Federal Reserve to up toxic asset purchases to $5 trillion?

The U.K. Telegraph is reporting some horrifying news that behind closed doors the Federal Reserve is considering purchasing more toxic assets. A lot more. To bring the total from $2.4 trillion to $5 trillion dollars.

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

Huge h/t to MTGM. A deflationary spiral, no surprise to anyone reading the government statistic report overviews posted here, or the fact the economy is slowing, yet is the answer to buy more toxic, worthless crap?

Someone explain that one to me.

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This is not a redistribution

This is not a redistribution of wealth, right? Because I would be against it if it were.

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Chicago Fed Pres. asks what would purchase of toxic assets do?

Aha, I'm not alone in wondering what would be the point of purchasing more toxic assets. Chicago Fed President leery of the same thing.

Seriously, what does this has to do with job creation? Nothing, just like so many other things claim to saved the economy, which are really about feeding the Banksters.

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Job Creation, No-Asset Side of $6.4Trillion CDS Loss.

The $5Trillion in Toxic Asset purchases are already defaulted swaps. The real total is the $6.4 Trillion of CDSs below fair value for 2008 and 2009 (search BEA U.S. International Accounts). A $1.4Trillion tranche is coming. I suspect Germany is behind this, the biggest dog, with the loudest bark.

When your leadership is clueless and corrupt, you engage in this kind of nefarious behavior, that is what you know how to do. Creating credit or jobs is not thought you would ever have.

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Burton Leed

They are not CDSes

Sorry BL, they are not. The Fed holdings are in a previous link. The majority are MBS, which is mortgage backed securities as well as consumer loans which are securitized. Now one can say these are grossly overvalued by the Federal Reserve but one cannot say they are a vehicle, i.e. a CDS, which they are not. A credit default swap is not a CDO. A CDS a little side bet, an insurance policy, against another asset class. Many CDSes were against MBS, packaged up as CDOs, that's the big AIG scandal. But the Fed did not buy up CDSes, they bought the asset classes themselves, these were the securitized tranches, such as CDOs, often packages with mortgages, i.e. a MBS.

I know it's all very confusing and the only reason I've got a handle on it is due to writing up some many posts researching out what the various classes of derivatives were. It's a bitch. Anyone who delves into this deserves grad school credit for the effort. It takes a labyrinth to hide theft, such as the corporate tax code...but let's try to get the Fed holdings correct here.

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MBS Are Balance Sheet Assets - CDSs Should Not Be

If you trace back the BEA Posting, you see that BEA calls the 2 asset classes 'losses on derivatives.' That sounds like a CDS not an MBO to me.

They should call assets MBSs or CDS. A CDS is a derivative, a contingent asset. An MBS is an actual asset. This is the way BEA labels this. We should not have to play Carnap the Magnificent with an asset class.

So I see where you are going, it is the underlying asset not the derivative that should be labeled as such. Not my label.

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Burton Leed

not so, sorry

A credit default swap is a very specific vehicle and would be labeled as such. a loss on derivatives or assets does not imply there is a CDS associated with it. You can have a CDO or a MBS lose value all on it's own. A CDS is a separate "investment" vehicle, while it's associated with an underlying asset class it is not or does not represent a loss on that asset class.

Just because there is a derivative does not mean there is a CDS purchased on that derivative. Also, because the Fed bought these I do not believe they in turn allowed more derivatives on them, because they are held by the Fed, they are not out into the private sector. (although these days any insanity is possible). But bottom line if they held CDSes they would be listed as such.

Ex. GS bought CDSes on a CDO from AIG. CDO tanks in value and defaults. CDS implies a contract which because the underlying asset defaulted (the CDO), AIG must pay up on the CDS. It's like insurance but insurance is not the thing insured, it's separate.

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Krugman quotes GS as $10 trillion

in Federal Reserve private debt purchases to "help" the economy.

Krugman does an overview on what the Fed could do to "help" the economy, but frankly I still do not get, beyond buying up, reducing principle on consumer/residential mortgages that goes directly into debt relief for the middle class, how buying up worthless MBS and other securitized loans, which as far as I am aware, do not "trickle down" to the poor smuck (individual) who is stuck with the debt...helps "the economy".

This post has become popular on the Internets, so those reading it, give me a calculated answer on how buying more securitized derivatives, even MBS and consumer loans helps the economy for I don't see any of this helping the U.S. labor force, the U.S. middle class.

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