FED buys $40 Billion in Mortgage-Backed Securities

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FED buys $40 Billion in Mortgage-Backed Securities

Post by Red Aegis on Mon Sep 17, 2012 10:04 pm

On Thursday, the Federal Open Market Committee announced that the Federal Reserve will purchase $40 billion a month in mortgage-backed securities indefinitely (MBS) from financial institutions, will keep interest rates at zero percent until at least 2015, will make additional purchases if the employment picture doesn't improve, and in general will maintain an stimulative policy for a "considerable time."

The announcement sent stock and commodities prices soaring, and the U.S. dollar plummetting, as the Fed gave a clear indication that ZIRP and monetary stimulus will be the new normal going forward. Although the announcement would seem to fall short of the expectations many had -- that the Fed would make asset purchases totaling upwards of $400 billion over the coming months -- the open-ended nature of the Fed's latest action makes it clear that more monetary stimulus is not only possible, but probable.


Well this sucks. At least they're letting us know which bubble will blow up, in this case which will blow up again. People will think that the economy is coming back since they will once again be able to borrow enough to buy homes. Then the same thing will happen as in 2008. More wealth will be siphoned and the class wealth divide will become even greater.

If I'm mistaken please let me know.

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Re: FED buys $40 Billion in Mortgage-Backed Securities

Post by Red Aegis on Tue Sep 18, 2012 12:21 am

The financial crisis of '08 was caused in a great extent by the sale of insurance on different assets by many of the major companies that either went down or were bailed out through the legislation that Obama had passed. One of the best ways to explain it is that companies would sell the contract for the insurance money to each other, inflating the price of whatever it was that they had the insurance on (in this case property, mostly homes). This insurance was there in case the people that had mortgaged their homes could not pay, so when that began to happen the owners went to the insurance companies and demanded their money. It could not be provided, since the sheer amounts of money necessary was too great. One of the biggest reasons for all the defaulting was the fact that the banks were making risky loans through cheap credit but selling them as though they were good loans. All this cheap credit and willing banks gave people the ability to buy houses that they would not be able to before, and they had little reason to suspect that their investment would not increase their wealth with time. Richard Wolff explains this well:

David Barsamian wrote:Why do you say [the housing boom that started in 2001] was unsustainable?
Richard Wolff wrote:Because the boom was based on cheap credit - a key reason we had a boom in housing, in building housing, in construction jobs - and by the way, this affects all parts of American culture. . . . Over a one-year period, the Federal Reserve reduced interest rates faster and further than had ever happened in U.S. history. It suddenly reduced the cost of borrowing money - that's what it means when you drop interest rates - on an unprecedented scale. . . . Then lowering interest rates was like fueling an addiction with more [debt dependence]. In effect the Federal Reserve said to an American population that was already borrowing too much, Here, borrow even more, and we'll make it cheaper for you. . . . Young people were able to take out huge mortgages at very low interest rates without having to put much down, so houses were built like crazy. . . . [The credit users] couldn't pay off their mortgages. . . . all kinds of pressures that made it impossible for them to keep up the payments.
(Occupy the Economy: Challenging Capitalism, Barsamian interviewing Wolff, p. 26-27)

With people not able to pay and the insurance on those mortgages being defaulted on as well the crisis exploded. These were some of the conclusions of the official commission from the United States government:

Conclusions of the Financial Crisis Inquiry Commission wrote:While the vulnerabilities that created the potential for the crisis were years in the making, it was the collapse of the housing bubble - fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages - that was the spark that ignited a string of events, which led to a full-blown crisis in the fall of 2008. . . . Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not. In case after case after case, regulators continued to rate the institutions they oversaw as safe and sound even in the face of mounting troubles, often downgrading them just before their collapse.
(Financial Crisis Inquiry Commission Report, p. xvi-xviii)

Taking all this into account when considering the article posted in the OP it is reasonable to assume that the purchase of the mortgage-backed securities will further encourage banks to re-start their prior activities and build another housing bubble.

It is also plausible that this bubble will burst within a faster time-frame since the american people are poorer and subject to more economic stresses: increases in gasoline prices, increases in educational costs, increases in food cost, ect. When this happens the influence of the bourgeoisie will likely cause another bailout and wealth will be further put into the hands of those that already have it in abundance.

Can the people see this coming? Hopefully they do, but even if they do there's no guarantee that it would be prevented anyway.

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Re: FED buys $40 Billion in Mortgage-Backed Securities

Post by Red Aegis on Sun Sep 23, 2012 10:49 am


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Re: FED buys $40 Billion in Mortgage-Backed Securities

Post by Red Aegis on Wed Sep 26, 2012 12:55 pm

The Real News Network has been referencing this topic heavily recently. I'll put their reports here, since it has to do with Quantitative Easing's effects and what motivates governments to do it.




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