Oh Really? (Kocherlakota on CNBS)


Oh Really? (Kocherlakota on CNBS)

Posted by Karl Denninger

The Fed’s Kocherlakota said in an interview on CNBS today that The Fed could sell $15-25 billion in mortgage securities a month, implying that this would normalize the balance sheet by 2020.

2020 eh?  Ten years into the future?

Mr. Kocherlakota seems to have forgotten history – and not only recent history.  We’ve yet to go a decade without a serious financial “upset” of some sort; we had the early 1990s recession, the 2000 tech wreck and of course the 2008 meltdown.  Before that there was 1987, the early 1980s recession and then the 1970s oil embargo and inflation scare.

Notice that there hasn’t been a ten-year uninterrupted period where The Fed could have “unloaded” what’s on its balance sheet.

This, of course, presents a problem.

What presents an even larger problem is this:

That’s the 10 year Treasury rate (again), and while it came in a bit today I wouldn’t call it “heading down.”  That nice little technical pattern targets 6%, a rate that would bring ruinous losses (in amounts likely to exceed $100 billion!) on The Fed’s mortgage portfolio, assuming it tries to sell those securities.

Frankly, I don’t see how The Fed pulls this off, and since The Jawbone is now out talking about it, I have to assume they’re not quite so sure how to do it either.

In my opinion skepticism is well-advised here.

My belief is that they’re trapped.  They need lower rates to create that “par” value, while at the same time they also need ample funds around in Treasury to backstop losses so people will buy the MBS without a haircut. 

Where’s the money going to come from? 

Well I can tell you where it won’t come from – sovereigns.  China sure isn’t going to be all that interested – or capable, especially if they drop their hard peg.  Europe?  Greece anyone?  Me thinks not.  Money market funds?  At what yield will people dump them and buy Ts?  I think not.

Oh wait – we could start another stock market panic!


My antenna is up on this folks…..