May 2010 Archives
Daniel Gross (Slate) explains why we shouldn't worry about the size of the Fed's balance sheet.
Most of the assets that will remain on the balance sheet the longest are the mortgage backed securities (think Fannie and Freddie). Here, the Fed can afford to be a long term speculator. They, more than your average Wall Street entity, have the patience to wait until those mortgages are refinanced, the houses are sold, or they are simply paid off. Remember, a crucial problem during the crisis was the inability to properly price the assets because no one was willing to buy. This drove down the prices of good assets as well as bad, and you know the result.
By and large, the effort by the Fed was successful. Attention should now be focused on how to make sure they don't ever need to do it again. That's a tall order when we all know that if they had to do it again, they probably would. We call this problem "moral hazard," and it's the reason that common sense regulation really is necessary.
The bottom line? The Fed wants to get the junk off its balance sheet and return to a situation in which it has about $1 trillion in assets, the lion's share of them in the form of government bonds. To do so, it will need to rid itself of about $1.3 trillion in assets. That's a lot. But when you add up the components of the balance sheet that are shrinking, the task doesn't seem quite as daunting. By the end of 2011, by my rough calculations, at least $300 billion of the Fed's current assets will be gone with a substantial additional amount on the way out--and all without the Fed having to stage a huge sale of assets.
Most of the assets that will remain on the balance sheet the longest are the mortgage backed securities (think Fannie and Freddie). Here, the Fed can afford to be a long term speculator. They, more than your average Wall Street entity, have the patience to wait until those mortgages are refinanced, the houses are sold, or they are simply paid off. Remember, a crucial problem during the crisis was the inability to properly price the assets because no one was willing to buy. This drove down the prices of good assets as well as bad, and you know the result.
By and large, the effort by the Fed was successful. Attention should now be focused on how to make sure they don't ever need to do it again. That's a tall order when we all know that if they had to do it again, they probably would. We call this problem "moral hazard," and it's the reason that common sense regulation really is necessary.
