Thursday, October 8, 2009

Federal Reserve is Mass Shorting U.S. Real Estate

A stunning chart in this NY Times article caught my eye:



Here is an unbelievable quote:
"So far, the Fed has been most aggressive in supporting the market for mortgage-backed securities, which plays a crucial role in housing finance. The Fed is virtually the only buyer for these instruments, purchasing about $905 billion worth of government-guaranteed mortgage-backed securities through mid-September. Industry analysts estimate that is about 80 to 85 percent of the market."
The Fed LOVES to say they are buying when they are selling. It is their favorite scam. For example, "buying" T-Bills with printed cash, which is, of course, a sale of printed cash in exchange for interest payments. The key here is that the Fed is only "buying" government-guaranteed deals. So they have no risk. In fact, their only "risk" is to the upside, this is nothing but a short sale. They make money if the security tanks.

Hey, if I could force the U.S. taxpayer, without an Act of Congress, to back my crazy "buy" with a future taxpayer PAYMENT (hmmm... that doesn't sound like taxpayers are selling to the Fed, its sounds like we are buying) guaranteeing both the principle and the total interest, that would really be something.

I forced a sale at a high price, and I end up delivering the security at a low price.

Simply put:

The Fed is SHORT SELLING all the Mortgage Backed Securities they can lay hands on to the U.S. taxpayer, at absurdly high prices that no one in their right mind would pay.


13 comments:

  1. Is this the warning sign that the U.S Housing

    Market is about to collapse further?

    Or the warning sign for the collapse of the

    U.S Government?

    ReplyDelete
  2. http://www.nakedcapitalism.com/2009/10/is-the-consumer-really-deleveraging.html

    ReplyDelete
  3. From the same article - "Despite the running problems, federal officials hope to start weaning the securitization markets off government support next spring. The Federal Reserve has spent about $905 billion buying government-guaranteed mortgages in an effort to keep mortgage rates low. It will continue buying until it reaches its target of $1.25 trillion."

    OK FDR - "The Federal Reserve has spent about $905 billion" does "spent" mean "printed" currency. Basically meaning the "Federal Reserve" is trading worthless paper for trillions in assets? Holy!

    ReplyDelete
  4. "Basically meaning the "Federal Reserve" is trading worthless paper for trillions in assets? Holy!"

    Of course, these were assets once worth $10s of trillions in pure commercial leverage. That is EXACTLY why we find ourselves are encircled by vicious hyperdeflation.

    And they aren't buying, they are selling.

    ReplyDelete
  5. They make money if the security tanks.

    this is confusing to me. are you saying that they're buying assets with funny-money they printed up? but they just get funny-money back, don't they? i can see how they can't *lose* money, but i don't see how they make money if the MBS tanks in price. let's say it goes to 0 -- how will the Fed have doubled their money, as a normal short-seller would?

    ReplyDelete
  6. FDR, I believe deflation is pressuring very intensely, but the wild card is what the US dollar will do when it gets dumped as the reserve currency, dumped as the currency of oil, and after treasuries tank because our debt is too dangerous!! Bottom line, deflation would be the natural effect of all our BS fiscal and monetary policies, but the unknown is the dollar which can't hold our debt. aieeeee, where to invest? I would feel very comfortable shorting gold and buying treasuries to counter deflation - but not now, too many unknowns. Your thoughts?

    ReplyDelete
  7. "the wild card is what the US dollar will do when it gets dumped as the reserve currency"

    I believe the dollar is strengthening tremendously in both value and stature. The reason is simple, debt grows substantially in value as deflations rage.

    China is building a huge dollar position for good reason, they aren't as stupid as US citizens thing they are. They own us. The high interest rate debt we owe them is growing in value daily as prices drop. If US prices fall 50%, they get a 100% rate of return on 0% Treasuries.

    ReplyDelete
  8. "but they just get funny-money back, don't they? i can see how they can't *lose* money, but i don't see how they make money if the MBS tanks in price."

    1. I print cash to buy $1M in taxpayer-guaranteed, Mortgage-Backed Securities that deliver 6% mortgage interest cash flow.

    2. The mortgages default and the market value of the security becomes nearly worthless.

    3. The taxpayers pay me my securitized losses valuing my loss of cash flow and principle, plus they pay me all the interest I was supposed to collect, plus I can foreclose with no cost basis.

    If the price went up, I could only get the interest cash flow.

    ReplyDelete
  9. interesting, thanks. does this mean as an investor it's a good idea to be buying MBS alongside the Fed? i guess they could get their own special bailout, but seems like that'd piss other (esp. foreign CB) holders.

    ReplyDelete
  10. "does this mean as an investor it's a good idea to be buying MBS alongside the Fed?"

    You can certainly short real estate in general. Stocks too. The Fed has every interest in tanking US asset prices. Discussed at length in my blog.

    ReplyDelete
  11. Hello. Very interesting article and very interesting comments. I agree that it is a good time to buy a property, but I wouldn't say that purchasing for examle a family house is a good investment, quite the opposite, you will never get a profit, but you will spend a lot of money. I believe that the recession will take a long time because of all the housing "bubbles" and living in debt to which we got used to and about which we don't actually do anything.
    Take care,
    Jay

    ReplyDelete
  12. fdralloveragain: Could you pleaes break down this post like Im a five year old? I really want to understand this stuff but I am just a public school graduate. I remember that the govt sells Tbills (bonds?) when they want to shrink the money supply. and buys them when they want to expand the money supply. otherwise im lost. Thanks.

    ReplyDelete

The USA's political-economc system is best described as:

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