http://www.manifestdensity.net/2010/01/12/in-which-my-ignorance-of-finance-is-revealed/ Just another WordPress weblog Tue, 07 Sep 2010 23:10:52 +0000 http://wordpress.org/?v=2.9.2 hourly 1 http://www.manifestdensity.net/2010/01/12/in-which-my-ignorance-of-finance-is-revealed/comment-page-1/#comment-8350 my ignorance revealed: spending freeze edition « Manifest Density Tue, 26 Jan 2010 14:53:08 +0000 http://www.manifestdensity.net/?p=1180#comment-8350 [...] consider this another plea for explaining the obvious thing(s) I’m missing. At the moment I find myself convinced that [...] [...] consider this another plea for explaining the obvious thing(s) I’m missing. At the moment I find myself convinced that [...]

]]> http://www.manifestdensity.net/2010/01/12/in-which-my-ignorance-of-finance-is-revealed/comment-page-1/#comment-7531 Tom Tue, 12 Jan 2010 17:42:10 +0000 http://www.manifestdensity.net/?p=1180#comment-7531 Okay, that makes sense. Thanks! Okay, that makes sense. Thanks!

]]> http://www.manifestdensity.net/2010/01/12/in-which-my-ignorance-of-finance-is-revealed/comment-page-1/#comment-7528 ryan Tue, 12 Jan 2010 17:00:35 +0000 http://www.manifestdensity.net/?p=1180#comment-7528 You've basically got it. If the Fed didn't own those Treasuries, the interest income would leave the government and represent a net hit to the budget. The large new holdings of MBS are generating a lot of income for the Fed, and it wasn't clear that they would (it is assumed that a lot of junk mortgages are backing those securities). The MBS still aren't worth very much, and if the Fed sells them to reduce the size of its balance sheet and mop up cash from the economy, then it will likely take a loss on them -- they'll fetch less than the Fed paid. But in the mean time, the coupon payments the Fed is receiving are generating some nice earnings, which will likely cover the eventual loss on the sale and then some (unless the economy takes another turn for the worse). You’ve basically got it. If the Fed didn’t own those Treasuries, the interest income would leave the government and represent a net hit to the budget. The large new holdings of MBS are generating a lot of income for the Fed, and it wasn’t clear that they would (it is assumed that a lot of junk mortgages are backing those securities). The MBS still aren’t worth very much, and if the Fed sells them to reduce the size of its balance sheet and mop up cash from the economy, then it will likely take a loss on them — they’ll fetch less than the Fed paid. But in the mean time, the coupon payments the Fed is receiving are generating some nice earnings, which will likely cover the eventual loss on the sale and then some (unless the economy takes another turn for the worse).

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