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News Link • Federal Reserve

Delusional: Why Bernanke Isn't Having a Nervous Breakdown

They really are having trouble gauging how much cash is going to flow at them from their MBS "investments." This should not be a surprise. I recently wrote: The Fed just announced their purchases for this month. It will be $18 billion. To recap at this point: Krugman is way off and doesn't know what is going on. He wants the Fed to go nuclear. Cowen doesn't appear to understand that there is complexity. B of A analyst is looking at the right numbers but appears to be off by about 50%. And EPJ's own Bob English gets almost a direct hit with his calculation of $14.7 billion. This shows you how complex things get with Bernanke's new tools. But there's much more. The monthly estimates only hold under current conditions. As English puts it: If interest rates were to stay constant (which of course they won't), this would equate to $170.9 billion. If interest rates continue to go down, the amount increases, if they rise, the amount decreases. Also, if Freddie and Fannie started realizing losses and paid off defaulted securities, this number could explode. Got that? Although cash flow estimates of Fed reinvestments are based on current interest rates. If rates go up or down, the cash flow will vary. And if Freddie and Fannie start realizing losses and pay off defaulted securities, you don't want to know what's going to happen. The numbers will explode.

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