From Harley Bassman, The Convexity Maven, January 14:
In response to the Global Financial Crisis (GFC) in 2008/09, the US Federal
Reserve Bank (FED) initiated Quantitative Easing (QE) and Zero Interest Rate
Policies (ZIRP) where it respectively purchased trillions of US Treasury bonds
(UST) and Mortgage bonds (MBS) and lowered its Federal Funds interest rate to
near zero.It took similar actions in March 2020 to support the Financial Markets as the
Covid pandemic shuttered much of the Global economy.Lowering interest rates is a time-honored policy to support an impaired economy
as a lower cost of borrowing frees up funds to be used elsewhere to enhance
economic activity; but sometimes there are unintended consequences.Today we examine how such policies have gummed up housing activity and
suggest a rational and viable policy to bust up the housing log jam....Most standard thirty-year mortgages are guaranteed by one of the housing
related Government Sponsored Enterprises (GSE); you know them as Ginnie
Mae, Fannie Mae and Freddie Mac. I detailed this process in “A Deep Dive into
Mortgage Bonds” published on November 3, 2022....
....MUCH MORE
Related, July 1, 2024:
The Convexity Maven Is Perplexed
Markets can be wrong, "the truth is in the price" only some of the time, and there is something weird about how mortgage backed securities are being priced.
Harley Bassman, the Convexity Maven, knows a heck of a lot more* about packaged products than I do, but the fact he's been making this pitch for a while now leads one to consider the MBS trade as an example of the Climateer theory of wrongness: He is either wrong in the underlying thesis or he is wrong in his timing.And I don't know which.
Anomalies that don't disappear over time elicit two emotions, fear that one might be missing some key factor which will become apparent only after one has committed a substantial fraction of one's net worth to the trade, and greed-based intrigue because it is in the interstices of the matrix and their intersection with understanding that alpha is found.
Or something....
Coming at this stuff from a slightly different angle, Charles Plosser.
We visited Plosser a few times, he was a very sharp guy:
- Former Philadelphia Fed President Charles Plosser: "Why The Fed Should Only Own Treasuries"
- Fed Purchases Of Mortgage Backed Securities Have Destroyed The Housing Market
- The Mortgage Backed Securities Trap The Federal Reserve Set For Itself, In One Chart
- "How and Why the Fed Should Tweak QT"
- Atlanta Fed Head Raphael Bostic On Mortgage Backed Securities: "We are going to have to actively try to sell them."
Professor Plosser died August 14, 2025. From Federal Reserve History:
Charles I. Plosser
President, Federal Reserve Bank of Philadelphia, 2006 – 2015
Born: September 19, 1948
Died: August 14, 2025Charles I. Plosser served as president and chief executive officer of the Federal Reserve Bank of Philadelphia from 2006 to his retirement in 2015.
Plosser was born in Birmingham, Alabama. He earned a bachelor's degree from Vanderbilt University in 1970 and master's and doctoral degrees from the University of Chicago, in 1972 and 1976 respectively.
Before coming to Philadelphia, Plosser was the John M. Olin Distinguished Professor of Economics and Public Policy and director of the Bradley Policy Research Center at the William E. Simon Graduate School of Business Administration at the University of Rochester, where he also served as dean from 1993 to 2003. He was also a senior research associate at the Rochester Center for Economic Research in the university's College of Arts and Sciences, and a research associate at the National Bureau of Economic Research in Cambridge, Massachusetts. In addition, Plosser has been a visiting scholar at the Bank of England and the Federal Reserve Bank of Minneapolis. Plosser was also the co-editor of the Journal of Monetary Economics for twenty years....
....MUCH MORE
His undergraduate degree was in engineering (cum laude with honors) and his first advanced degree was a U.Chicago MBA before his Chicago econ. Doctorate. Interesting cat.
