Tuesday, November 25, 2008
fed starts buying mortgage-backed securities
The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.
And so it begins. Bernanke’s Fed is buying — not just borrowing — mortgage securities. In a huge way too - $500bn in MBS and $100bn in GSE obligations.
The question being: who needed the TARP bailout package, when the Fed could have just done this all along? (Inferred answer: it was a political sop, now that the climate on capital hill has changed, bailouts are de rigueur)
Immediate effect: expect a rally on the ABX.
The Fed is pushing further and further towards a Bank of Japan-like quantitative easing strategy. Purchasing, directly, troubled assets being yet another plank of the BoJ’s plan that Bernanke is replicating.
Financing implications are not yet clear. Either this will result in even more Treasury issuance or, more likely, it will be funded from the Fed’s increased balance sheet without sterilisation, meaning more imbalance in the monetary supply.
clearly the fed has noticed the further acceleration fo housing declines.
the dollar reaction was quick, but we will have to see how the fed competes against the deflationary collapse of credit and therefore monetary velocity. BoJ got a decade of deflation in spite of such policies. they can suck agency MBS out of the system and lower agency rates, but they cannot force anyone to either lend or borrow -- and the psychology of the boom has clearly turned.
as was noted earlier this month as the warmup to quantitative easing became apparent, watching excess reserves on the fed balance sheet will be essential to figuring how (in)effective money printing will be. until now increasing bank liquidity through special repo facilities has resulted, in the face of tightening credit standards and borrower debt aversion, not in significant credit growth but only in massive piles of excess reserves on deposit at the fed -- as of november 20 in the amount of $633bn, as seen on the fed's H.4.1 release, up $624bn on last year at this time.
UPDATE: the result -- a 75 bps one-day dive in mortgage rates.
UPDATE: more and optimism from clusterstock -- at least short-term optimism. with no obvious exit strategy, however, it may be too early to tell.