Sure, it's maddening that we're on the hook to bail out the Mortgage Bankers Association mob syndicate. But we're on the hook not just because the Fed owns a ton of the bonds the mob originated. We're also on the hook because we, the taxpayers, bailed out that mob when the federal government took Fannie and Freddie into conservatorship. We now own or guarantee the entire portfolio of once under water mortgage paper that's about to go under water again.
It's especially maddening that the mortgage mobs brought down the financial system in the first place with their massive bubble financing fraud in the 2000s. It's maddening that not one single mortgage mafia don was ever brought to justice. And it's maddening that because of that, we're about to see Act II.
But the imaginary mark-to-market losses in the Fed portfolio aren't the issue, whether from a moral standpoint or a practical standpoint.
If You Still Think It Matters, Consider This
If you still think it matters that the Fed doesn't mark its bonds to market, thereby recognizing losses based on current market prices, remember, the Fed doesn't mark its gold to market either. It holds 261.5 million ounces of gold in the form of a certificate from the U.S. Treasury, to which the Fed transferred ownership of the physical gold back in 1934.
Granted, it "supposedly" holds that gold, but I'll give the Fed the benefit of the doubt. We've all seen the pictures of the gold in the Fed's vault and in Fort Knox. I mean, really, who's going to tell the Fed it doesn't own all that gold? Let's face it, the Golden Rule applies. He who has the gold makes the rules. Gold rarely physically changes hands when it is bought and sold anyway. Mostly it sits in central bank storage vaults, particularly the Fed's vault.
So let's assume that the Fed really owns that gold and could sell it if it wanted to.
The Fed values that gold not at its market value of $1,200 or $1,250 per ounce, but at a total of $11 billion or $42.22 per ounce! That's right. It values its gold at 1/29 or 3.4% of the current market value. If we're going to talk about $66 billion of unrealized losses on the Fed's bond holdings, then we should also recognize $313 billion in unrecognized gains on its gold holdings.
Since neither its bonds nor its gold will ever be subject to forced sales at market, it just doesn't matter.
Of All the Outrageous Things the Fed Has Done, This One Takes the Cake
There are plenty of things that the Fed does and has done that are outrageous. The fact that it pays the banks billions in unearned subsidies every month in the form of interest on excess reserves is morally repugnant and a direct cost to the taxpayer. Now, that's outrageous. The fact that the Fed doesn't mark to market pales in comparison.
The really outrageous behavior was Quantitative Easing (QE) – pumping $3.5 trillion in newly conjured cash into the accounts of Primary Dealers over the 2008–2014 period.
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That policy inflated the stock and bond market bubbles and drove unthinkable risk-free profits into the accounts of massive leveraged speculators and banks. It benefited only the already privileged system and market insiders, the Fed's cronies and real clients. It robbed senior citizens of interest income on the savings that they had worked so hard to honestly accumulate over lifetimes of honest labor. Many, including my widowed mother, and perhaps your elderly parents, were forced to consume their savings, and died dependent on government aid – paid for, again, by all of us.
You see, there is no free lunch. The Fed never acknowledges that. For every benefit it confers on its cronies, there's an equal but opposite cost to society that goes unrecognized. But some of us do see it and know its devastation.
From the unearned benefit to bankers and speculators, and the cost to our parents and grandparents (may they rest in peace), Bernanke said that workers, and particularly the working middle class, were supposed to rise on the benefits of trickle-down economics. That idiotic concept has been known for decades to be a fraud, just like Bernanke's other fraudulent idea that the Fed caused the 1929 crash and the Great Depression by being too tight monetarily.
Of course that trickle-down didn't happen, which in turn led to the political turmoil that we see exploding in the U.S. and all over the world.
The Fed Is Making Another Mess Trying to Undo Its Last Mess – Here's What to Do
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So now, the Fed, to its belated credit, is trying to undo the mess it created with QE by "normalizing" its balance sheet. The corollary of balance sheet "normalization" is that the Fed is also now pulling $50 billion per month out of the banking system. That reduction of money in the system drains the system of the fuel for investment demand. Weakening demand is part of the cause of the falling market value of the Fed's bond holdings.
The other cause is the federal government issuing an average of $100 billion+ per month in new paper to sell in the market. Under QE, the Fed bought or financed all net new Treasury issuance. Today the Fed says to the market, "Sorry boys and girls, you're on your own." So there's no longer enough money in the system to absorb that flood of issuance without something else being liquidated. Usually, that something else is stocks. But bonds get their alternating turn in the barrel too.
Whether we like it or not, we must take the Fed's medicine. It has begun to involve big losses – real market losses – and those losses will only grow over the next couple of years.
Hopefully you have heeded the warnings and gotten out. You can sleep like a baby and collect that ever-increasing stream of interest income on your T-bill holdings as you roll them over. Meanwhile, all around us, the rest of the world is losing its mind as it sees the value of its stocks and bonds get pounded in these vicious demand vacuums that appear in the market every few weeks.
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The post Here's How To Make Money Off the Fed's "Losses" - Part 2 appeared first on Lee Adler's Sure Money.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.