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Discussing Rescue for Mortgage Backed Securities
The Fed's move to protect Bear Stearns last week may only be a preview of what is to come. Last weekend, the Federal Reserve Bank of New York held the mortgage backed securities of Bear Stearns as collateral. This weekend, the Financial Times reported that the Federal Reserve, European Central Bank, and the Bank of England are discussing the purchase of some of the $6 trillion in mortgage backed securities (MBS).
Snapshot asks, are the risks this poses to the taxpayer outweighed by the stabilization of financial markets?
Financial Times - Central banks float rescue ideas
Financial Times - US can learn from Japan's crisis
Bloomberg - Fed May Buy Mortgages Next, Treasury Investors Bet
Bloomberg - Federal Home Loan Banks May Buy $100 Billion of Mortgage Bonds
The Right Move
The Fed made the right move. Even the most ardent free-market enthusiasts posit that perferct or near-perfect information is necessary for markets to function properly. In this case, there is clearly a great deal of uncertainty. The Fed's purchase will help to buy time for Wall Street to sort out where the losses are and adjust prices accordingly.
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