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.

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.

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:
http://www.bloomberg.com/news/2011-01-10  /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.

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.

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.

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.

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.

I do know that if you are stealing capital as the Fed is, it darn well better be an emergency. QEII was definitely not an emergency.

For the Fed to remit its earnings to the treasury is already pure monetization.

To answer DanHess, I expect the “unwind” to be a very slow process over many years (if it happens at all). They can likely unwind through the steady maturity of their assets.

Has anybody seriously suggested a more rapid “unwind”?

So will the Fed hit Treasury with an enormous losses at the time of unwinding? Will the Fed ever unwind its balance sheet? Does it have a legal obligation to unwind? What are bounds of what the Fed is allowed to do?

Folks at Zero Hedge: “Oh you sweet, dear, fool did you think there was actually going to be an unwind?”

@chris_Gaun