5 ms·

The Federal Reserve purchases $85 billion in U.S. Treasury bonds—much of it worthless subprime mortgages—each month.

by Tycho 13y ago

lifeisstillgood 13y ago
it's called inflating your way out of debt. It's not going to stop till the trillion or so it cost to stop the world economy collapsing is about as valuable as the outfitting for the Spanish-American war. When the Cypriot government tried to take 6% of everyone's bank accounts there were riots in the streets. Our go ernments are doing the same thing, but we blame bankers.
spinchange 13y ago
I stopped reading at this point. Beside the fact that a U.S. Treasury bond is not a mortgage backed security, subprime mortgages have not been originated in several years. A discussion about central banking or U.S. monetary policy would be one thing, but this is factually incorrect.
prewett 13y ago
This is incorrect just on the face of it. US Treasury bonds are simply government bonds, just like corporate or municipal bonds. They are NOT subprime mortgages. They are NOT mortgages. They are NOT worthless (unless you think the US will default on its bonds). I couldn't make it past the first page of this article...
ergoproxy 13y ago
I think people are missing the main point. Debt-equity swaps have been a major tool of the Federal Reserve in bailing out TBTF banks. Here's how it works: I'm a banker. I paid $10B for MBSes in 2007. Big mistake. In 2008, their valuation fell to $0. So I do a swap with the Federal Reserve. I give Ben Bernake my portfolio of MBSes. And he gives me $10B in US Treasury Bonds he's purchased. I never would have made a dime off my MBSes. But now, the US tax payer is on the hook for paying me $10B in principal plus interest. Meanwhile, the Fed puts "$10B" of MBSes on its books. Doesn't matter that these debts are worth zero. They get to do it... Right now, the Fed has "$1.5T" of MBSes on their books from doing these deals. Source: http://money.cnn.com/2013/12/19/news/economy/federal-reserve-assets-four-trillion/ http://money.cnn.com/2013/12/19/news/economy/federal-reserve... I used to be VP of Mortgage Tax and Accounting at a Wall St. bank back in the 90s, and I try to stay up to date on this fiasco. I don't have a problem with what Chris Hedges said, just how he said it: he said it too fast, and it came out wrong. The main idea is still right.
- Tycho 13y ago
  Technically I suppose the MBS issuers are now a subsidiary of the Treasury. But I'm not sure about the 'worthless subprime debt' part. They're buying good quality MBSs in order to keep rates down and support the housing market, not to take toxic assets off the books of financial institutions.
  - ergoproxy 13y ago
    It's important to note that the Fed is purchasing these securities at "face value"...they're not doing any kind of valuation. Lawrence Hunter wrote an op-ed for Forbes back in 2012 saying the Fed's (at the time) "$1.3T" of MBSes were "worthless." http://www.forbes.com/sites/lawrencehunter/2012/10/29/are-federal-reserve-regulated-banks-laundering-dirty-money/ http://www.forbes.com/sites/lawrencehunter/2012/10/29/are-fe... My main job was pricing MBSes. The calculation is basically sum of discounted contingent cashflows. Even before the 2008 crisis, back in the mid 90s, I'd often see MBSes with a negative net income. Then I'd get frantic phone calls from upset clients, often accountants or CFOs or brokers, who couldn't understand how a valuation less than zero was even possible, and I'd have to explain how their expected expenditures were going to be greater than their revenues... I tend to agree with Hunter and Hedges that the Fed's "$1.5T" of MBSes are mostly worthless. That said, I also understand the reasons why the Fed is making these purchases: increase MBS prices, increase liquidity in the MBS market, and so forth. But the bigger reason still seems to me: bail out TBTF banks. For the Fed's POV on this subject, they publish FAQs and data on their "MBS Purchase Program" several places: http://www.federalreserve.gov/newsevents/reform_mbs.htm http://www.federalreserve.gov/newsevents/reform_mbs.htm http://www.newyorkfed.org/markets/ambs/ambs_faq.html http://www.newyorkfed.org/markets/ambs/ambs_faq.html http://research.stlouisfed.org/fred2/series/WMBSEC http://research.stlouisfed.org/fred2/series/WMBSEC
    - Tycho 13y ago
      Thanks for taking the time to post the links. However I have some issues. Firstly, the Fed is purchasing agency MBSs at market rates. They are pushing prices up since they are bringing demand to the market, but they are otherwise bidding competitively. The idea that these MBSs are basically worthless doesn't make sense when there is a large market for them. Secondly a lot of the MBSs (which are all government guaranteed) are newly issued, so it can hardly be said they are helping TBTF banks decant their toxic assets leftover from the financial crisis. Thirdly, the Fed actually eventually made a profit on the toxic debt they acquired during the bailouts. The current MBS purchase programs are far less risky. Furthermore, the US Gov has guaranteed the future cashflows of all these MBSs... so I think TBTF banks are a sidenote on this whole issue.

The Federal Reserve purchases $85 billion in U.S. Treasury bonds—much of it worthless subprime mortgages—each month.

by Tycho 13y ago

The Federal Reserve purchases $85 billion in U.S. Treasury bonds—much of it worthless subprime mortgages—each month.

it's called inflating your way out of debt. It's not going to stop till the trillion or so it cost to stop the world economy collapsing is about as valuable as the outfitting for the Spanish-American war. When the Cypriot government tried to take 6% of everyone's bank accounts there were riots in the streets. Our go ernments are doing the same thing, but we blame bankers.

spinchange 13y ago

I stopped reading at this point. Beside the fact that a U.S. Treasury bond is not a mortgage backed security, subprime mortgages have not been originated in several years. A discussion about central banking or U.S. monetary policy would be one thing, but this is factually incorrect.

prewett 13y ago

This is incorrect just on the face of it. US Treasury bonds are simply government bonds, just like corporate or municipal bonds. They are NOT subprime mortgages. They are NOT mortgages. They are NOT worthless (unless you think the US will default on its bonds). I couldn't make it past the first page of this article...

ergoproxy 13y ago

I think people are missing the main point. Debt-equity swaps have been a major tool of the Federal Reserve in bailing out TBTF banks. Here's how it works: I'm a banker. I paid $10B for MBSes in 2007. Big mistake. In 2008, their valuation fell to $0. So I do a swap with the Federal Reserve. I give Ben Bernake my portfolio of MBSes. And he gives me $10B in US Treasury Bonds he's purchased. I never would have made a dime off my MBSes. But now, the US tax payer is on the hook for paying me $10B in principal plus interest. Meanwhile, the Fed puts "$10B" of MBSes on its books. Doesn't matter that these debts are worth zero. They get to do it... Right now, the Fed has "$1.5T" of MBSes on their books from doing these deals. Source: http://money.cnn.com/2013/12/19/news/economy/federal-reserve-assets-four-trillion/ http://money.cnn.com/2013/12/19/news/economy/federal-reserve... I used to be VP of Mortgage Tax and Accounting at a Wall St. bank back in the 90s, and I try to stay up to date on this fiasco. I don't have a problem with what Chris Hedges said, just how he said it: he said it too fast, and it came out wrong. The main idea is still right.

Tycho 13y ago
Technically I suppose the MBS issuers are now a subsidiary of the Treasury. But I'm not sure about the 'worthless subprime debt' part. They're buying good quality MBSs in order to keep rates down and support the housing market, not to take toxic assets off the books of financial institutions.
- ergoproxy 13y ago
  It's important to note that the Fed is purchasing these securities at "face value"...they're not doing any kind of valuation. Lawrence Hunter wrote an op-ed for Forbes back in 2012 saying the Fed's (at the time) "$1.3T" of MBSes were "worthless." http://www.forbes.com/sites/lawrencehunter/2012/10/29/are-federal-reserve-regulated-banks-laundering-dirty-money/ http://www.forbes.com/sites/lawrencehunter/2012/10/29/are-fe... My main job was pricing MBSes. The calculation is basically sum of discounted contingent cashflows. Even before the 2008 crisis, back in the mid 90s, I'd often see MBSes with a negative net income. Then I'd get frantic phone calls from upset clients, often accountants or CFOs or brokers, who couldn't understand how a valuation less than zero was even possible, and I'd have to explain how their expected expenditures were going to be greater than their revenues... I tend to agree with Hunter and Hedges that the Fed's "$1.5T" of MBSes are mostly worthless. That said, I also understand the reasons why the Fed is making these purchases: increase MBS prices, increase liquidity in the MBS market, and so forth. But the bigger reason still seems to me: bail out TBTF banks. For the Fed's POV on this subject, they publish FAQs and data on their "MBS Purchase Program" several places: http://www.federalreserve.gov/newsevents/reform_mbs.htm http://www.federalreserve.gov/newsevents/reform_mbs.htm http://www.newyorkfed.org/markets/ambs/ambs_faq.html http://www.newyorkfed.org/markets/ambs/ambs_faq.html http://research.stlouisfed.org/fred2/series/WMBSEC http://research.stlouisfed.org/fred2/series/WMBSEC
  - Tycho 13y ago
    Thanks for taking the time to post the links. However I have some issues. Firstly, the Fed is purchasing agency MBSs at market rates. They are pushing prices up since they are bringing demand to the market, but they are otherwise bidding competitively. The idea that these MBSs are basically worthless doesn't make sense when there is a large market for them. Secondly a lot of the MBSs (which are all government guaranteed) are newly issued, so it can hardly be said they are helping TBTF banks decant their toxic assets leftover from the financial crisis. Thirdly, the Fed actually eventually made a profit on the toxic debt they acquired during the bailouts. The current MBS purchase programs are far less risky. Furthermore, the US Gov has guaranteed the future cashflows of all these MBSs... so I think TBTF banks are a sidenote on this whole issue.