Fed Watch:  Asset Swap myths, legends and other bulldust

A report in Bloomberg states that there is talk that the US Federal Reserve ‘might’ start reducing its $7 Trillion dollar mountain of mortgage backed securities.

This rumour concerns one of the biggest myths of the Federal Reserve response to the GFC / Great Recession.  That the Federal Reserve’s QE interventions in a range of markets were nothing more than an “asset swap”.


The modern banking and monetary apologists loved to roll out that myth “it’s just an asset swap” to justify why having an ‘independent’ Central Bank wade out into the market to ‘support’ its banking franchisees and the private-public monetary model was nothing for anyone to worry about.

When it comes to the Federal Reserve interventions in the home mortgage market, the political choices implicit in that intervention – whose wallets got help from the Fed – are striking.

$7 Trillion dollars of new money for existing asset owners

“..The Fed owns more than a quarter of the $6.86 trillionin agency mortgage-backed securities, and its holdings are likely to dwindle to almost nothing at some point because it only bought the securities as an emergency measure to prop up U.S. housing in the last recession..”

Yep – you read that right. The US fed owns almost $7 Trillion in residential mortgages!

Emergency measures? It’s now almost a decade later. 

There is more mould on those “emergency measures” than on that oozing thing at the back of your vegetable crisper.

Every one of those mortgages effectively represents money handed by a buyer to a seller of an asset and doing so supported the price they received. In other words the ‘wealth’ of asset holders selling assets has been enhanced by the actions of the Federal Reserve a private, and “independent” of the democratic government, institution with effective control over public money.

The funds used to buy those assets were created out of thin air. Now some might say that creating $7 Trillion dollars in new money and handing it to asset owners is unfair, inequitable and the sort of thing that boards of unanswerable central banks do because they are most concerned with the interests of private banks and enhancing the ‘wealth’ of existing asset owners and not for the general public or the creators of new productive capacity.

Those “some people” would be exactly right.

But we had to “put a floor” under house prices

Now some will say how important it was to “put a floor” under the US housing market but $7 Trillion is a lot more than a bit of decking. Plus how does anyone know whether the floor that was built is not full of termites and dry rot when it is being supported by $7 Trillion dollars of public money. A fake floor that only stays solid if the Fed keeps pumping public money into the market via the reinvestment of the proceeds of repayments of earlier purchases.
If the Fed actually ends its experiment, don’t hold your breath, as the housing asset price fluffer of last resort we may find out.

The alternative that would really Make America Great Again.

So what would have been a fairer and more democratic and more accountable way of squirting $7 Trillion dollars into the US economy as the GFC debt bubble popped and bloated housing prices found their true floor?

Simple – having the Federal Reserve finance (interest free) $7 Trillion worth of fiscal policy in the form of either government expenditure or equitable tax cuts.

The exact composition would have been a matter for the political process but the test of success would be:

  1. The extent to which the expenditures expanded the productive capacity of the US economy.
  2. The proceeds found their way, with as few steps  as possible, into as many US wallets as possible.

For example:

Say spend $10B on improved public transport or even a very fast train line somewhere – anywhere. You know like the ones poor China seems able to whip up by the dozen but Uncle Sam has been unable to build a single one.  Perhaps another $10B tax cuts on small businesses or start ups creating jobs and new industries.

There you go $20B allocated and only $6980B to go!

Hell you might even find you have a few new bridges and dams to go with your new fast train network.

But as we all know by now, we can’t have good things because protecting the public-private monetary model, managed free of the democratic process by the ‘private’ Federal Reserve, with a dominant role for asset price fluffing and speculation obsessed private banks is just toooooooo important.

Fixing a broken and dysfunctional banking and monetary system has never been more important.

Cue the private bank apologist flying monkeys to swoop in about now.

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