The Fed Now Owns Over $2 Trillion in Mortgages, What Else?

Mish

Since Covid hit, the Fed has been on a massive balance sheet expansion program. Let's look at the details in a pair of charts.

Fed's Balance Sheet Summary

  1. Total Balance Sheet: $7.093 Trillion
  2. Treasuries Owned Outright: $4.431 Trillion
  3. Mortgage Backed Securities Owned Outright: $2.025 Trillion
  4. Treasuries Plus Mortgages: $6.456 Trillion
  5. Gold: $11 Billion

Gold Comments 

The gold certificate account reflects the receipts issued to the Reserve Banks by the Treasury against its gold holdings. In return, the Reserve Banks issue an equal value of credits to the general account of the Treasury, computed at the statutory price of $42.22 per troy ounce. Because nearly all of the gold held by the Treasury has been monetized in this fashion, the Federal Reserve Banks' gold certificate account of $11 billion represents the nation's entire official gold stock.

If the Fed valued gold at $2,000 per ounce instead of $42.22 per ounce it would be worth about $0.5 trillion. 

What's in the Gap Between Treasuries + Mortgages and the Total?

The Fed publishes balance sheet details every Thursday in a Federal Reserve Statistical Release, affectionately known as H.4.1.

Note: Fred has the Fed's Balance Sheet Total (Less Eliminations from Consolidation) Wednesday Level at $7,093,161. 

The Fed's H.4.1 shows $7,053,440. In the detail below, I show the main assets on the detail chart below adding the final category of Other to make it balance.

Balance Sheet Details

Fed's Balance Sheet Details 2020-09-24

Explaining the Gap

  • Primary Dealer Credit Facility
  • Money Market Liquidity Facility
  • Paycheck Protection Liquidity Facility
  • Commercial Paper Funding Facility II
  • Corporate Credit Facilities
  • TALF II
  • Central Bank Liquidity Swaps
  • Foreign Currency Assets 
  • IMF Special Drawing Rights
  • Currency

When liquidity gets messy, the Fed steps up to the plate with massive amounts Repos (temporary funding, sometimes with very long durations), but the current value of repos is zero.

Illegal Facilities

Many of the Fed facilities violate its charter and are thus illegal.  

John Hussman explains in Fundamentally Unsound.

If you are primarily interested in Fed illegal activities and not Hussman's comments on valuations, start reading at the following subtitle.

On the illegal abuse of public funds by the Federal Reserve

Let’s begin with a simple observation: instead of using CARES funds in the manner that Congress intended – to make secured loans to States, municipalities and corporations suffering actual damage from the COVID-19 epidemic – the Fed is using Congressionally-approved crisis funds to buy corporate bonds from investors in order to boost valuations and protect bondholders from losses, with neither sufficient collateral nor evidence of inability to secure bank credit (both of which are legally required). Worse, the Fed is also creating base money to “leverage” these purchases. Let’s walk through why all of this is an illegal abuse of public funds.

Read the top line of a dollar bill. Then read the current provisions of Sections 14 and 13 of the Federal Reserve Act. Every dollar created by the Federal Reserve must be backed by a) gold; b) a government-backed IOU, typically Treasury securities, but also including securities guaranteed by foreign governments, or c) obligations arising out of commercial transactions or Section 13 emergency lending, both which must be explicitly backed by collateral “sufficient to protect taxpayers from losses.” 

The reason for those provisions is simple. Under the U.S. Constitution, Congress is the only branch of government with spending authority. So the Federal Reserve Act is carefully written to prevent actions by the Federal Reserve that would amount to fiscal policy.

The Fed has announced the intention to “leverage” the funds approved by Congress with additional money creation, in an amount ranging between 3-10 times what Congress actually allocated, in order to buy unsecured corporate bonds from private investors. Aside from the violations of law involved here, and the shift of private risk onto the public balance sheet, it’s important to understand is that the financial effect is to amplify speculation and the issuance of low-grade debt.

The moment those securities lose value, the Fed will have effectively created money without taking enough legally-required collateral to protect the public from losses. This is quite literally a crime, akin to counterfeiting billions of dollars.

Hussman also pounds the Fed on wealth disparities blasting Fed Chair Jerome Powell's lie "Fed policies absolutely do not contribute to wealth disparities."

Of course they do. Monetary inflation benefits those with first access to money, the banks and the already wealthy. 

The Fed's illegal maneuvers are even worse.  

Hussman also has lots of comments on Covid and masks. His full report is lengthy, but please give his article a read, especially if you believe masks don't work.  

Mish

Comments (23)
No. 1-16
PecuniaNonOlet
PecuniaNonOlet

38 days till election. At this rate, the fed will own it all by next summer! What are the pros and cons of fed feudalism? Mish, it may be worth an exploration.

19 days till Boris Brexit Bonanza.

Rocky Raccoon
Rocky Raccoon

Reminds me of that scene in the HBO John Adams mini series.

"I fear our revolution will have been in vain if a Virginia farmer is to be held in hock to a New York stock jobber, who in turn is in hock to a London banker. The opportunities for avarice and corruption would certainly prove irresistible."

Bam_Man
Bam_Man

"We pretend to lend you money, and you pretend to pay it back."

RunnrDan
RunnrDan

$2 Trillion in MBS is equivalent to 40 US upper class cities, as follows:

250,000 - Approximate population of upper class city, like Irvine, CA
$1,000,000 - Assume each house is worth $1 million.
$0.25 Trillion <---Multiply # of people x ave. home price (1 Trillion = 1x10^12)
$2 Trillion / $0.25 Trillion = 8 <---Eight (8) cities worth of MBS

Maybe 1 and 4 actually own a home in the city? The above assumed everyone does! So, adjusted:
8 x 4 = 32 cities.

However, if average home price in the upper class city is $800,000, then 32/0.8=40 upper class cities.

Tinker with the numbers as you like. Bottom line is a bank that We the People can not audit owns a substantial amount of property they never had to work for. Also keep in mind the $2 Trillion is just what they are admitting to. What if we were to consider their colluding proxies?

Eddie_T
Eddie_T

"The moment those securities lose value, the Fed will have effectively created money without taking enough legally-required collateral to protect the public from losses. This is quite literally a crime, akin to counterfeiting billions of dollars."

So I think that gets to the heart of it.........under NO circumstances can the Fed let the bubbles burst, because at that point they all become felons...not to mention the fact that when that happens...... it's likely to be happening at the same time that the credit system of the entire planet locks up like a clapped out jalopy that's run out of oil.

Until that happens all the real elites think the Fed governors are the guys in white hats trying to save "da economy" and keeping the juice flowing to the overpaid CEO's for more stock buy-backs. So on with more BAU and more Fed leverage.

It's unlikely to change by reform.....but likely to change by catastrophic failure. But the game of musical chair has gone on for much longer than a lot of people I know ever thought it would.

We sure do live in interesting times.

RunnrDan
RunnrDan

"Many of the Fed facilities violate its charter and are thus illegal. "

Not only is the Fed in violation of its its charter, more importantly, they are in violation of the Declaration of Independence which states that everyone has the right to life, liberty, and private property (last term broadened in the Declaration to "pursuit of happiness"). By artificially inflating property prices, they have made the pursuit of private property impossible for practically an entire generation.

RedQueenRace
RedQueenRace

"The moment those securities lose value, the Fed will have effectively created money without taking enough legally-required collateral to protect the public from losses."

The public does not take a loss when this happens. The Fed does as they lose an asset on the balance sheet backing the money they created to buy it. The public "took a loss" when the Fed created the money in the first place. The Fed's ability to reduce reserves by selling assets takes a hit but unless the losses are gigantic this is largely, if not completely, academic.

This becomes an issue for the Fed only if they go into a negative capital position and the public collectively withdraws all or most of its money from the banking system in physical cash form. But a bank run has always been a potential problem and cash will likely be banned before that is allowed to happen. That or the collateral requirement for FRNs will be modified or eliminated and the money is simply printed.

The hole created in the Fed's balance sheet by a loss can be repaired over time via the interest paid on the Treasury securities they hold. Currently they turn over income above their expenses to the Treasury. If they stop returning the excess they will repair the balance sheet by destroying reserves, which reduces their liabilities and this can be done until their capital position is repaired. This would very likely be problematic to do for very large losses but a loss here and there should not be a problem.

KidHorn
KidHorn

Doesn't matter. It's all accounting to make the ledgers even out. The FED can't give money away, so they exchange it for bad debt held by banks or the gov't swaps IOUs for it.

Maximus_Minimus
Maximus_Minimus

The printed money to buy those MBS is now used to make Robinhood traders rich without doing any work.
The rest is used to buy anything tangible on the Titanic.
The plan is working.

A short economic history:

  • hunter-gatherer economy
  • agricultural economy
  • industrial economy
  • post-industrial economy
  • post-rational economy
AshH
AshH

I'm not an expert on this, but my understanding is that the Fed is funding the SPV and the Treasury is the entity that is technically buying the bonds. That's how they justify it as being legal.

As an aside, I've heard that there's really nothing stopping the Treasury from buying stocks if they wanted to, and stock are typically less risky than the junk bonds they've been buying recently.

Casual_Observer2020
Casual_Observer2020

We are headed to $50T of debt by the end of the decade. The Fed is going to have to do a lot more. MMT is coming. This is the decade of reckoning.

RonJ
RonJ

"Many of the Fed facilities violate its charter and are thus illegal."

Bankers are held above the law. ZERO bankers were prosecuted for crimes they committed during the housing bubble.

After Bernanke left office, he pretended to lament that he referred no one while he was he was in charge of the FED.

As the law doesn't matter, it is odd that the FED isn't already directly owning Apple and Amazon.

bluestone
bluestone

I thought Hussman devalued a good article on the Fed by unnecessary linking with masks.

1Roseburgman
1Roseburgman

The good news is that the Fed has unlimited fuel. The bad news is that they're flying under near-zero visibility and the altimeter is kaput.

yewtaipan
yewtaipan

CREDIT RATING CURVE ( please comments )

The credit rating curve is based on the equation of motion:

distance=position+speedtime+0.5accelerationtimetime

For estimating a production unit's credit rating, say in the era of
automation, the credit curve should look like:

credit=performance+productivitytime+0.5potentialtimetime

A credit distribution hub would distribute the credit based on this equation,
where the performance, productivity and potential coefficients are to be
calculated from the actual data, of which the ticker of a stock quotes could be
a good benchmark for the calculation.

The validity of this curve should, in fact, be proven by using it in a stock
trading exercise, first virtually, then with real money.

The "performance" is simply the cost of production, which the credit system
will automatically match to sustain the level of performance.

The "productivity" is the change in production, or the slope, which should be
track to adjust the credit rating accordingly.

The "potential" is the innovation and research breakthroughs that require
accelerated investments, while the result would only manifests in the distanced
future, or in the acceleration part of the curve.

so, the equation should look like:

credit=perfor+productime+0.5potenttimetime

and the idea is to track the value of the "credit", or in term of stock, just
the price, and calculate the values of "produc" and "potent", from which to
buy, sell or hold the stock, using 3 time points: the current value and the
other two previous ones.

At time=0,1,2 respectively, the equation becomes:

credit(time=0)=perfor
credit(1)=perfor+produc+0.5potent
credit(2)=perfor+2.0
produc+-2.0*potent

From them we can derive:

perfor=credit(0)
produc=2credit(1)-1.5credit(0)-0.5credit(2)
potent=credit(2)-2
credit(1)+credit(0)

And for stock trading, just replace credit by the stock quotes coming out of an
online ticker, we can calculate the produc and potent accordingly. We should
pick the stocks of top major monopoly companies of automation infrastructures,
such as Amazon, Alibaba, Walmart, Google and Apple.

For example, as a preliminary trial run, we could use a scheme:

OPTION 1. If produc > 0 and poten > 0, buy 2*(produc+poten) amount of stocks

OPTION 2. If produc+poten > 0, but either produc<0 or potent<0, then we would
just hold the stock.

OPTION 3. If produc < 0 and poten < 0, sell all the stocks and play some other
stocks.

With the convenience of software automation, we could get the software robots
to help us do parametric studies with different option schemes to our hearts
content.

I have did a similar project using ROBACUS on the MIT scheme of breaking the
bank in blackjack. After trillions games, it showed the scheme is basically a
scam, being extremely difficult and prohibitively embarrassing to get the odds
over 50%. Hope the stock market will be kinder.

By - = - DR.JOE CHING
NUCLEAR WEAPON SYSTEM DESIGNER
B.S.Engineering Physics,UC,Berkeley
M.S.Engineering Science,Caltech
Ph.D.Nuclear Engineering,Columbia Univ.
Oak Ridge National Laboratories
Energy, Incorporated
UNIV. CAL.Berkeley, Nuclear Dept