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CC
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 Posted: Thu Nov 19, 2009 1:28 am GMT Post subject: Fed is buying mortgage securities to keep rate low, but...? |
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I heard Fed is buying mortgage securities to keep the rate low, but how do they sell those in the future? They can't keep buying forever. So who will buy their mortgage security products anyway, or to whom they can sell?
I really don't get it. Any idea? |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Thu Nov 19, 2009 2:51 am GMT Post subject: |
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They don't need to sell, do they? They could hold them to maturity, hypothetically speaking.
They could also discount them far enough that they would actually be worth buying. That wouldn't be such a great deal for tax payers and savers holding dollars... which means that's probably what they'll do.
- admin |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Sat Nov 21, 2009 12:53 am GMT Post subject: Re: Fed is buying mortgage securities to keep rate low, but. |
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| CC wrote: | I heard Fed is buying mortgage securities to keep the rate low, but how do they sell those in the future? They can't keep buying forever. So who will buy their mortgage security products anyway, or to whom they can sell?
I really don't get it. Any idea? |
On the contrary there is nothing to prevent them buying forever (although
I dont predict that) and there is no particular reason they need to sell.
They might sell some of these at some future point for example during
market operations to raise interest rates.
Also, I have to point out that these purchases are not a cost to taxpayers,
although they may represent a cost to savers if the Fed actions eventually
trigger inflation. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Sat Nov 21, 2009 3:54 pm GMT Post subject: Re: Fed is buying mortgage securities to keep rate low, but. |
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| mpr wrote: |
Also, I have to point out that these purchases are not a cost to taxpayers,
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They do represent at least an opportunity cost if they are paying more than the market price, and that is indeed what they are doing. They are getting less of an asset than what they are paying for.
- admin |
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Sat Nov 21, 2009 4:19 pm GMT Post subject: |
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| Think about that. Think about how the top 15% of wage earners pay 85% of the amount of taxes and the bottom 50% pay 2% of the cost of government. The government is forcing the percentage of citizens who pay taxes to overpay for an asset. Wait, that is really buying down a liability right? This approach is kind of like a Union. The younger union members get screwed and pay hefty dues to pay for the older ones and the younger ones won't get a return on their investment. It isn't very different to a criminal "Street Tax" where you don't get an opportunity to practice unless you buy a thug off. Now the Unions are pushing to get this law passed where you don't get a private ballot. Chicago Style.. you'll see the wimps voting "Present". They want to make sure that they know who to intimidate. The prior generation went on a feeding frenzy and left the young to pick up the tab. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Sat Nov 21, 2009 8:33 pm GMT Post subject: Re: Fed is buying mortgage securities to keep rate low, but. |
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| admin wrote: | | mpr wrote: |
Also, I have to point out that these purchases are not a cost to taxpayers,
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They do represent at least an opportunity cost if they are paying more than the market price, and that is indeed what they are doing. They are getting less of an asset than what they are paying for.
- admin |
What opportunity cost ? They create the money needed to pay for it
as a bookkeeping entry. You could certainly argue that it is a windfall
for the holders of mbs, but if they weren't doing it interest rates in general
would be higher which would be bad for the economy in general. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Sat Nov 21, 2009 10:14 pm GMT Post subject: Re: Fed is buying mortgage securities to keep rate low, but. |
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| mpr wrote: |
What opportunity cost ? They create the money needed to pay for it
as a bookkeeping entry.
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That money isn't free. It leads to inflationary pressures, as you pointed out earlier.
| mpr wrote: |
You could certainly argue that it is a windfall
for the holders of mbs, but if they weren't doing it interest rates in general
would be higher which would be bad for the economy in general. |
Yes, interest rates are lower in the near term, but the cost may end up being higher interest rates in the long term, due to inflation. It may end up increasing the average interest rate of the period of time that it affects, which could be worse for the economy. I am not predicting that this is what will necessarily happen, I'm just saying that creation of money to overpay for assets is not without a serious potential downside.
- admin |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Sun Nov 22, 2009 12:39 am GMT Post subject: Re: Fed is buying mortgage securities to keep rate low, but. |
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| admin wrote: | | mpr wrote: |
What opportunity cost ? They create the money needed to pay for it
as a bookkeeping entry.
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That money isn't free. It leads to inflationary pressures, as you pointed out earlier.
| mpr wrote: |
You could certainly argue that it is a windfall
for the holders of mbs, but if they weren't doing it interest rates in general
would be higher which would be bad for the economy in general. |
Yes, interest rates are lower in the near term, but the cost may end up being higher interest rates in the long term, due to inflation. It may end up increasing the average interest rate of the period of time that it affects, which could be worse for the economy. I am not predicting that this is what will necessarily happen, I'm just saying that creation of money to overpay for assets is not without a serious potential downside.
- admin |
Unfortunately in the situation we're in there is no course of action
which is without a serious potential downside. I'm sympathetic to
the argument which says save the patient now and worry about
the consequences later.
I also have difficulty believing that we will not eventually get inflation
out of this, but that may not be such a bad outcome, depending on
how it is managed and the circumstances in which it occurs. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Sun Nov 22, 2009 8:20 pm GMT Post subject: |
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| inflation is just as bad if not worse than deflation. Better to limp now than paralyze later. Low interest rates transfer wealth from tomorrow to those today. It is simply wealth distribution from those who cant vote yet to those who can, like government debt. |
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