"Unlike its New York brethren though, the Federal Reserve has a literal licence to print money, minting some $52bn in profit last year and paying $46bn in dividends to its shareholder, Uncle Sam...
“The man on the street doesn’t understand the $46bn earned by the Fed and given to the Treasury,” laments David Kotok, chairman of Cumberland Advisors.
Financial markets do, and it is making them increasingly skittish. The Fed’s profits stem largely from its purchase of mortgage securities, a programme that is slated to end in about a month at some $1,250bn. The first hurdle is weaning the market off this money-printing exercise. That alone could lead to an unwelcome rise in mortgage costs. More daunting will be soaking up the excess cash created before it sparks inflation in the real economy.
The most straightforward and obvious method, selling the securities, would be likely to crush the mortgage market while wiping out its “profits” from the operation to date. Instead, it will be likely to soak up the excess funding in the banking system – a delicate task that could lower inflationary expectations and cement a recovery if done right or spark deflation if botched..."
Jakab goes on to discuss the problems of the likely losing positions on the US Treasury's bailout portfolio, and the fear over what will happen when these artificial props to the economy are removed.
In a housing & lending market now dominated by Fannie Mae and Freddie Mac, what happens when you can no longer maintain that taxpayer-funded level of support?
Related articles and posts:
1. Fed profits: $52 billion in 2009 - Fortune.
2. How the Federal Reserve earned its profit - Econbrowser.
4 comments:
What would happen without Fannie & Freddie? First, mortgage rates would move higher -- the GSEs are able to borrow/lend at lower rates, due to the (now) explicit backing of the gov't. Second, as a result of rising rates and/or reduced demand, housing prices would likely fall ever further.
Thanks, Randy.
I agree, that would certainly be the likeliest scenario over short & intermediate terms. The ensuing (2nd) house price slump is the event Jakab worries over at the end of his article.
So then I wonder what would happen longer-term, if GSEs Fannie & Freddie were wiped off the face of the earth and not replaced with a new government housing "solution" (as Barney Frank & co. are already calling for, unbelievably enough).
I'd guess credit standards would tighten back up to reflect realistic lending risk and truer market rates would offer everybody a much clearer picture of housing's true affordability at a given time.
I'm not sure what would happen. But I doubt that we'll find out for years and years. FNM and FRE will not die easily. If they're replaced by this, they'll be replaced by something even worse, not better.
Brain/finger fart.
Meant to say, if they're replaced by this bunch...
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