The Fed Should STOP buying MBS—

QE is the Federal Reserve buying long dated securities including MBS. The Fed pays the banks for these (and other long maturity securities such as Mortgage-Backed Securities ((MBS)) and Treasuries) and the payment is recorded as an accounting entry, by way of increasing the deposits banks hold with the Fed. The Fed pays the banks (sellers) a daily floating interest on this. This effectively means that by buying longer maturity Treasuries/MBS the Fed is reducing its long-term debt. Paying banks a daily rate of interest, which floats, is economic equivalent to issuing short term floating rate debt. So, if the Fed were a homeowner, this translates to the equivalent of a homeowner trading long term fixed rate mortgage (at very low rates) for (changing rates) short term floating rate mortgage. In the case of the Fed, it was around $ 40 billion/month.

Why is this not sensible?

First it does not make sense to replace very long-term low interest date with uncertain interest, daily priced, short term debt.

Second, it is not sensible for the Fed to buy mortgages when the housing market is booming. Few people own financial assets, especially MBS. So, purchasing financial assets helps just a few people for by buying MBS the Fed is propping up value.

Third, borrowing short to buy long term financial assets is both misguided and unsustainable in the long ter. The Fed should recognize inflation, problematic aspects of QE.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech ActiveAllocator.com, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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