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Will the Fed Stop Buying Mortgage Debt?

By: Steve Johnson

3/17/2010 - 50 Comments

The Fed's $1.25 trillion quantitative easing program has kept the U.S. housing market from totally imploding is supposed to end at the end of the month.

But I’m not sure it will.

The U.S. housing market is teetering on collapse even with this massive program, how will it function without it?

If the Fed does not continue to purchase mortgages, then the mortgage market will need to rely on the private market – which is virtually non-existent at this point. 

Interest rates would have to spike to draw in private investors to purchase mortgages.

A spike in mortgage rates would exacerbate the banking industry and expose its already hidden insolvent position.  Thousands of banks for go bankrupt and millions more homeowners would find themselves underwater as home prices drop.

This is likely to cause a serious collapse of the U.S. housing market.

At the same time, the Fed desperately needs to clear its book of these bad mortgage loans.  They not only need to stop purchasing mortages, they need to moving them off its balance sheet to give them more room for quantitative easing of the trillions in U.S. deficits that cannot be funded by foreign creditors anymore - as foreign central banks continue selling U.S. Bonds.  

Perhaps the only answer, other than to let the housing market crash, is to print the difference.  The Fed is likely considering create trillions of new money to purchase Treasury bills and mortgages to keep the system from a crash.  This will be the third round of major inflation.

In the short run the system may not crash, but the long term effects are going to be devastating for the value of the dollar and the entire U.S. economy.

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