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Is it a good time for the Fed to sell GSE debt?

|Includes: FMCC, Fannie Mae (FNMA)

Mortgage rates continue to drop for a number of reasons.  Despite very high levels of angst about US federal government indebtedness, a global flight to quality has seen US Treasuries and gold rising in tandem.  Clearly, we are the one-eyed man in the land of the blind. Despite the risks we bear, we are trusted more than others at this point in history.

And mortgage rates have been so low for so long that few wish to refinance, making prepayment risk low and cashflows off of mortgage backed holdings stable.  Also supporting low prepayment rates is the fact that labor market mobility is low, people are clinging to their jobs and seeking to become more productive (much to the glee of their employers, although they must realize that going forward productivity growth must slow as this form of extractive surplus value asymptotically approaches its vanishing point).  And people are underwater.  So they stay in their houses.

At the same time, Bernanke, the Fed, and the rest of the government recognize that the market's confidence in them is thin.  Right now they're coasting on the poor fortune of the Euro.  Even still, Russia has stated that it's seeking to diversify its foreign reserves into Canadian and Australian dollars (Russia has, admittedly, shown a tendency towards FX mischief in recent years).  The markets have confidence in us now, but generalized anxiety means we have to work to maintain this confidence.

The Republicans (with a little Democratic help) just shot down a bill to fund an extension of jobless benefits with $50 billion, because of deficit worries.

Because of QE, the Fed holds in excess of a trillion dollars of GSE debt on its balance sheet.  Right now, selling a little of it, or announcing a plan to sell it, might not change anything in terms of effective money supply.  There's not much demand for loans, and they're being doled out carefully too.  Plus QE is being countered by state budget woes and by people buying physical gold and burying it in their backyards.  It could be that selling GSE debt or planning to would incite further confidence in US public finance.

*As an aside, I'd like to say that I remain generally Keynesian.  I believe that stimulus has been applied suboptimally to date, and insufficiently.  However, I fully recognize that I'm in the minority right now, and that a Keynesian message cannot be effectively communicated to the American people.  My point is that reversing QE to a limited extent probably wouldn't matter much to the effective money supply and, counterintuitively, might provide some relief, encourage greater confidence, and get money flowing again.

Disclosure: FGMNX, VFIIX, TIPS