Today I got sick to my stomach when the Fed announced two more alphabet soup du jour programs. One program will involve the direct purchase of GSE and MBS paper by the Fed. that’s another $600 billion that the Fed will add to its books. This action was necessitated by the ending of the FCB subsidy to this market, which they began to pull last summer. I have chronicled this saga for you since 2004 when it first became clear that the FCBs were bailing out Fannie and Freddie and playing prevent defense in propping up the US housing market. I had long postulated that when it became clear to them that their efforts were doomed to failure and loss, and that when they had fewer US dollars to recycle due to US economic weakness, that they would reverse course. I also warned that when they did, the US mortgage market would collapse. In recent weeks we watched as spreads between GSE paper and Treasuries soared because of the FCB reversal of position. No other entities could take up the slack and, as a result, today the Fed stepped into the breach.
Bear in mind however, that the FCBs still hold about $900 billion of GSE debt. The Fed has only offered to buy $100 billion of that paper. There’s still a big problem looming after the Fed takes the first $100 billion of dumpage.
The other program, called the TALF by the Fed, for Term Asset-Backed Securities Loan Facility, will lend up to $200 billion for the purchase of short term ABS. I’d prefer to think of the acronym meaning Terrible Assets Live Forever.
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