Fed Buys Another 71 Billion Mortgage-backed Securities

The Fed has bought another 71 billion mortgage-backed securities in the last week, as you can see in the chart below,

Two important points to note:

1) The Fed's balance sheet is now overflowing with assets it cannot sell: Treasury securities (politically difficult to unload in large numbers) and toxic assets (no one wants to buy them).

2) The Fed can't keep buying more US debt (ie: treasuries and mortgage debt) without expanding its balance sheet (essentially printing more money).


Martijn said...
It would be nice if you'd post the historic balance all the way up from the 30s or so. That shows quite nicely how it has been slowly building up until august 08 and than exploded.>

Here is the same chart as above going back to 2002.

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30 Responses to Fed Buys Another 71 Billion Mortgage-backed Securities

  1. Martijn says:


    It's basically SDRs that have exploded since 09. Seems quite significant to me. What's up with that?

  2. Martijn says:

    My bad, mistook the toxic stuff for SDR account as the colors are quite similar.

    Look like the Fed's been loading up on toxic waste as never before.

  3. Jeff Burton says:

    Thanks again, Eric, for explaining this to me starting about a year ago.

  4. Martijn says:

    Perhaps the Fed is buying treasuries through banks.

    Here you can see that the amount of treasuries on its balance sheet is not that big in comparison to '07 and even seems to stabilize. It has however continued to load up on (toxic) MBSs. So perhaps the deal is that the Fed buys toxic waste of the banks, and banks buy Treasuries for the money received.

    That might also explain the negative interest on short term treasuries. negative interest on short term treasuries.

  5. Martijn says:

    Interest might on short term T-bills might be negative because banks are buying them with the cash received from the fed.

  6. Martijn says:

    Could the Fed be monetizing through banks?

    Feb buys MBSs, banks use the cash received to buy short term T-bills.

  7. dashxdr says:


    Look at Jim Willie CB's commentaries and interviews on contraryinvestorsecafe. He makes the claim there is a stealth monetization going on exactly as you describe.

    Foreign central banks hold mortgage backed securities. US Fed buys them for cash. They turn around and buy US Treasuries.

  8. dashxdr says:

    There's another trick going on to recapitalize the banks. The Fed loans money to banks at zero interest. The banks deposit the money back with the Fed, which pays them interest. So they get free money, zero risk.

    It's really monetization again.

  9. Martijn says:


    The negative interest on short maturity paper from the fed and the huge increase in toxic MBSs on their balance seems to prove point.

    I'll have to read up on Jim Willie, but it seems like an arguable case.

  10. breezer1 says:

    monitization, however it is done will lead to hyper inflation which will happen overnight when deflation hits the wall.
    the collapse of paper money is becoming more visible to the mainstream population globally.
    prepare for supply chain disruptions. the current batch of criminal elite running our governments have no way out. the fuse is burning at both ends.
    what scares me is the next emergency,(distraction). they will need to make this one even bigger and nastier than ever. God bless us all...

  11. bw33 says:

    Is the bank repurchase program (link below) not a backdoor bit of trickery that may allow the Fed to unload its balance sheet and contract the money supply?


    Obviously it does nothing to solve the toxicity problem, but wondering if this will remove the problem of the Fed not being able to sell its bad assets.

  12. Martijn says:


    It would be nice if you'd post the historic balance all the way up from the 30s or so. That shows quite nicely how it has been slowly building up until august 08 and than exploded.

  13. Martijn says:

    Anyway, the Fed was expected to buy 500 Billion in MBSs this year, so this is not a real surprise.

  14. dashxdr says:

    Keep your eye on the debt ceiling. The Fed has no limits as regards its open market operations, and I expect there are in reality many trillions more $$$ floating around than the measly $800 Billion TARP cover story. I think that was just to explain big money operations of the Fed, lending the implication that the Fed is operating under the control of the US government.

    But I have a feeling there is some honor in the debt ceiling number. That is, the treasury can't really issue more debt secretly. So as operating money proves insufficient (tax receipts by federal government) watch as the debt ceiling is raised again and again. Very embarassing to the US government, that is.

  15. Numonic says:

    bw33 I don't see how the Fed can afford to withdraw cash from the system when FDIC funds are close to empty.

    The big issue here is not if the Fed can withdraw enough capital from the banks but if the Fed can inject enough capital in to the banks.

    The banks, govt. and Fed want the assets to go down in price allot so that when it comes time for the Fed to sell the assets(if they succeed in recapitalizing the banks) it doesn't drain the system of capital. Asset prices still need to go down allot because for one the banks are still undercapitalized and the assets are still too high for the Fed to sell without draining the system of needed capital.

    In my opinion the Fed is failing and will fail at injecting enough capital in to the banks before the effects of the undercapitalized banks show up. Those effects being stricter rationing of physical cash withdrawals from banks($100/week limit) and even some banks not allowing physical cash withdrawals of any amount. What would that mean for the banking system I don't know, some say it doesn't matter because we can still use electronic transactions but if it really didn't matter, the banks and Fed and govt. wouldn't be going through so much to try to prevent it from happening by injecting capital in to the banks and doing all kinds of things to keep the cash circulating as much as and as fast as possible in the system.

    The reason Treasuries do so well is because the Fed has an obligation to buy them.

  16. Numonic says:

    The debt ceiling is as meaningless to the Treasury's expansion of credit(treasury debt) as the banks reserves is to the expansion of bank credit.

  17. dashxdr says:

    The debt ceiling is as meaningless

    Not to the ongoing day to day operations of the US empire. As long as that empire collapses, everything else is meaningless.

  18. Numonic says:

    dashxdr come again? What did you just say?

  19. dashxdr says:


    I don't chew my cabbage twice.

  20. dashxdr says:

    All kidding aside, my point is that with the US government / empire / Federal reserve / US treasury / JP Morgan / Goldman Sachs / International banking cartel...

    whatever you want to call it, with that monstrosity gaming all markets, nothing matters. There will never be long term stability. Runs on banks, inability to print enough dollars, whatever. It is trying to build on top of quicksand.

    The root of the evil is the entity I described above. A fundamental measurement of its expenditures is the debt ceiling. Its appetite for money is insatiable. So when it keeps going back for more money, it'll keep having to raise the debt ceiling. Impossible to hide that (I hope).

    As I said, when this corrupt entity of entities collapses then we can start living again. Until then it's just a matter of survival.

  21. Numonic says:

    The banks selling these assets to the Fed is essentially short selling assets to the Fed. So it should be no wonder why the banks are doing everything in their power to cause those assets to drop, which they are doing by decreasing lending which is causing unemployment to rise, foreclosures to increase and asset prices to fall. The banks will continue to decrease lending until the banks are recapitalized and until asset prices are low enough so that when the Fed sells the assets it doesn't bankrupt the system. But if the solvency problem is as bad as I think it is, the banks won't have to worry about the Fed's exit strategy bankrupting the system because before the exit strategy is even started the system will be going bankrupt in spite of the Fed's and world's efforts to prevent it.

  22. Trader says:

    Hi Numonic,
    Are you Mannfm11.blogspot.com?

    It's also a very nice blog.

  23. HarryS says:

    Breezer 1

    Love you comments. You are well under the surface. What do you think the next "Distraction" will be? And to cover up what disaster? Maybe A complete US economic collapse? Say after the Dollar is done being shorted and the Fed audited leaving the dollar in ruins. That would need one big song and dance.


  24. Numonic says:

    Hey people don't worry about asset prices not being high enough. I just thought about it again and there is absolutely nothing to worry about when it comes to mopping up the so called "excess reserves". Besides what I've said previously, think about this. It is impossible for there to be US caused inflation and for the Fed to fail at being able to mop up the reserves and here's why.

    Some people fear that the excess reserves will cause the banks to go crazy with lending and that the Fed's balance sheet will be full of assets with prices not high enough to mop up the excess reserves. But that is a pure contradiction. How can we have inflation and at the same time have the assets the Fed holds be worthless? You can't. If there is inflation, the assets the Fed holds will also increase in value and so when the Fed sells the assets back to the banks, those assets will be high enough to pull out enough cash from the system. And if you feel inflation will be extremely high that just means, the Fed has more power to pull cash out of the system because the higher inflation is, the more excess reserves the Fed will be able to pull out of the system. If you truly believe that the monetary base has bearing on the expansion and contraction of credit and you fear inflation, you shouldn't be pushing for the Fed to empty it's balance sheet now, you should hope that they wait until inflation gets high enough. You can't at the same time say inflation is high enough and at the same time fear that prices on the assets may be too low. That's contradictory. If you fear that the expanded monetary base is too much for the Fed to sop up with the assets it holds, then you should be hoping that the Fed does not sell the assets until inflation gets high enough and the value of those assets rise high enough. Otherwise the Fed would loose the tools to be able to mop up the assets.

    The only way this can fail is if the Fed decides to sell the assets before inflation is high enough. But at the same time, if inflation is too high, the action of the Fed selling the assets will undo everything it has been doing for the past year and the banks will be insolvent again. I disagree that the monetary base has any bearing on the expansion/contraction of credit since that is done electronically and I've explained this many times. But my point is, there should be no fear of the Fed NOT being able to stop inflation because the Fed can decide when to sell the assets and it can choose to not sell the assets until after inflation is high enough. The inflation will mean the prices of the assets it holds are also up and since the prices of the assets it holds are up, when it sells the assets it will be able to pull enough of the reserves out of the system. And on the other side of the spectrum, even if they decide to sell the assets before inflation is high enough, I said that the monetary base has no bearing on the expansion/contraction of credit so you shouldn't worry about inflation getting out of control in that case either. The commercial banks themselves are in total control of the expansion and contraction of credit and therefore are in control of inflation and deflation in the economy.

    Now if you take in to consideration the expansion/contraction of credit in another country like China for instance, that presents a different issue. If China is expanding credit too much, prices will be rising in tangibles but China's expansion of credit has no effect on the value of the assets the Fed holds because those assets are US assets(US bank loans). Only way China's expansion of credit can have an effect on the assets the Fed holds is if China started getting mortgages on US houses and US businesses.

  25. Numonic says:

    China itself is expanding credit and causing inflation in things other than US loans. I believe the only reason China is doing this is to pacify the civil unrest that went on because of the increase in unemployment. I also believe that when US is ready to expand credit, China will follow with decreasing it's credit program so that inflation will not get out of control. So as far as that situation there is nothing to worry about. China only wants to create enough consumption to replace the consumption that was lost in order to pacify the civil unrest from the rise in umemployment. The central banks are working together and have inflation, deflation and civil unrest under control.

    The only thing it seems to be loosing control of is the shortage of Federal Reserve Notes. No matter how easy and fast it seems to move the FRNs around in the banking system(which is evident by the effective funds rate) the banks can't seem to have enough cash and are forced to get cash from the FDIC and FED. I believe this year we will see the effects of physical cash shortages, whatever they may be. I believe stricter cash withdrawal limits at banks and possibly a rule by the banks saying that for every physical dollar you withdraw, your account will be debited $2 and for every physical dollar you deposit your account will be credited $2. So all the cash that is out there will be going to banks and very little will be leaving. A sort of event like the gold $20 coin getting you $35 in bank notes. This could also effect the market as people would probably have different prices for payments with physical cash VS debit/credit cards. Keep your eyes on FDIC funds. Go to the "Gold Market Reaching a Breaking Point" blog to keep up with FDIC funds by me.

  26. Numonic says:

    Correction, this quote: "Otherwise the Fed would loose the tools to be able to mop up the assets. "

    Should say "Otherwise the Fed would loose the tools to be able to mop up the excess reserves .

  27. stibot says:

    I suspect you can see both inflation and deflation now and in the future.

    Deflation on assets you were used to buy using loan and inflation on goods you were used to buy using cash.

    Because banks are not lending, you can see high inflation while home/cars prices continue to collapse. Just my thoughts..

  28. Numonic says:

    Crazy thing is sometime ago I was arguing that the electronic money and physical money wouldn't split up in value but now I'm saying it might. It won't be a first time in history. We saw this happen in 1933 when the legal tender(gold coin) separated in value from it's derivative(bank note/certificate). And we saw it in other hyperinflations in history. And I stand by what I said before: In 1933 there was no shortage of gold, the shortage was of the currency which happened to be made of gold. Just as today there is no shortage of cotton and linen but there is an imminent shortage of Federal Reserve Notes.

  29. Numonic says:

    stibot said...

    "I suspect you can see both inflation and deflation now and in the future.

    Deflation on assets you were used to buy using loan and inflation on goods you were used to buy using cash.

    Because banks are not lending, you can see high inflation while home/cars prices continue to collapse. Just my thoughts.. "

    Well the inflation in other things comes from the expansion of credit in other nations. Physical cash spending can not cause inflation because physical cash is only used in a small percentage of transactions. If China and other emerging countries weren't expanding credit like they are, we would see prices drastically lower than they are right now because the forces coming from the US and other nations in recession are deflationary.

  30. Numonic says:

    But my question is, was it the fact that the currency was made of gold before that made implementing stricter cash(gold coin) withdrawals such as the so called "gold confiscation" before more dramatic or was it just the act of not being able to supply depositors who demanded cash(gold coin) for their cash derivatives(bank note/certificate) that made it so dramatic? The action of banks today makes me believe it is the latter, that it doesn't matter that the cash is no longer made of gold, that it is just as bad not being able to provide the cash even though it's made of only cotton and linen. If you think about it there is no difference in the money because the fact that the currency was made of gold meant nothing. It was illegal to melt the coin for the gold so it wasn't like people cared that the currency was made of gold. In some way it might seem worse for the mint to have a shortage of cash today because in the case with gold being used to make the cash back in 1933, it was understandable since gold is a rare commodity but it is probably shameful for the mint to fail to print/mint enough cash to meet demand today since the cash is made of a far more abundant commodity(cotton and linen). Which is probably why there is never any talk about it. Even suggesting it gets you ridiculed. Plus more importantly, you know what the shortage of cash would be admitting, it would be admitting that central banking has failed. At least before they could use the excuse that gold was the problem, that gold was too rare to be used as cash, even though that was not the problem. The problem was that giving the power of creating cash to one central power puts too much burden on that power and causes that power to fail to do the job. They can't use that excuse today because the cash is made of an abundant commodity(cotton and linen) and if there is a shortage of the cash, it will be exposed that the govt. failed to provide enough cash for the system. That would be the death of central banking. Legal Tender laws would have to be repealed as the legal tender laws will have failed the nation. The central bank will loose seigniorage as it will have to compete with other private mints for the minting of the cash. I don't know, we'll see what happens if/when the effects of the shortage of cash show up this year.

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