Both the NYT and Washington Post are getting into the misinformation business this morning. Both papers claimed that the Fed buys mortgage-backed securities (MBS) as one of the ways in which it injects reserves into the financial system (along with Treasury bonds and bonds issued by government agencies). This is NOT true. I was shocked to read a Bloomberg column (subsequently corrected) yesterday that reported that the Fed had purchased $19 billion of MBS. This would have been shocking because it would have been an extraordinary departure from the Fed’s normal practice, which the Fed would not do unless it viewed the situation as truly desperate. The reality behind the story was that the Fed has accepted $19 billion in MBS as collateral on loans that it had made to banks through its discount window. The Fed, like any bank, demands collateral when it makes loans, and mortgage-backed securities have long been an acceptable form of collateral on loans from the Fed. The only departure from standard practice was that the Fed encouraged banks to use MBS as collateral. This was clearly an effort, albeit modest, to shore up the market for these assets. The dealings of financial markets can get quite complicated especially with so many exotic instruments now in circulation. But, the mechanics of the Fed’s open market operations are not that difficult to understand. The NYT and Post should get them right.
--Dean Baker
