Brad Setser's reply to my post on his blog on this FCB binge:
russ -- thx for the heads up. I am less inclined to be conspiratorial -- i suspect some central banks are just putting some of the reserves they accumulated in q4 (and in some cases, in january and february -- given china's trade data, the PBOC's reserves are still going up, tho maybe at a less rapid rate than in q4). I also want to look over the weekend at what happened to overall reserve growth in february; some CBs presumably were back in the market after Korea shook things up last week.
I'm still not clear on what Alder (*) sees as the implications of this? It appears that credit growth overall is in decline, but now BOTH the banks and FCB (s?) have jumped in heavily to buy the GSE's holdings. If these are not open market purchases, then to me it's just liquidity neutral, like rearranging deck chairs on the Titantic. However, it is also important to note, that in the prior week (2-24) the FCBs bought $20.310 billion for their custodial account, and that is a major Bubble blower, even if the agency transactions of the following week weren't. I do find it astonishing that the banks would want even MORE mortgage exposure though, as they are already in over their heads.
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I tend to agree with Alder that it's some kind of quid pro quo deal, but I think it may be facilitated through the Treasury maybe more so than the Fed. The Fed is moving in a different direction, and actually sold (drained) $200 million in securities holdings in the last three weeks. As Monty Python would say, "And now for something completely different."
(*)
If not for a massive sale of real estate loans and mortgage backed securities to banks by non-banks, actual unadjusted total credit in the banking system would have been down by $5 billion, instead of up by $27.6 billion. The banking system may have picked up assets, but it was at the expense of another sector. Since we know that the biggest non-banks, the GSEs, are in liquidation mode, chances are that the bubble as a whole may have stalled that week.
Of note also is that all of the transferred assets involved real estate loans. In addition, Friday we saw that the Fed's primary dealers had acquired over $9 billion of MBS that week. We also found out Friday that the foreign central banks accumulated $11 billion in Federal Agency securities (i.e. GSEs) last week (ended 3/3). This is more than six times the average weekly rate of acquisition.
It's time to connect the dots. Fannie and Freddie are selling, it was a terrible week in the bond market, and suddenly major commercial banks, the Fed's primary dealers, and foreign central banks were jumping all over each other to consume mass quantities of GSE paper in a lousy market. These massive sales would seem to have the Fed's fingerprints all over them. Is there a clandestine rescue operation under way? If there is, they certainly wouldn't want to advertise it.
If there is, what are the implications? Normally when financial crises develop, the Fed engages in massive pumping, and that is inevitably bullish. But they have not been pumping lately. In fact, the Fed has been haphazardly reducing its asset base since the end of December. This is not a Fed acting like there's a crisis. It is a Fed actually promoting a rise in interest rates, which the market is obliging at the short end. Fannie Mae, meanwhile, one of the two major bubble blowing machines of the GSE credit bubble apparatus, is in aggressive liquidation mode. On the other hand, the Fed's lack of action and GSE shrinkage is being offset in recent weeks by a massive injection of cash into the system by foreign central banks recirculating accumulated dollars into GSE and Treasury paper. . It seems a doubtful proposition that FCB action alone is enough to keep our markets percolating at their current high levels. In the short run, perhaps it can, but their pattern in the past has been to sustain elevated levels of buying for only four to six weeks at a time. The current binge is three weeks along. So we'll see.
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