The Fed Bought MBS Starting in 2000

posted by Nima

April 18, 2009 · Posted in Monetary Economics 

The following is rather commonplace to people who understand the financial crisis. I just felt it necessary to refresh people’s memories since for some reason no one in the mainstream seems to point this out.

Even though the US housing bubble was a symptom of a much bigger problem of general credit expansion, it obviously began to expand by an accelerated and unusual pace in or around the year 2000.

What caused this? It was of course due to the fact that the Federal Reserve Bank decided in August 1999 to add Mortgage Backed securities to its portfolio:

The broader range of collateral approved by the Committee for repurchase transactions included mainly pass–through mortgage securities of GNMA, FHLMC, and FNMA, STRIP securities of the U.S. Treasury, and “stripped” securities of other federal government agencies.

John Paul Koning has this chart on the mises.org site:

Should it be a surprise to anyone, then, that what ensued was a period of reckless speculation in and issuance of these types of securities and their derivatives?

So what should we do to avoid such a disaster in future? The solution is simple. Audit the fed, expose its disastrous policies, and get rid of it once and for all.

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