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Fed faces trap as it frets over withdrawal from QE

 
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balor123



Joined: 08 Mar 2008
Posts: 1204

PostPosted: Thu Jan 21, 2010 4:37 am GMT    Post subject: Fed faces trap as it frets over withdrawal from QE Reply with quote

Fed faces trap as it frets over withdrawal from QE

Did you all see this article? I don't know why I never thought about this problem. Wow! So the Fed is sitting on all these MBS (~$2 trillions worth). They want to stop buying them but if they do then there's going to be a lot more debt competing for treasuries which will drive up yields. They can continue buying them but at some point they'll have so much that investors will stop trusting treasuries due to the large debt burden and they'll rise anyway. Hence no one wants to touch long term debt except the too big to fail banks, who are only buying it because they can play the short/long debt arbitrage knowing that they'll get their bonuses now and if it doesn't work out later they'll get to keep them and the Fed will probably continue to bail them out with low rates, etc. Remember, before the Great Recession MBS were driving up yields, a problem the Fed doesn't have now. Either way, when they reappear on the market people will either: not trust them anymore, driving up mortgage rates, or they'll trust them and stop buying treasuries. There just isn't enough cash in this world to pay down this debt while the engine is still running.

I think everyone else is just holding their breath for another miracle like the computing revolution. That's one big pickle that they've got.
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Renting in Mass



Joined: 26 Jun 2008
Posts: 381
Location: In a house I bought in December 2011

PostPosted: Thu Jan 21, 2010 12:02 pm GMT    Post subject: Reply with quote

Quote:
I think everyone else is just holding their breath for another miracle


Yeah, I think they know they're screwed, but when the choice is disaster now or disaster later, I can't blame them for choosing disaster later. Like you said, maybe a miracle will happen before "later" comes around.
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