Since 2008, the Bernanke-Yellen Fed has acquired about $1.4 trillion of mortgage-backed securities, making it now as large a mortgage intermediary as Fannie Mae or Freddie Mac ever were. One economist has even called this new mortgage intermediation function of the Fed, “Feddie Sue.” It has financed this new position with zero-maturity interest-bearing excess reserve deposits that banks may withdraw on demand. When short-term rates inevitably return to normal levels, the Fed will either have to allow these deposits to flow out as currency, or else will have to pay banks a high enough rate on these deposits to keep them from withdrawing them. The Fed should never have acquired these mortgage-backed securities and bonds in the first place. In doing so, it has acted like a 1960s’ Savings and Loan Association, and has exposed itself to interest rate risk comparable to that which destroyed the S&L industry when rates rose in the 1970s and ‘80s. These long-term assets should have been funded with long-term sources of funds like pension funds and retirement plans all along. Allowing the corresponding reserve deposits to flow out as currency would be massively inflationary, so the Fed must raise the rates it pays to prevent this. This will generate ruinous losses that are already locked in. Whoever got the Fed into this mess should be fired. from: blog.independent.org/2013/11/04/questions-and-answers-for-janet-yellen/
Posted on: Tue, 05 Nov 2013 23:17:08 +0000
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