The Federal Reserve again loosened its collateral requirements, this time to accept commercial real estate mortgages and mortgage securities, beginning 3/27.
- The Fed’s reckless move to accept mortgage products (when it is an unknown extent of bad mortgages that is precipitating the current global credit crunch) sets the stage for nationalizing the losses and sticking the taxpayer with the bill.
- The insidious tactic allows the Fed to take mortgages at a high, stated value and later “discover” a lower value, the difference being a loss to the Fed but free money to the firms that unloaded the toxic waste onto the Fed.
- Giving out higher value Treasuries in exchange for lower value mortgages also means that the actions would not be “sterilized” (money-supply neutral) but would be “accidentally” inflationary.
- The Fed’s decision also puts the Fed in the absurd position of entering the real estate business. As Jim Rogers quipped, soon Federal Reserve Chairman Ben Bernanke will be flying around in his helicopter to collect rents.
The Fed might as well start accepting Milton Bradley Monopoly boardgame deeds as collateral. I expect citizens to ask Bernanke and their Congressional representatives to pay cash or Treasuries in exchange for printed Monopoly deeds such as Baltic Avenue or St. Charles Place.