Total MBS purchases to date: $1.25 Trillion (that’s brand new money)
Another painful bite from Thursday’s confirmation hearing comes from this exchange between Tennessee Senator Bob Corker and Bernanke where Corker asks if mortgage interest rates will rise a “couple hundred basis points” (meaning 2%) when the Fed’s MBS purchase program ends.
The short exchange begins at the 6-minute mark.
- “We have said that the current program is going to come to an end at the end of the first quarter. It is a monetary policy decision and the committee will have to see how the economy is evolving and whether or not we need to do more. The several hundred basis points… there is a lot of uncertainty about exactly what the impact will be .. and I think that is very much at the high end of what estimates are.”
- “In order to try to mitigate the effects we have been tapering it off very slowly and so far we have not seen much effect but we’ll see how that evolves and the committee is prepared to respond if necessary.”
DB here. These are the first public comments B-52 has made on extension of the MBS queasing program, and should signify to the bond markets that the Fed will resume purchases quickly if rates spike in March when the program is slated to be terminated.
For those wondering why this matters:
Total MBS purchases to date: $1.25 Trillion
The FED is creating credit (dollars) from thin air and using them to purchase MBS (mortgage-backed securities) of all shapes and sizes, with the hope that interest rates will stay artificially low (spurring lending) and that the value will rise for MBS on banks’ balance sheets.
This is not helpful because it leads to an “artificial rise” in real estate values (when we still need to for home prices to fall so that they reach an equilibrium with incomes more inline with sustainable, historical trends), and it leads (eventually) to inflation and the devaluation of the dollar as the money supply is increased in order to make the MBS purchases in the first place.
However, none of this should come as a surprise, since we have known for 18 months that the only plan Bernanke, Summers, Geithner and Obama have for the crisis is a massive bubble re-blow. And keeping interest rates artificially low in order to encourage speculation in riskier assets (i.e., real estate) is step 1 in the Central Banking Guide For Dummies that Bernanke keeps on his shelf, next to his original copy of John Maynard Keynes, My Lord And saviour .