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Comment by s1artibartfast | Hacker News Reader

I read the article twice an I don't understand the challenge posed by leaving the mortgages on the balance sheet.

I don't think that the fed has wo worry about freeing up the capital to relocate because they printed it into existence in the first place. They also don't want to do more QE because the market is already overheated.

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If they can't kill inflation by killing equity markets and bonds the last target left is the housing market. So if you believe that their true goal is to kill inflation at this point, which I more or less do, than the thing the Fed feels like it needs to do is to target housing prices directly and their best lever for that is the MBS on the balance sheet.

But if the inflation is not due to overconsumption in the US, but about global problems with supply side issues on the front and China in lockdown not helping at all, how does it make sense to cause a housing crash?

I certainly think the fed should stop to build the bubble, but it should also not go all in and crash everything.

Inflation’s main cause is printing trillions of dollars in unbacked currency. The Trump admin and now the Biden admin are very fond of doing so for the sake of short term political advantage.

Why does Norway that didn't print money have similar inflation in that case?

> how does it make sense to cause a housing crash?

Less housing demand presumably means less home construction and renovation, which eases the strain on supply-chain limited resources. Lower home prices also reduce the amount of equity sellers, or HELOC borrowers, can spend on NFTs or whatever [1].

[1] https://en.wikipedia.org/wiki/Wealth_effect

I think the idea is that the Fed is trying to tamper demand by softening the economy. Lower demand will inevitably help prices. It doesn't help much though if we get a "rough landing" and people can't afford food/housing because they're out of a job.

It is not true that lower (local) demand will inevitably lower prices. For example if Costa Rica lower oil demand to almost 0 by saying only 1/1000 people could buy gas from now on it would not change the local gas price at all. If anything it could go more up as the fixed costs in infrastructure would be more expensive for each unit sold.

You can kill inflation with demand side strategies, even if the root cause of the recent changes in inflation are supply side.

Imagine an ad infinitum example. Let's say the price of gas goes to $1M a gallon. The fed then somehow removes every dollar from the economy. The price of gas is still going to be approaching zero when denominated in dollars after demand is forced to zero(in reality the price of gas would just change to be denominated in physical violence in this mad max scenario but that's an aside)

Only if you are the only country in the world (or bigger than the rest combined). That being said all of the central banks are doing the same so maybe it works that way.

If someone want they can get a free lunch, no need to increase the rate but everyone else lowers inflation for them.

You are refuting the details of my self admittedly absurd example. The point is, you can kill supply fueled inflation with demand side polices. Any country can do this within the scope of transactions denominated in the currency they control

Sure, but the effectiveness will be less if the "problem" is global. If the US has 50% of the worlds demand for some good, and only the US fights inflation, then the effectiveness of the measures taken will only be 50%. So for the US maybe that is still possible, but if you are Costa Rica that becomes meaningless.

I don't get how selling MBS on the market will lower housing prices, housing prices are a result of demand/supply + interest rate affordability, neither of which will be affected by selling MBS' that carry an older lower rate and don't pay out that much. I think it only results in Fed technically losing money.

> don't understand the challenge posed by leaving the mortgages on the balance sheet

There isn't one. The Fed wants to tighten financial conditions, and selling mortgages is a good way to do that for the same reason buying mortgages (or more precisely, mortgage-backed securities) is a good way to loosen them. Mortgages are simply more quotidien than e.g. Treasuries, and so could bring novel political risks.

The hazard of leaving it on the balance sheet is the Fed having massive exposure to something that they probably shouldn't.

Which isn't really a problem... because it's impossible for the Fed to get called in the way a bank would if there's a housing crash.

But is probably less than ideal... as it's just weird to have the Fed holding that much mortgage debt directly.

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