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"Distilled to its roots, the Fed has been manufacturing “savings” from thin air for the better part of a decade. When the financial crisis hit in 2008, American

"Distilled to its roots, the Fed has been manufacturing “savings” from thin air for the better part of a decade. When the financial crisis hit in 2008, American savings were depleted, so the Fed had to step in to produce savings (to finance huge government deficits). Now the Fed is attempting to remove that “savings” at a time when: 1) The private sector is experiencing falling savings. 2) The government is likely on the precipice of expanding its dis-saving in the form of greater deficits. ... Not to state the obvious, but all else equal, if the Fed started shedding assets at $30 billion a month (or $360 billion a year), it would exhaust the entire stock of private savings. This doesn’t allow for larger government deficits. Given the current savings level, it is mathematically impossible for the Fed to shed assets at $50 billion/month. By 2019, as we are farther out from peak net savings rates set in 2015, it is likely the stock of private savings is smaller still, and hence the ability for the Fed to shed assets at a rate of $50 billion/month is utterly impossible. Net savings have fallen in the last 2 years from a peak of just over $700 billion to the current $355 billion. Will savings halve again in the next two years? If so, there is no mathematical way in the world the Fed can shed assets at the rate it outlined yesterday." Source: http://blog.knowledgeleaderscapital.com/?p=13520 http://blog.knowledgeleaderscapital.com/?p=13520 I tend to side with the uneducated who think the FED prints money out of thin air because it is closer to the truth of the matter of where real economic value exists moreso than the anachronistic mechanics of FED policy three card monte. When all is said and done, the FED took on toxic assets it will not be able to unload into a weak economy. The only hope it has is to sell the assets at face value in exchange for inflated dollars or hope the economy booms beyond everyone's expectations in the next two years. Sure hope the latter happens because otherwise the FED has done nothing but defer the pain of 2007 into the catastrophe of 2020.

b1daly 9y ago
Why can't the fed just hold onto said toxic assets indefinitely?
- alexmat 9y ago
  In order to "hold onto the assets" the FED actually has to buy US Treasuries when its current treasury holdings mature. The way the FED sells assets is to simply allow the treasuries to mature without buying any to replace it. The implication is that by choosing to buy or not buy treasuries, the FED can help control the US treasury interest rates which either help boost or slow down the economy as needed. The issue with holding and never selling is perpetually low interest rates which encourages people to borrow more since it is cheaper to do so (in theory stimulating growth, but in reality inflating asset prices when it goes on too long). If the FED doesn't unload its treasury holdings, interest rates stay low and capital will continue to take bigger risks to find higher yield, plus an unsustainable asset price inflation as it remains cheap to borrow money to buy assets like houses which then go up in value which creates even more demand through more cheap credit. I'm already over simplifying, but here is a less abstract illustration: Imagine you lose your job and you need some money to get back on your feet. You borrow against a line of credit to cover living expenses. You find another job but it doesn't pay enough to cover your standard of living, so you keep the line of credit open and just make the minimum payments. You are the US economy and the line of credit is the FED right now. If the line of credit is not paid off, if you lose your job again, there will be nothing to borrow against or even make the minimum payments. The smart thing to do is pay off the credit card balance so you can use it again if you're in trouble. The problem is you can't do that unless you cut back on spending... and this is why the FED always points out that the control of the situation is not with the FED but with congress, they need to cut spending... <insert laugh track> And I didn't even address your exact point. This is just the "non-toxic treasuries". The toxic stuff is non performing home loans. Imagine trying to sell those back to someone! Are you willing to buy them? More info here: https://www.newyorkfed.org/markets/mbs_faq.html https://www.newyorkfed.org/markets/mbs_faq.html

b1daly 9y ago

Why can't the fed just hold onto said toxic assets indefinitely?

alexmat 9y ago
In order to "hold onto the assets" the FED actually has to buy US Treasuries when its current treasury holdings mature. The way the FED sells assets is to simply allow the treasuries to mature without buying any to replace it. The implication is that by choosing to buy or not buy treasuries, the FED can help control the US treasury interest rates which either help boost or slow down the economy as needed. The issue with holding and never selling is perpetually low interest rates which encourages people to borrow more since it is cheaper to do so (in theory stimulating growth, but in reality inflating asset prices when it goes on too long). If the FED doesn't unload its treasury holdings, interest rates stay low and capital will continue to take bigger risks to find higher yield, plus an unsustainable asset price inflation as it remains cheap to borrow money to buy assets like houses which then go up in value which creates even more demand through more cheap credit. I'm already over simplifying, but here is a less abstract illustration: Imagine you lose your job and you need some money to get back on your feet. You borrow against a line of credit to cover living expenses. You find another job but it doesn't pay enough to cover your standard of living, so you keep the line of credit open and just make the minimum payments. You are the US economy and the line of credit is the FED right now. If the line of credit is not paid off, if you lose your job again, there will be nothing to borrow against or even make the minimum payments. The smart thing to do is pay off the credit card balance so you can use it again if you're in trouble. The problem is you can't do that unless you cut back on spending... and this is why the FED always points out that the control of the situation is not with the FED but with congress, they need to cut spending... <insert laugh track> And I didn't even address your exact point. This is just the "non-toxic treasuries". The toxic stuff is non performing home loans. Imagine trying to sell those back to someone! Are you willing to buy them? More info here: https://www.newyorkfed.org/markets/mbs_faq.html https://www.newyorkfed.org/markets/mbs_faq.html