Uncle Fed Buys Mortgages
The US Federal Reserve injected $38 billion dollars into the economy this Friday. This is the largest repurchase agreements entered into by the Fed since September 11, 2001.
The significant about Friday’s repurchase agreements is not the size, but what they are buying. Yes you guessed it mortgage-backed securities (MBS). The entire $38 billion dollars went to purchases MBS, the largest purchase of this asset type ever conducted by the Fed, destroying the previous record of $8.6 billion set back in September of 2005.
If you understand Economics 101, the sudden purchase of MBS by the Fed is to say a bit odd. It has been taught by economist when the Fed expanded the money supply it did so by buying government bonds and bills. As an example, back in September 2001, at the wake of 9/11 the Fed provided liquidity by buying what it traditionally bought; treasury securities.
The Fed sets a target for the federal funds rate and protects it by either removing or supplying money according to the needs of commercial banks. It supplies by buying securities from the banks with freshly created money (you know those worthless dollars you carry around in your pocket). The new money supply increases the reserves commercial banks hold, allowing these banks to expand credit to businesses and consumers.
The Fed removes money by selling securities to commercial banks who then pay the Fed money as payment, thereby reducing reserves and removing credit from the system. Since August 1999 the Fed officials have been temporarily suspending their rules on buying MBS, giving themselves the authority to freely purchase Ginnie Mae–, Freddie Mac–, and Fannie Mae–issued MBS on a provisional basis without hindrance on size and timing.
In recent Fed documents, only clauses 1 and 2 remain listed. While the purchase may only be temporary. A person has to wonder how long before the Fed grants itself the power to buy MBS permanently. Never the less the Fed’s response shows it is worried about the growing mortgage crises showing a willingness to do anything to buy its way out of it. Unfortunately, buying MBS to manipulate the market the Fed be causing more harm than good.
Oh, and no Uncle Fed is not a government agency, it’s a private enterprise.
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[Keywords: Loan, Mortgage, Real Estate, federal reserve bank, Mortgage back securities, bubble burst, housing market, home loan, eloan, save my house. ]
August 13th, 2007