Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed Policy: Underwrite Mortgages to Underwrite the Treasury

Interest-Rates / US Debt Mar 23, 2011 - 04:26 AM GMT

By: Dr_Jeff_Lewis

Interest-Rates

In a little known program to which few have been paying attention, the US Treasury is attempting to unwind positions it inherited from a very expensive bailout of government-sponsored entities Fannie Mae and Freddie Mac. 


The Treasury department has as much as $143 billion in securities to sell to investors, with the first sale starting at $10 billion in the month of March.  These asset sales, though not for immediate digestion by the Federal Reserve, must be purchased with investment dollars from private investors.   The Fed, after all, is still focused primarily on Treasury yields themselves and will remain steadfast in purchasing Treasuries before presumably beginning new talks about QE3.

For the Fed, inflation is almost a necessity.  As most investors have realized, the bulk of the portfolio of loans owned by both Fannie and Freddie are toxic, and due to the regulatory environment that permitted Fannie and Freddie to buy most anything with exposure to the risk of loss, the US Treasury sits on copious amounts of underperforming assets at a time when millions of people, still out of work, have to make the decision between paying their mortgage or putting food on the table.

However, for the millions of others who are employed, the decision to hold onto their house is a noble one.  Many buyers, now underwater, see some 15-30 years of repayments in which they will not only pay nearly double the cost of the home in interest, but in which they will also have paid more in principle than the current market value of their home.

The Fed’s Double Task

The Federal Reserve, knowing full well that inflation exists in items excluded from the core CPI—food and oil—wants to see inflation in real estate prices.  In doing so, it must continue to bid down the cost of money and ensure at the same time that homeowners feel confident to buy their own home.

Without activity in the retail space for single-family homes, the Treasury will accumulate even more losses, which again must be afforded by the Federal Reserve.  An unlimited credit line from the US Treasury means that while Fannie and Freddie may have long gone bankrupt, the printing presses of the American central bank can keep their dying models alive enough to extract what little is left - all at the cost of the US dollar.

The total cost for bailout, which now stands at just over one-quarter of a trillion dollars, is not at all absolute.  In fact, the eventual sale of all assets purchased in 2009 will require not only an improving job market, but an improving real estate market, as well as a decline in borrowing from the US Treasury.  With all these elements of a normally free market intertwined, there is only one solution: the Fed has to keep the dollar down.

Gold and silver are in a unique position to continue their rallies as these assets hit the market.  MBS debt and US Treasury debt, though not the same institutionally, still pull from the same amount of risk capital that circulates throughout the economy.  Unless this capital is made up by private investors, the Fed will absolutely have to continue indirect monetization of the two failed GSEs.  This comes at a time when the Fed’s firepower leftover from QE2 is being rapidly exhausted, and a QE3 program would be necessitated in order to liquidate Treasury assets without draining the fixed-income market.

If the Treasury continues on its fundraising campaign, QE3 is not only anticipated, but assured.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

B.
23 Mar 11, 13:09
How Weaker Dollar and Inflation Improve the Repayment Prospects?

It doesn't make any sense to me , yet folks like you repeat the myth as a mantra. Why don't you show how a falling dollar and price basket inflation (Iassuem that's the inflation to which you refer) will make repayments of GSE backed conforming mortgages more of a sure this - especially when those that owe the money on those mortgages are not seeing their incomes go up in nominal terms. The floor is yours.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in