by Asher B. Edelman
Below is a short letter I sent to the Editor of the Wall Street Journal. In the near future I will be following up with more details and a suggested solution.
TO THE EDITOR OF THE WALL STREET JOURNAL
I read with interest David Enrich’s “Banks Load Up on Mortgages, in New Way”. Sadly, he neglected to mention that these “0 risk” mortgage securities are then delivered to the Fed window where the banks borrow back their investment at ¼ of 1%. As the mortgages are deemed to be risk free and have no reserve requirement, the banks can accumulate an infinite amount of these securities and refinance at the Fed.
Clearly, that allows the banks an infinite return (the difference between ¼ of 1% and the yield on the securities times infinity). The American taxpayer funds this difference! Once again, billions of dollars on top of the twelve trillion already committed to saving the large financial institutions are flowing to those same institutions, the ones who caused the mess.
It would be much more logical if the Fed simply bought these securities. At least, the yield would go to the taxpayers’ account rather than drain it.
It is this type of arrangement that inhibits the banks from direct lending. Why should they lend with a non-risk, taxpayer financed bonanza presented on a silver plate with gold serving utensils?