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The Fed's $2.7T mortgage problem

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Re: The Fed's $2.7T mortgage problem

#61

Post by dvt »

aidenn0 wrote: post #49
dvt wrote: post #30

> The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol Hill. I think this article is a bit of a nothingburger. Of course QT has the opposite effect of QE, that's the entire point . The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDO…

If housing prices deflate more than 20%, nearly everyone who bought a house with 20% down in the past 2 years will be underwater, no?

If we assume that the home-owners have been building equity in their homes for the past 2 years, no, they would be at 0 + equity. This of course stings a little, but still not underwater or filing for bankruptcy.

Re: The Fed's $2.7T mortgage problem

#62

Post by cs702 »

I'd be more concerned about the other ~$6.3T of holdings in the Fed's ~$9T balance sheet.[a] The Fed has publicly announced it will allow its bond holdings to mature, to the tune of ~$90B/month, without recycling the proceeds back into treasury and agency-sponsored mortgage-backed bonds.

Given that all treasury bonds that mature and most mortgage bonds paid off via home sales are refinanced, private investors -- that is, mutual funds, ETFs, pension plans, individuals, etc. -- will have to buy an additional ~$90B of bonds every month, give or take, going forward.

That's $1T/year that private investors must find to buy treasury and agency bonds newly issued to refinance old ones.

Without a doubt, this will have a large, persistent effect on treasury yields and credit spreads.

[a] https://fred.stlouisfed.org/graph/?g=PlId

Re: The Fed's $2.7T mortgage problem

#63

Post by NovemberWhiskey »

gmadsen wrote: post #54
JumpCrisscross wrote: post #17

> it will incur big financial losses that reduce the funds the central bank returns to the Treasury...expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people This isn't how it works. No doubt, some will try to spin it that way. But the Fed balance sheet's gains and losses are an accounting artefact. (It will always make money when low…

how independent is it really if they are printing money to buy treasury bonds?

That seems like a non-sequitur to me. When "quantitative easing" occurs, the Fed buys Treasuries not because it lets the government spend more, but to reduce interest rates and encourage lending.

Re: The Fed's $2.7T mortgage problem

#64

Post by qeternity »

JumpCrisscross wrote: post #60
Areading314 wrote: post #56

Earlier quoted context omitted.

If the Fed "loses" money by buying high and selling low, it means dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for. This creates permanent inflation/dilution of the currency.

> dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for Open market operations are one among many of the Fed's policy tools [1]. [1] https://www.frbsf.org/education/teacher-resources/what-is-th...

These are debt instruments. If the Fed buys UST, MBS, etc from the market, those assets will be serviced over time and the money will return to the Fed.

Re: The Fed's $2.7T mortgage problem

#65

Post by vkou »

Mountain_Skies wrote: post #20
konfusinomicon wrote: post #11

Earlier quoted context omitted.

I dabble in news sources from both sides of the aisle and I've not heard the opinion that inflation is a result of poor people, only that its the result of a perfect storm of the pandemic and an unjust war halfway across the world, which mostly makes sense... who is blaming the poor?

It appears that one side is fantasizing about what they'd like the other side to say so they can attack on that. Of course, we're talking about a country of over 330 million so it is possible to find someone somewhere that holds any given opinion even if it's not widely shared.

It's not a fantasy to observe that the right-wing of the American political spectrum spent most of 2020 and 2021 screaming about individual handouts and unemployment benefits, while only raising a token protest about PPP loans, and the firehose of money that the Fed started dumping into the capital markets, starting in March 2020.

In reality, all of those steps were necessary to prevent economic disaster, but now that disaster has been averted, and wages started rising, everyone's clutching their pearls about inflation.

Re: The Fed's $2.7T mortgage problem

#66

Post by tempfs »

ethbr0 wrote: post #27
candiddevmike wrote: post #5

The recession in 2008 was never really fixed, we just kicked the can down the road.

The recession of 2008 was absolutely fixed , in that bank collapses were prevented, highly leveraged products based on bad loans were drained from the balance sheets, underwriting was tightened up, and economic activity rebounded. That fix was just never paid for , in terms of shrinking Fed balance sheets and renormalizing rates.

You can't halt a bank collapse, but you can postpone it and attempt to reduce the impact with inflation which is exactly what has happened.

Additionally, if you don't address the lack of regulation that allowed the collapses in 2008, which we absolutely did not, it will keep happening and those future occurrences will grow in severity. Since now, in order to 'make money', the frauds have to be bigger, faster, and more aggressive.

Re: The Fed's $2.7T mortgage problem

#67

Post by qeternity »

gmadsen wrote: post #54
JumpCrisscross wrote: post #17

> it will incur big financial losses that reduce the funds the central bank returns to the Treasury...expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people This isn't how it works. No doubt, some will try to spin it that way. But the Fed balance sheet's gains and losses are an accounting artefact. (It will always make money when low…

how independent is it really if they are printing money to buy treasury bonds?

> how independent is it really if they are printing money to buy treasury bonds?

This article is literally about them printing money to buy private assets...

Re: The Fed's $2.7T mortgage problem

#68

Post by gopher_space »

vkou wrote: post #29
onlyrealcuzzo wrote: post #21

Earlier quoted context omitted.

Define inflation. Assets have been artificially inflated for a very long time due to QE and low interest rates and the Fed's balance sheet. If that were single handedly the reason for corn and lumber to get more expensive (general inflation) - we should've seen that a long time ago. There's a lot going on - and it's hard to blame everything on the Fed. Rising inequality? Sure. General inflation? Not convinced.

My guess is rising wages. When wages go up, it can either go at the expense of profits, or at the expense of prices (Or, most usually, both). The labour shortage in the pandemic created upward wage pressure, which added to existing pressure[1] caused by rising housing/healthcare costs. Notice how interest rates went up, as unemployment hit an all-time low? Capitalists hate low unemployment, as it causes wages to go u…

> As a result, businesses either have to raise wages, or shut down, or significantly reduce their hours.

If these were your only choices you were on the edge of profitability right before a global pandemic hit. Plenty of reasons for that. Commercial Rent Control is "progressive" and the people who own property like this can afford to let it sit vacant indefinitely and will literally abandon this amount of profit because they feel like it.

Re: The Fed's $2.7T mortgage problem

#69

Post by JumpCrisscross »

qeternity wrote: post #64
JumpCrisscross wrote: post #60

Earlier quoted context omitted.

> dollars have been created with no mechanism by which they can be retired, because the Fed has no corresponding assets they could use to exchange them for Open market operations are one among many of the Fed's policy tools [1]. [1] https://www.frbsf.org/education/teacher-resources/what-is-th...

These are debt instruments. If the Fed buys UST, MBS, etc from the market, those assets will be serviced over time and the money will return to the Fed.

> those assets will be serviced over time and the money will return to the Fed

The comment I responded to [1] posited the Fed needing to engage in extraordinary tightening. Waiting for the debt to be repaid would be insufficient in that case. (Also, defaults unbalance the equation.)

In that case, the Fed would need to sell assets to draw cash out of the economy. My point was that if the Fed ran its balance sheet to zero, it would still have unlimited firepower in the form of slashing interest on reserves through zero, borrowing through repos and potentially even raising the reserve requirement. These are powerful tools. Too powerful for regular use, which is why the more-precise open market operations are preferred.

TL; DR Running out of room to tighten is not a problem for a central bank.

[1] https://news.ycombinator.com/item?id=31428385

Re: The Fed's $2.7T mortgage problem

#70

Post by JumpCrisscross »

qeternity wrote: post #59
dvt wrote: post #30

> The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol Hill. I think this article is a bit of a nothingburger. Of course QT has the opposite effect of QE, that's the entire point . The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDO…

> The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year CDOs did not blow up the housing market. The housing market blew up the CDO market. In 2007, people said the exact same thing, and by every single metric the housing market is far more extended than it was then.

> CDOs did not blow up the housing market. The housing market blew up the CDO market.

Both statements are correct because there was a feedback loop.

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