Why’s the Fed Turning to the Mortgage Market?

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.

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Hunter Lewis 11-28-2011

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About Hunter Lewis

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Hunter Lewis is co-founder of AgainstCronyCapitalism.org. He is co-founder and former CEO of global investment firm Cambridge Associates, LLC and author of 11 books on moral philosophy, psychology, and economics, including the widely acclaimed Are the Rich Necessary? (“Highly provocative and highly pleasurable.”—New York Times). He has contributed to the New York Times, the Times of London, the Washing­ton Post, and the Atlantic Monthly, as well as numerous websites such as Forbes.com, Fox.com, RealClearMarkets.com, and Townhall.com. His most recent books are Economics in Three Lessons & One Hundred Economic LawsCrony Capitalism in America: 2008–2012, and Where Keynes Went Wrong. He has served on boards and committees of fifteen leading not-for-profit organizations, including environmental, teaching, research, and cultural and global development organizations, as well as the World Bank.