote_phone wrote: post #8

hn_throwaway_99 wrote: post #7

I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well". That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?

The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.

The rest of the world buys US treasuries cause we buy their goods. China buys treasuries because we buy goods with dollars. China has to do something with the dollars. They can buy goods or they can buy assets. They aren’t that interested in our goods, so they buy bonds. If they wanted to unload the dollars they certainly could, but that would weaken the dollar and strengthen the yuan and make it unattractive for the US to buy goods from them.

Despite the Fed going where they have not before (and probably shouldn’t go) the world probably isn’t going to dump treasuries because of it.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#15

Post by renewiltord » Wed, Sep 09, 2020, 5:27 AM UTC

vermilingua wrote: post #12

alex_young wrote: post #4

That is interesting, but can someone explain why this is a bad thing?

IANAE(conomist), but my naive interpretation is this: let’s say the pandemic causes 25% of mortgage holders to become delinquent, a number I don’t think is unreasonable. If the Fed owns a third of all mortgages (and their ownership is a normal distribution of all mortgages, I have no idea if this is true), that’s 25% of $2T that is suddenly at risk. If the total Fed balance sheet is $7T, that’s 7% of their total asse…

Yeah but the Fed can just make 7.5% more money and we're back at even and it won't even be bad because they're trying to increase inflation not decrease it.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#16

Post by remote_phone » Wed, Sep 09, 2020, 5:29 AM UTC

alex_young wrote: post #10

remote_phone wrote: post #8

Earlier quoted context omitted.

The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.

Why would that happen because the fed owns a lot of mortgage debt? I don’t see the connection.

Entities buy UST because there’s a demand for it. It’s considered the risk-free asset, so when you have billions in cash, you park them in UST because you know you can get it back.

But instead of having natural demand for UST, the Fed has started buying UST which have driven down the interest rates. And they started buying mortgages to drive down those interest rates as well.

But they’re doing it by creating money and buying them on the open markets. It’s basically monetizing their obligations which is unnatural and fake.

So if (and it’s a big if) the markets decide they don’t want anything to do with this, and would rather buy a Japanese government bond, the markets would get flooded with those products, causing interest rates to spike. They would take the USD and sell them and buy Japanese Yen for example. Again selling USD would cause the price to drop relative to other currencies.

Whether this is likely is another story.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#17

Post by throwaway4good » Wed, Sep 09, 2020, 5:30 AM UTC

hn_throwaway_99 wrote: post #7

I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well". That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?

The fed can keep interest rates low; it is literally what they are doing by buying the bonds.

In principle you should see higher inflation and a falling currency. However this policy (aggressive buying of all kind of bonds) has been persued by the Europeans and Japanese for years and it haven't really caused a collapsing currency or high inflation.

Some may argue that it suspends a natural reallocation of resources in the economy. And causes the economy to keep overallocating real resources into things like real estate and finance causing bubbles, malinvestment and zoombie institutions ultimately leading to lower growth.

However that assumes that you had a free market in the first place which you never really had.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#18

Post by JMTQp8lwXL » Wed, Sep 09, 2020, 5:31 AM UTC

I would be curious to see analysis for what home prices would be with 0 Fed intervention. Also, I don't understand how millennials aren't supposed to see this figure and immediately feel a sense of rejection, that the housing market is some form of a pyramid scheme, where you had to get in early to have a chance.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#19

Post by robfitz » Wed, Sep 09, 2020, 5:31 AM UTC

remote_phone wrote: post #8

hn_throwaway_99 wrote: post #7

I keep thinking of all the huge amount of asset purchases by the Fed, especially legally dubious purchases like corporate bonds, that "this won't end well". That said, I don't really know what "not ending well" would look like. Would it just be total runaway inflation? Can anyone more knowledgeable comment on what possible endgames are for these asset purchases?

The worst case scenario is the rest of the world dumping US treasuries, and causing interest rates to skyrocket and USD to plummet.

Also:

* 70% of global trade is currently denominated in USD (oil markets, commodities, etc)

* US has a lot of debt to other nations

* USD is the global reserve currency, giving the US fairly unique economic power and security

If the USD gets printed into significant devaluation in order to support assets (like bonds, houses, corporates, stocks), then it reduces the real value of the debts that the US owes to other countries (since denominated in USD), which erodes their faith as lenders. Taken together, this:

* Erodes confidence in the USD as a global reserve currency and causes governments to look to other stores of value (e.g., government buying of gold has recently been at an all-time high)

* Artificially inflates asset prices, leading to a bigger crash later when the government support is unable to continue (due to reduced confidence from foreign lenders)

That's all pretty terrible for the US and USD, if it happens.

But there's also an equally credible (though counterintuitive) theory that the USD will actually go up in value (deflation) due to every other country in the world needing to take similarly drastic action and the US being destabilized the least (i.e., the least bad of a set of bad options and everyone rushing into USD and US investments for relative safety).

Plenty of very smart people are on both sides of this argument, but everyone agrees that we are buying ourselves some significant future pain.

Re: The Fed now owns nearly 1/3 of all U.S. mortgages

#20

Post by christkv » Wed, Sep 09, 2020, 5:32 AM UTC

More interesting than they owning 1/3 of the mortgages is what quality is the mortgages they own. Are they all sub prime quality? If they are is this a strategy to save banks from a default crisis in the near future without taking the systemic hit like 2007.