What was the impact of the Fed's buying Mortgage-Backed Securities?
This is another great post by Spenser worth reading!
A lot has been made about the government's extraordinary intervention into the housing market in the post-bubble era. In fact, I recently participated in a lively debate on CNBC about the Treasury Department's Christmas Eve decision to increase its $200 billion backstop of Fannie & Freddie to a basically unlimited level for the next three years.
One of the most important and overlooked parts of the government's bailout of the housing industry has been the Federal Reserve's purchase of mortgage-backed securities ("MBS"). Basically the Fed has been buying the debt of Fannie Mae and Freddie Mac, which allows them to in turn keep buying new pools of mortgages from lenders.
What impact has this massive program had? Um, maybe none at all argue two Stanford economists. Yikes. They call the program (with a possible $1.25 trillion at its disposal) to be "statistically insignificant". This runs counter to the widely-held belief that the Fed's purchase of MBS has helped drive mortgage rates down by 50-100 basis points. Who's right? We'll probably never know. This program is just one of the many things the government is doing to try to help keep home values from plummeting further. But it's a pretty expensive program not to have a clearly measurable benefit. And there are definitely some downsides to it (other than the obvious one of cost). It appears that the Fed is going to stop the program in 1Q10, but they've extended it in the past, so who knows....
ST Paper - December 20
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