It is likely that much of the Federal Reserve’s recent buying of US Treasuries (the government in effect prints money to buy its own bonds), has been undertaken out of fear that US Treasuries might not otherwise find buyers. The rationale has been that these moves are meant to keep interest rates down and stimulate the economy but what the Fed fears most is that a sale of US bonds will fail, thereby sending interest rates up.
Because Europe is such a mess, the US has recently become a “safe haven” for bond buyers. Hence the Fed is less worried about the US government selling its bonds. As a direct consequence, it is now buying mortgage bonds rather than government bonds. Where does it get the money to buy the mortgage bonds? Mostly from expiring US government bonds that were bought earlier with newly printed money. So in effect the Fed is using its newly printed money to buy mortgage bonds at prices that have been boosted by its own intervention.
Who benefits from this intervention? Mainly the owners of mortgage bonds who are subsidized by getting to sell them at inflated prices. That certainly includes banks. Do borrowers who got in over their heads prior to 2008 but are otherwise deserving benefit from this? No, unless they can refinance at lower rates, and most of them won’t qualify.
Hunter Lewis 11-28-2011