For context, MBS have been stuck on the balance sheet for the last 16 years and account for about $2.35 trillion of the balance, sheet, two thirds of the size of the U.K. stock market. I understand that the Fed has a mandate to make money, but my searches indicate that the Fed has no longer been underwater on these assets since mid 2023. I think most economists would agree that the percentage of MBS and “other” assets on the balance sheet should be close to zero, and for better or worse, 100% of fed members are economists. Eyeballing the charts, it looks like the Fed is selling treasuries faster than MBS assets, and in the last year, other assets spiked with the SVB bailout.
In speeches, Fed members trot out the soft lie of a statement that interest rates are the only tool they have to manage inflation, and this is certainly not true when the Fed has private assets that approach or rival the GDPs of many countries. It seems to me that the Fed can cut interest rates, which helps everyone, even low-income earners, and still attack inflation by the selling of mortgage backed securities. Lower interest rates should give a boost to real-estate, but the Fed could conceivably manage any related real-estate growth by accelerating and decelerating the sale of MBS and other assets.
The reason I am asking is that I'm heavy on tech and waiting for warnings signs of economic trouble. Anecdotally, a ton of REIT deals that were financed at low interest rates pre-covid will have to refinance at much higher rates late this year and early next year. Many companies won't be able to do so. I personally don't mind if they can't, and I even experience joy at the economic troubles of all the companies with business models that involved leasing office space and parasitically re-renting it at much higher prices, with speculators adding no value to the economy. I would love to see these speculators get burned. If they still come out ahead because the Fed doesn't want them to be burned, then that reeks of moral hazard.
However, I am worried that Fed members know more than I do, and that Fed members are worried about real-estate exposure on bank balance sheets. For example, CITI has a price/book around .55, which ordinarily would be a no-brainer buy. But, a number like that makes me worried that banks are in more serious trouble than their typically well-above book value prices represent, and that the Fed is happy to allow for real-estate inflation, even though it is driving overall inflation, to keep is MBS assets from going underwater again.
I'd love to hear from any economists who know what is actually going on or anyone who is very plugged into the MBS market.
Leave a Reply