Federal Reserve Seeks an Exit Strategy from Mortgage Backed Securities
Posted on | November 9, 2009 | No Comments
Since the downfall of the American banking system, the Federal Reserve has infused a large amount of money in reserves into the banking system in order to prop up the falling banks. Eventually these funds will have to be removed in order to avoid more deficits for the US, and extreme amounts of inflation. The question is, how will the Federal Reserve go about removing these funds?
So how much money exactly has been put into the banking system? Taking into consideration Bear Sterns, AIG and the many other banks which accepted government help, there is approximately 1.1-1.3 trillion dollars floating around in the banking system which needs to be removed.
The Reserves current strategy for this removal is to allow the line item entries which the feds have made, to slowly decline at their own rate until these accounts reach a balance of zero. It currently appears as if these accounts are on a slow decline now, but there is nothing the feds can do to do speed this process up.
Should this process not be effective the Federal Reserve’s second option is to use a process called reverse repos. By this process the fed would slowly remove the funds as oppose to “yanking” them out of the banking system and creating the second great depression. This removal would take place through market transactions and the feds would be extremely careful as to not get ahead of the curve of the banking system. This method may prove to be effective because through market transactions the feds would be able to determine if there was any resistance to the removal of funds and correct their mistakes before they occurred.
One way or another the Federal Reserve must develop an exit strategy from the large amount of funds they have placed in the US banking system. The hope is to do this slowly, and not further damage the economy.
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Author: Sylvia Wayne
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