Comments on: Fed profitability datapoint of the day A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: goldtracker Wed, 12 Jan 2011 19:51:19 +0000 When you control the money is it any wonder that you make a profit?

Of course the truth is that they win even if all those assets on their book vaporize because the American people would be the one’s on the hook then.

By: TFF Wed, 12 Jan 2011 16:20:47 +0000 Never mind, I found this one: 41/current/h41.htm#h41tab2

The MBS holdings are all longer-term securities. But of the $1T in US Treasury obligations, about 60% have a maturity of five years or less.

By: TFF Wed, 12 Jan 2011 16:10:01 +0000 Absolutely agree on that, drew.

It will be very hard to sell longer-term bonds in an environment with rising interest rates. Even harder in an environment with persistently high unemployment.

This is the report you refer to:  /yellen-speech-may-offer-proxy-for-plan ned-unwinding-of-fed-qe.html

Any idea where we can look for a peek at the Fed’s book? Most interested in the maturity dates.

By: drewiepe Wed, 12 Jan 2011 15:52:38 +0000 Janet Yellen would certainly have you believe that they will be sold – over roughly a 5 year period starting as soon as mid 2012. I still remain convinced that the intention IS to sell the bonds down, just as I remain convinced that the Fed has no idea quite how hard this will be in practice.

By: TFF Wed, 12 Jan 2011 03:54:14 +0000 True, Danny_Black. But how are their maturities structured? They have typically stayed short in the past — and while they are definitely buying up longer-term assets now, I believe the intent remains to hold them to maturity. Do you expect circumstances will force them to sell ahead of that?

By: Danny_Black Tue, 11 Jan 2011 19:28:16 +0000 TFF, you are of course assuming they hold to maturity.

By: TFF Tue, 11 Jan 2011 16:36:22 +0000 My service business generates varying profits but can never generate a loss — I have essentially zero fixed expenses.

The Fed’s book is a little like that. Their ‘cost of funds’ is literally zero, so ANYTHING they receive is pure profit. The only way they can ever lose money is if the bonds they purchase default, and don’t they restrict their holdings to Treasury securities and others with a government guarantee?

Okay, so they could theoretically lose money if forced to sell into a down market. But they aren’t ever forced to sell and they don’t practice “mark to market”. So I don’t think this is terribly likely.

By: Danny_Black Tue, 11 Jan 2011 16:14:20 +0000 Nick_Gogerty, so lets say my system is to take 8trillion stick it in the bank at 1% and 80bn interest then how can that generate 80bn in losses?

Would be good to know the duration on these holdings. I seem to vaguely recollect the fed was going to hold the GSE MBSes to maturity. Would love to know how Nick thinks that can generate a loss.

By: Nick_Gogerty Tue, 11 Jan 2011 14:41:47 +0000 A system capable of generating $80B in profits is also capable of generating $80b in losses. The response to such an outcome may however by slightly different.

If the fed were to show losses of $80b, the general public and international response may reach a more appropriate level of inquiry about the processes generating such returns.

The asymmetry of response reflects the common problem with risk and psychological bias. No one questions variance and its causal source when positive. Soul searching only starts after negative variance shows up, at which point many act surprised that any such thing could happen even after the same mechanism and process showed such extremes before.

By: TFF Tue, 11 Jan 2011 11:37:34 +0000 DanHess, the cash that the Fed remits to the Treasury represents the *interest* on the bonds they purchase, not the bond principal. When the bonds are redeemed, the outstanding liabilities are reduced and the cash is effectively destroyed (at least until it is spent again to purchase a new bond).

It is a little strange that we don’t have clearly stated goals for QE (other than juicing the economy and increasing employment). Some goals I have variously guessed:

* Push China to allow a more appropriate relative valuation between the yuan and the dollar. With massive QE, they will face high inflation as long as they keep the link tight. (Essentially the Cold War strategy in which the US spent the Soviet Union into the ground.)

* Devalue the dollar to make American labor more competitive in a global market. Dropping wages by 30% to 50% would be devastating for anybody with a loan and would not share the pain between workers and retirees. Better to inflate the currency while wages stagnate.

* Punish investors who have fled to “safe” investments. You can still put half of your money in Treasuries, but it won’t be worth anything by the time they mature. Maybe the stock market is looking tempting again?

* Encourage Congress to enact fiscal stimulus by directly monetizing the new debt.