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Home Publications Blogs Beat the Press The Fed Can Just Hold Mortgage Backed Securities, Reducing Interest Burdens

The Fed Can Just Hold Mortgage Backed Securities, Reducing Interest Burdens

Friday, 23 July 2010 04:44

The NYT portrayed the Fed as facing a serious dilemma in dealing with its portfolio of mortgage backed securities (MBS). It argued that it can either start selling them now and risk slowing the economy or wait until the economy has recovered more and risk losing money by selling them in a higher inflation environment.

There actually is another option that would address the deficit concerns that appear constantly in the NYT and other media outlets. The Fed could simply hold the bonds indefinitely and then reinvest the proceeds in Treasury bonds when the MBS are paid off. This means that the Fed would have a constant flow of interest income which would be rebated to the Treasury, reducing the interest burden from the debt to the Treasury. Insofar as it is worried about inflation, the Fed could raise bank reserve requirements (on a fixed schedule) among other actions.

This option should have been discussed in the article. Japan's central bank has gone the route of holding large amounts of long-term debt for long periods of time. In spite of this fact, the country remains far more concerned about deflation than inflation.  

Comments (10)Add Comment
written by izzatzo, July 23, 2010 7:24
That's right Mr Who's Your Nanny, talk about moral hazard, just have the Fed buy up all the bad debt and sit on it till it's paid off.

Why not take it to next level and just have the Fed write off its monetized debt altogether like a private corporation writes off excess capital with accelerated depreciation as a legitimate loss? Then the old debt wouldn't be a problem of crowing out unlimited new monetized debt to create inflation.

Stupid liberals.
written by skeptonomist, July 23, 2010 8:58
If I am reading the Fed balance sheet right, essentially all of the "quantitative easing" consisted of MBSs, presumably Fannie and Freddie. Turns out that Bernanke's theories have real-world application in getting certain people off the hook. As izzatso says, this is an incentive for those institutions, whoever runs them, to expand the business of supporting guaranteed-to-fail mortgages. Dean has mentioned before that the Fed's holding this debt is effectively withholding market punishment for all those, not just Fannie and Freddie, involved in mortgage bloating.
Working people pay their bills.
written by Scott ffolliott, July 23, 2010 9:05
Working people pay their bills. Perhaps we can put more people to work, and then we can worry about the Federal Reserve Banks balance sheet.
written by skeptonomist, July 23, 2010 9:08
One of the problems all along has been that the Fed doesn't know, or won't tell, how much of this debt is bad. The Fed will get interest income from the stuff that doesn't default, but will this be offset by the dead loss of defaults? By holding the debt, the Fed gets to keep the whole issue under the rug.
written by Tom, July 23, 2010 4:41
If inflation and interest rates go up, the Fed will still incur a loss on its MBS portfolio regardless of whether or not it sells these assets. Simply holding them to maturity does not negate the lost opportunity cost that occurs.
Jesus Christ
written by Bill Jones, July 25, 2010 5:31
You are fucking stupid
The Fed could simply hold the bonds indefinitely and then reinvest the proceeds in Treasury bonds when the MBS are paid off

These are not going to be paid off.
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.