The Fed’s MBS Shell Game

The ‘twins’ can buy MBS to force the market down, relieving the Fed of intervening. Even more nefarious they can sell their bonds for less than face value and book a loss to the taxpayer. They can also write down mortgages for troubled homeowners, and send the bill to the Treasury. This allows the Fed to act as if they are withdrawing from supporting the markets. Just like a shell game, when you watch one shell there is mischief occurring with the other shells. Classic. When you force the yields on MBS down the effect is also felt in the treasury auctions. The added political benefit is that the losses on the ‘twins’ debt will not show up for a few years. The Fed has a mess on their hands. All the treasuries and MBS they have bought sport low interest rates. They will be marked down as interest rates rise. The ‘twins’ can pump some air back in the real estate market, and leave the ensuing bubble under a new administration.