The FEDERAL RESERVE gave its interest payments earned on the MBS and other securities to the U.S. Treasury as mandated and the media pundits were giddy. It’s very difficult to determine what this “profit” means. If the FED was forced to mark its massive purchases to market would there really be any gain? The FED would say that they can hold the securities to maturity but that would mean that they have no exit strategy from the Large Scale Asset Purchase policy–QE by any other name–and any talk of such exit plan would be mere rhetoric.
Now that the Treasury has the money are they going to use it to offset the massive losses incurred and incurring on the portfolios of the nationalized FREDDIE MAC and FANNIE MAE? Maybe the profligate states like Illinois and California will demand that the FED provide the money to meet their severe budget shortfalls. To say the FED has earned money when so much is still at risk mirrors the P&Ls for which WALL STREET paid themselves in 2006 and 2007. Maybe Chuck Prince and Stan O’Neal should be appointed the Chairman and Vice-Chairman of the FED. The accounting ruse being played is equivalent to three card monte games in Central Park. I also wonder where the ducks go in the winter.
Today, the Japanese announced that they would be purchasing European Bonds as they want to be good citizens of the global financial system. It seems that it was a vote of confidence in the EU but when their words are parsed it is a nice gesture but nothing to get too excited about. The BOJ will buy bonds from the EFSF, which are basically the high-quality bonds of the most credit-worthy Europeans with 60 basis points more yield. It could be a positive for the PIIGS if it means that other would-be buyers of EFSF issued bonds would be forced to purchase some periphery bonds as a way to enhance their overall yield. But the markets will have to wait for the upcoming auctions to confirm that reality.
It does pose the question: IS EUROPE BECOMING A BETTER VALUE THAN THE U.S.? At least the PIIGS are paying rates commensurate to the risk, which is far more than the U.S. Government is doing. The FED‘s asset purchases have perverted the curve structure and it is impossible to determine what has value relative to risk. The market is going to be concerned with this issue until the time that the FED begins its exit strategy. Until then lets roll the dice.