The Law Is Strange

From Sudeep Reddy:

Real Time Economics : An Old Law for a New Step at the Fed: The Federal Reserve Act’s Section 13(13), created in 1933 and amended in the late 1960s, allows the Fed to lend to any individual, partnership or corporation with collateral backed by U.S. government securities or securities issued by federal agencies. Fannie Mae and Freddie Mac debt is generally included in that latter category of safe holdings, even though it’s not directly guaranteed by the U.S. government...

Of course, the reason the Fed is contemplating this is that right now Fannie Mae and Freddie Mac debt is not regarded as "safe"--even though it is in normal times.

Comments

[Frank the sales forecaster]

Dear Dr. DeLong,
Isn't the need for additional capital by FNMA/FDMC the result of the changes in the definition of a conforming loan as passed by congress as part of the "stimulus" package. In the simple chain of events: Fed keeps credit markets liquid and rates attractive, Congress eases up conforming loan requirements, market participants respond to incentives and refi out of jumbo's into conforming loans, comes the inevitable increased capital demands for the agencies that have to guarntee/buy/capitalize this huge increase in conforming loans. Surely the head of the Fed and members of Congress saw this coming. Certainly they didn't believe that the secondary market for mortgage backed securities was going to absorb the large increase in conforming loans, that would have been silly. So isn't this just more supply exceeding demand and not really a change in "safety"?

[MattY]

The promise that the taxpayer is willing and able to take on more debt is problematic. As the taxpayer promises more than can be delivered, the new debt rapidly turns to inflation as government supports more than revenue affords. We have run out of space to make linear adjustments.

[MattY]

Sign me up, I want my FedAmerica card.