In the first of a series on monetary disinformation spread by the media, AMI Researcher and Chapter Leader Dick Distelhorst dismantles each paragraph of a recent effort by The New York Times. The article is reproduced as presented on The New York Times’ web site, interspersed with Dick’s piercing commentary in bold italics.
Mortgage Securities It Holds Pose Sticky Problem for Fed
By BINYAMIN APPELBAUM
Published: July 22, 2010
WASHINGTON — The Federal Reserve provided most of the money for new mortgages in the United States last year, effectively lending more than $1 trillion to American homeowners.
No, the Fed was effectively providing more than $1 trillion in new “excess reserves” to the “too-big-to-fail” banks and saving those banks by buying the toxic mortgages held by those banks from them at full price.
Now the legacy of that extraordinary intervention is hanging over the central bank as it faces growing demands for an encore to help revive the flagging economy.
What is “hanging over” the central bank is all the toxic mortgages the central bank bought from the “too-big-to-fail” banks to save them, instead of saving the American people.
While officials and economists generally regard the program as successful in supporting the housing market, it has left the Fed holding a vast pile of mortgage securities — basically i.o.u.’s from homeowners — that it does not want and cannot sell.
The Fed doesn’t hold i.o.u.’s from homeowners, it holds toxic mortgage assets the banks created deliberately and, when they went bad, sold them to the Fed. Which means the American taxpayer, not the big banks, take any losses.
Holding the securities could cost the Fed a lot of money and hamper its ability to fight inflation, while selling the securities could drain needed money from the still-weak economy.
Don’t drain money from the economy, drain it from the “too-big-to-fail” banks by selling them back those same toxic mortgages at the same price the Fed paid those banks for them. This would also drain away a lot of the “excess reserves” buying those toxic mortgages from the big banks created. They’ve simply hoarded them in their reserve account, instead of using them to make needed loans.
Fed officials have expressed confidence that they can finesse the dilemma by gradually selling the securities as the economy starts to recover. But they are not eager to expand the challenge they face by beginning a new round of asset-buying, one tool the Fed could use to try to stimulate growth.
Buying more assets would not stimulate the economy, it would create even more “excess reserves” for the big banks which, since they already have over a trillion in “excess reserves,” would accomplish nothing positive for the economy.
“In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny,” Kevin M. Warsh, a Fed governor, said in a speech last month in Atlanta. He warned that new purchases could undermine the Fed’s “most valuable asset”: its credibility.
WHAT CREDIBILITY? The media pretends the Fed has credibility!
Some Democrats want the Fed to pump more money into the economy to help reduce unemployment, one of the central bank’s basic responsibilities. In testimony before Congress this week, Chairman Ben S. Bernanke said that the Fed retained that option, but did not now plan to expand on the steps it had already taken.
And just how would they pump more money into the economy? By buying government bonds directly from the Treasury putting the government even deeper into interest-bearing debt. Then the government could use the “debt-money” the Fed just created and loaned to them to create new jobs similar to the old WPA and CCC. Why doesn’t the government just create the money itself, debt-free and interest-free, and spend it into circulation. Why let the Fed, a private corporation, do it? Because “that’s the way the system works.” The system MUST be changed. The system IS the problem.
In part, Bernanke and other Fed officials say they believe that new asset purchases would be less effective now that private investors have returned to the market.
What new asset purchases? Is the author suggesting the Fed buy more toxic assets from the “too-big-to-fail” banks so they can become even more profitable and give themselves even bigger and even more obscene bonuses?
The Fed became one of the world’s largest mortgage investors because no one else was interested. During the fall 2008 financial crisis, investors stopped buying the mortgage securities issued by the housing finance companies Fannie Mae and Freddie Mac. The two companies buy mortgages made by banks and other lenders, providing money for new rounds of lending, then package those loans into securities for sale to investors, replenishing their own coffers.
The reason no one else was interested in buying these mortgages is because they were no good, and the big banks knew that when they created them. That is clearly on the record in the $550 million fine assessed against Goldman Sachs last week in a civil case – which should have been a criminal case. $550 million is just a few days profits for Goldman Sachs. Some of their executives should be in jail for fraud, but no one has been, or apparently will be, held accountable for fraud, greed and avarice.
Two days before Thanksgiving 2008, the Fed announced that it would buy $500 billion in securities issued by the two companies. By the time the program wound down in March 2010, it had spent more than twice that amount. The central bank now owns mortgage securities with a face value of $1.1 trillion.
Which, of course, gave the “too-big-to-fail” banks new “excess reserves” of $1.1 trillion which those banks could use, under the unconstitutional fractional reserve system, to create over $11 trillion of new “debt-money” IF they could find qualified borrowers – which they can’t because they have wrecked the economy!
A wide range of economists say the Fed’s program — so big that purchases outstripped the issuance of new securities in some months — helped to preserve the availability of mortgage loans and helped to hold interest rates near record lows. Rates that exceeded 6 percent in late 2008 remain below 5 percent today.
The writer doesn’t mention that the rate banks now pay the Fed and each other for “reserves” is 0.0025% or less, which means the “too-big-to-fail” banks can get “money” for less than one-quarter of one percent interest and use that money to buy U. S. government securities paying 3.5%. Who couldn’t get rich doing that?
But the Fed now must deal with the cleanup.
No, now the Fed must deal with the mess it created when it bailed out the “too-big-to-fail” banks instead of bailing out the American people. According to Bloomberg News and other studies, these big banks were directly given over $4.5 trillion. If that amount had been given to the American people instead of the big banks, it would have provided a check for $15,000 each for every American citizen. Then the American people losing their homes would not have lost them and the American people losing their jobs would not have lost them. Why didn’t our government do that? Makes too much sense?
The central bank could hold the securities until the borrowers repaid or refinanced their loans. Brian P. Sack, an executive at the Federal Reserve Bank of New York, estimated in March that borrowers would repay $200 billion by the end of 2011. And in the meantime, the Fed is collecting regular interest payments.
“We’ve been earning a fairly high income from our holdings and remitting that to the Treasury,” Mr. Bernanke told Congress on Wednesday.
The Fed is only remitting to the Treasury what the Treasury should have had in the first place if we created, issued and regulated our own money. The American Monetary Act would allow us to do just that. Read about the American Monetary Act at:
But holding the securities could make it harder to control inflation as the economic recovery gains strength, said Vincent Reinhart, the former head of the Fed’s monetary policy division, now a resident scholar at the American Enterprise Institute.
Why does this make it harder to control inflation? Because giving the “too-big-to-fail” banks (which are now even bigger) over $1.1 trillion of “excess reserves” gives them the ability, under the fractional reserve banking system, to create over $11 trillion of “debt-money,” which would, of course, create inflation – IF, and it’s a big IF, these banks had any incentive to find qualified borrowers, which, other than the government itself, they don’t want to take that risk on – or they would already be loaning that money, which they are not. And remember, they have a conflict of interest – if they just sit on the reserves, deflation continues and they are able to pick up real assets later, for a song!
The Fed bought the securities by pumping new money into the economy, stimulating growth. It could be difficult to reverse that effect without draining the money from the economy by selling the securities, Mr. Reinhart said.
The Fed did not pump new money into the economy, it pumped new “excess reserves” into the big banks and stimulated their growth, not the economy’s growth. It also helped created the biggest profits in history for these “too-big-to-fail” banks, which resulted in obscenely huge bonuses for the same people whose recklessness and greed threw millions of people out of their jobs and millions more out of their homes. Is the Fed proud of this? They seem to be.
“They created reserves, and those reserves ultimately can be inflationary,” Mr. Reinhart said. “The chief risk of keeping the balance sheet big and raising rates is that you might not be able to raise rates successfully” because the impact would be mitigated by the effect of the extra money still sloshing around the system.
As already stated, only if the big banks can find enough qualified borrowers, which they are not in much of a hurry to do.
Holding the securities also could cost the Fed a lot of money.
No, it could cost the American taxpayers a lot of money. The Fed doesn’t take the losses, the American people do. That’s just the way it was designed to work by the same big banks way back in 1913.
The Fed paid some of the highest prices on record for mortgage securities, basically accepting very low rates of interest on its investments. As the economy recovers and interest rates rise, the Fed will need to accept increasingly large discounts to make the securities attractive to other investors.
Which means money that would have been turned over to the government out of the Fed’s profits will not be turned over because these losses will reduce those payments. The Fed, historically, has turned over any profit each year to the U. S. Treasury. This has been as high as $40 billion a year. The Fed only does this because they don’t have the gall to keep those profits, which are only about 5% of the profits made from private corporations having the sovereign power to create money – the other 95% of the profits of ”debt-money” creation go to the privately owned banks, primarily the ”too-big-to-fail” banks.
David Zervos, head of global fixed-income strategy at the investment bank Jefferies & Company, estimates that the value of the portfolio will drop almost $50 billion each time interest rates increase by one percentage point.
I repeat, sell them back to the same banks the Fed bought them from at the same price the Fed paid and let the banks take the loss – which is the way capitalism is supposed to work. Instead, for the banks, especially the big banks, we have a system that “privatizes profits and socializes losses.” Great for the big banks, but not for the American people.
Selling the securities at a loss would reduce the Fed’s ability to transfer profits to the Treasury Department. Large enough losses could reduce the amount of capital held by the Fed, although it can always create more money.
Which is what I just said. The Fed taking the losses instead of the banks is absolutely wrong. The banks and their stockholders should pay the price for the actions of these banks, not the American taxpayers. The fact that the Fed can always create more “debt-money” is not the solution, it is the problem. The solution is for our government to take back the power to create, issue and regulate our own money by passing the American Monetary Act.
But perhaps the greatest risk is that investors will begin to doubt the Fed’s willingness to raise interest rates, knowing that each increase will damage its own balance sheet.
It doesn’t have to be that way. That’s the way the present privately-owned, debt-based, interest-laden monetary system works. This system is the underlying cause of almost all our economic ills. Let’s pass the American Monetary Act and return this enormous power, the power to create, issue and regulate money, to the United States Government where it has always belonged. See Article I, Section 8, Clause 5 of the Constitution of the United States.
“It compromises their integrity and their inflation-fighting mandate, because fighting inflation would be a direct detriment to their portfolio,” Mr. Zervos said.
What inflation fighting? The Federal Reserve System is the primary cause of inflation. Since the Fed took control in 1913 the value of a dollar has dropped by over 95%. A nickel in 1913 would buy more than a dollar does today. There’s an example of how good an ”inflation fighter” the Fed has been. And a “stable dollar” was one of the main goals for the Fed in the Federal Reserve Act. The Fed is a total failure at achieving its stated goals – which were not, of course, its real goals.
The Fed could avoid these problems by selling the securities now, before interest rates start to rise. But doing so would reverse the benefits of the original program, draining money from the economy while it still is weak. It would also fly in the face of the demands for the Fed to do more for the economy.
Not if the Fed sold them back to the same banks at the same price they paid the banks for them.
A fire sale also could damage the banking industry by driving down the value of the comparable mortgage securities that banks hold in large quantities.
The banks that created this problem should take the losses involved, not the American taxpayer, as is now the case.
So far the Federal Open Market Committee, comprising the board of governors and a rotating selection of presidents from the regional reserve banks, has chosen to wait.
Which means the Federal Reserve, which did everything the banks wanted to bail them out and return them to prosperity, enormous profits and huge bonuses, has chosen to wait and do nothing to help the American people. As already stated, if the Fed used over $4.5 trillion to bail out the banks immediately, why don’t they use another $4.5 trillion to bail out the American people and make them prosperous? We are told “we don’t have the money to bail out the people” – but over $4.5 trillion was readily available to the big banks. I wonder why it was available to the big banks, but not the American people? Maybe it’s because these “too-big-to-fail” banks and their owners have so much money (from having the sovereign right to create, issue and regulate money) and so much political power (from big campaign contributions) that they tell our elected officials what to do. You think?
The approach favored by most of the committee, according to the minutes of its June meeting, is to start raising interest rates before beginning to sell the securities. By waiting “until the economic recovery was well established,” the minutes said, the Fed would limit the impact of the asset sales on the broader market.
Of course, plain common sense tells you that raising interest rates in the middle of a Great Recession is the worst possible course of action, so a committee with no common sense would obviously want to do that and make things even worse. What else is new?
A version of this article appeared in print on July 23, 2010, on page B1 of the New York edition.