I was reading something this week on how the Fed could "exit" it's positions of US Treasury Securities and Agency Securities that it has purchased over the last several years. I'm sorry I cannot find this original link; but the correspondence stated several approaches that the Fed could use, the first of which in this case was redemptions.
I follow these types of correspondences not obsessively but pretty closely, and had never seen "redemptions" identified as primary.
The Fed has moved the average duration of it's Treasury portfolio out close to 10 years which would be a long time to wait for redemption; but another option involves the fact that the Treasury can redeem it's securities early; before the maturity date. Here is an instruction from the CFR on how they can go about it. Excerpt:
§ 375.30 Does the Treasury have any discretion in this process?
(a) We have the discretion to:
(1) Accept or reject any offers or tenders submitted in a redemption operation;
(2) Redeem less than the amount of securities specified in the redemption operation announcement;
(3) Add to, change, or waive any provision of this part; or
(4) Change the terms and conditions of a redemption operation.
(b) Our decisions under this part are final. We will provide a public notice if we change any redemption operation provision, term or condition.So conceivably, at a point at which the Fed would want to "shrink their balance sheet ", the Fed could request that the Treasury conduct a redemption operation and then Treasury could only redeem the securities offered by the Fed. All decisions final.
The Fed carries all of the Treasury securities it "owns" at "face value". See Note 2 to Table 1 of the Fed's weekly H.4.1 report here; and the Treasury can certainly redeem it's securities at "face value". So no need to worry about the Fed "losing money".... [Ed: LOL!]
Previous Fed communications have stated that any "exit process" could take 3 to 5 years; if by "exiting" the Fed means reducing it's balance sheet from the present level of about $2.8T down to the previous level of about $1.3T then that looks like a reduction of $1.5T max over 5 years or around $6B per week. Probably less as the Fed also "owns" a goodly amount of MBS some of which would likely be redeemed also over this time by the Agencies that issue those securities.
If these two government entities, Fed and Treasury, would cooperate in this way, this would seem like a very easy process to accomplish. Treasury would just increase it's plans for usual redemptions by $5B per week and the Fed would surrender it's Treasury securities as they were redeemed early.
FD: This whole post is a bit out of the MMT paradigm and to an extent "enters the mind of the moron"; but sometimes you have to do that so that you are not surprised by their actions when they are the ones running things.
Seems like you have done some good work Matt. Btw who moderates comments here ?
ReplyDeleteShaun H.
Shaun,
ReplyDeleteI dont think comments are moderated at all.
What seems to be happening is that google blogger seems to be automatically screening some as "spam".
Lately it seems to be happening to Ramanan (India) and now perhaps to you? (Ireland?).
Seems like the google spam filter has it's attention cast at sources outside the US for this blog????
resp,
Matt,
ReplyDeleteThe Fed has around $1.66T of US Treasuries.
On liabilities, it has $1.1T of currency in circulation which would go to $1.2T by the time it exits.
Hence the Fed needs to "get rid of" "only" $400-500B of Treasuries.
This can be easily achieved by mid 2016 by redeeming them at maturity - no need to wait till 10 years or early redemption.
Also, Agencies mature fast.
Ahh bummer,
ReplyDeleteYea connecting from Switzerland atm. Guess I will post from my blog account.
Cheers
Shaun H.
The only comments that get filtered are those that the spam filter catches. I look at the filter but not too often unless someone complains that their stuff seems to be getting hung in spam.
ReplyDeleteOccasionally I delete an obviously commercial post that slips through the filter, but it has to be blatantly commercial for me to do so. No one like a comment section that is spammed.
I aslo try delete duplicate posts to keep things neat. For some reason some of my recent posts have been duplicated I know not now. I suppose that happens with others, too.
So the short answer is that the spam filter filters the spam and I do some minor housekeeping on occasion.
I just visited the spam folder and liberated a few comments, one from Anon and three from Shaun.
ReplyDeleteT-Notes have this additional provision.
ReplyDelete"(b) The Government may redeem any part of a series of notes before maturity by giving at least 4 months’ notice but not more than one year’s notice."
http://www.law.cornell.edu/uscode/text/31/3103
Can't the Fed create and sell securities on their own as well? So if they didn't want to sell their holding of MBS for example to avoid raising mtg rates, they could instead sell new securities to sterilize the existing holdings?
ReplyDeleteRyan,
ReplyDeleteYour comment, and this whole thread leads me to a possible solution to a knotty problem. I have not thought it out completely, but here it is.
Problem MBS securities have loans that have a high risk of failure, and some properties are in fact in foreclosure, or about to be foreclosed. The Fed is holding these problematic assets.
As above, the Fed clears its balance sheet by selling to the Treasury. The USG, in turn starts a US Housing Authority. As foreclosures happen, and families file for bankruptcy, the property gets sold to the Housing Authority at the original purchase price, which then rents them at market rates or subsidized rates, and the former owner of the property and the Treasury gets his/her/its portion of the accumulated equity. The bank then has no loss on the loan, and the former owner can get into a queue to rent housing from the Housing Authority if they cannot afford to buy or rent a new property at market price.
In this way, foreclosures could be relatively painless for the former owner, and the housing inventory stays occupied.
MMT allows us to do it.
As I said, these are preliminary thoughts. Criticisms? Comments?
Clonal,
ReplyDelete"As above, the Fed clears its balance sheet by selling to the Treasury."
Dont you mean letting the Treasury redeem it's securities?
resp,
Matt,
ReplyDeleteThat is what I should have said.
OK..
ReplyDeleteBut if you are talking about redemption of Agency MBS, those would have to be redeemed by the issuer which would be the Agency (Fannie/Freddie) not Treasury.
However, the Agencies are now owned by the Treasury but this is a true legal distinction nonetheless.
Remember also, that these MBS that have mortgages which have been failing in them are NOT the Fed's problem, they are Treasury's problem as Treasury guarantees the Agencies (and Treasury has been putting 10s of billions into Fannie and Freddie over the last few years because of this guaranty)
All this talk of the Fed having "toxic waste" is NOT TRUE imo from the point of view of the Fed. These MBS which are failing are guaranteed by the Treasury, so the Fed is at NO RISK.
(if this seems convoluted remember we are entering the realm of the moron in this hypo in general so stuff may not make 100% sense to those of us with sound minds)
So imo, the "Authority" you propose probably could already be done under existing Agency charters.
The Agencies could do the "rent back" to those they foreclose upon to get the cash flow instead of going to Congress for more fiscal and throwing people out on the street.
Again it is NOT THE BANKS IT IS THE GOVT SCREWING MORTGAGE HOLDERS.
Same as Student Loans which are now held directly by the govt... Student loans are NOW A TAX you take out a student loan and you have signed up to pay more tax for no reason as the education you get does not provide a job....
Remember this is the realm of the govt moron... they have it ALL fucked up!
Resp,
Matt,
ReplyDeleteThen what is holding back a sensible way to deal with the problem od mortgage debt and student loan debt is the widespread belief that the government spending is dependent on taxes and /or borrowing, followed by the secondary belief that moral hazard should only be borne by the borrower, and a defaulting borrower should not be able to benefit from the default.
The moral hazard issue is easily dealt with by the Treasury acquiring the property at the original purchase price, and the defaulting borrower getting only the accumulated equity.
But before this can happen, the wrong beliefs about government spending have to be dispensed with.
Right Clonal to summarize:
ReplyDeleteAD collapses and somebody who was tricked into paying too much for a house just to live in gets thrown out of their job.
Now they cant pay the bloated mortgage payment and after thrown out of job is then thrown out of the home...
The mortgage has been securitized (MBS)and is now owned by the central bank and guaranteed by the Agency of issue which is further guaranteed by US Treasury.
Central Bank then presses it's guaranty with the Agency to receive the interest on the MBS. Agency then presses it's guaranty with Treasury. Congress appropriates USD balances to Treasury to give to Agency to give to Fed. Which Fed receives and then gives back to Treasury at the end of the year.
House is/has been vacant. Previous occupants either co-habitating or renting from landlord with govt loan on the apartment.
Govt morons have shuffled around a lot of balances.
Looks like the same type of moron chaos is being set up for student loans as we speak...
Resp,
As for student loans, see A MASTER PLAN for HIGHER EDUCATION IN CALIFORNIA 1960-1975
ReplyDeleteQuote:
STUDENT FEES
For the state colleges and the University of California
it is recommended that:
1. The two governing boards reaffirm the long established principle that state colleges and the University of California shall be tuition free to all residents of the state.
Current University of California Tuition Fees for residents - $12,200 more than twice what it cost in 2005. Remember, that the Master Plan called for no tuition fees
It's a tax not tuition if you have to take out a loan as fed govt is the lender (Sallie Mae looks like she is "tits up")... low income folks I believe can get student aid/scholarships with high GPA which may cover it.
ReplyDeleteResp,
My point was that education should be free, and one should not have to take out a loan to be able to obtain the education. The California Master Plan written in 1960 is well worth reading.
ReplyDelete"My point was that education should be free"
ReplyDeleteI certainly agree with that... FD my number one political issue is vouchers for K-12.
but I was trying to point out that not only is it NOT free, they have construed it into a tax on those who have to borrow to go to university as the principle and interest go to the Fed. govt now.
Resp,
I have no problem with vouchers for k-12, as long as that voucher pays for education in full (there are no other fees or costs,) and that no school that accepts vouchers can turn away a child that shows up at the door with a voucher. Otherwise this just becomes another subsidy for rich private schools, with no access to them for the poor and unconnected.
ReplyDeletehmmm ... every time the exit strategy sheds the mothballs and is let out, QE tends to follow ...
ReplyDeleteSo remind me ... what is the purpose of exit, exactly?
Surely not to remove the "inflationary tinder", as some like to erroneously refer to reserves (dishearteningly, Fed muppets/governors are the top of the list).
As Ramanan says, they mature anyway. But it's more than that. Exit refers to reducing banking sector reserves back toward a more "normal" level, which would imply market sales (in exchange for reserves). A simple maturity does not achive this transformation (is it not just a transfer between Treasury and Fed?).
To believe exit is a clear and present priority is to belive reserves are actually an inflationary timebomb, which they are not. It is also a pretty redundant operation, is it not, when reserves are paid a support rate? After all, the classic reserve drain is always associated with issuing Bills or SFPs or whatever ... it is functionally the equivalent to paying IOR.
apj
"As Ramanan says, they mature anyway. But it's more than that. Exit refers to reducing banking sector reserves back toward a more "normal" level, which would imply market sales (in exchange for reserves). A simple maturity does not achive this transformation (is it not just a transfer between Treasury and Fed?)."
ReplyDeleteapj,
Yes a simply maturity achieves this because the Treasury has less funds in its account when the Fed redeems the securities and does nothing and hence the Treasury needs to issue more Treasuries than usual and this drains reserves.
Usually the Fed redeems securities and buys equivalent quantity of Treasuries from the Treasury at auctions. In the exit plan it wouldn't do the latter.
that makes sense, tks
ReplyDeleteapj
"As above, the Fed clears its balance sheet by selling to the Treasury."
ReplyDeletepaid for, how?
(trillion dollar coin or bust, imho).
:o)
Beo,
ReplyDeleteThat is what I had in mind!
Beo,
ReplyDeleteCould the exercise I proposed be doable by administrative means, without an act of Congress?