The Fed's $1 trillion MBS Tar Baby

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machinehead's picture
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
The Fed's $1 trillion MBS Tar Baby

The latest minutes reveal that the Fed is torn between 'more stimulus' and trying to dump its heavy bindle containing a trillion worth of shaky Mortgage Backed Securities. What's a central planner to do?

“Members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably,” the minutes said.

Central bankers, as they have in past meetings, discussed longer-term strategies for reducing the Fed’s balance sheet. Total assets stand at $2.33 trillion, near a record high of $2.34 trillion reached May 19.

“A majority of participants continued to anticipate that asset sales would start after the committee had begun to firm policy by increasing short-term interest rates,” the minutes said.

The FOMC won’t raise its target for overnight lending among banks until the second quarter of 2011, according to the median forecast in a Bloomberg News survey of economists early this month. The Fed has kept its key rate at a record low since December 2008.

The minutes said policy makers “continued to agree that gradual sales” of the more than $1 trillion in mortgage-backed securities the Fed purchased to support housing markets “should be undertaken, at some point, to speed the return to a Treasury-securities-only portfolio.”

“Most participants continued to judge it appropriate to defer asset sales for some time,” the minutes said. “Several noted the modest weakening in the economic outlook since the committee’s last meeting as an additional reason to do so.”

Here is my assertion: the Fed will NEVER succeed in shrinking its $2.33 trillion balance sheet. At least, not without causing another recession.

Fiscal policy is already set to tighten, as stimulus spending is exhausted, and tax breaks expire at the end of this year. The recovery is treading water. Attempting to shrink the Fed's balance sheet would certainly push it over the line into double-dip recession.

In an economy with Ponzi characteristics, the reality is that ever-higher levels of monetary and fiscal stimulus are required to keep it going. The Fed can't possibly shrink its balance sheet until a roaring Bubble III is underway. But by then, banks will have started lending those excess reserves, and it won't be feasible to withdraw them all.

Bubble us up, Ben. There's no productive investment down here. Surprised


Davos's picture
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: The Fed's $1 trillion MBS Tar Baby

"Betting against gold is the same as betting on governments. He who bets on governments and government money, bets against 6,000 years of recorded human history." Charles de Gaulle

r101958's picture
Status: Martenson Brigade Member (Offline)
Joined: Aug 24 2008
Posts: 257
Re: The Fed's $1 trillion MBS Tar Baby

'Double-dip'.....bah, humbug. There is no recovery if the economy is being propped up by massive gov't stimulus spending. It is not a recovery, only a mirage. It is all one big recession/depression.

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