Well the Fed swapping reserves for junk MBS doesn't solve all the issues involving the properties in those MBS. So, it's basically sweeping things under a rug and out of site. No ownership, or legal issues resolved, much less what happens to the properties.
The banks got out of a stick position and didn't make a killing doing it, but now what. Wrap those MBS into a legal black hole until people forget about them?
Believe me, I don't care for the banking system at all(it's adds zero value to anything), or the people that run it, but it's what we unfortunately have, and it's a private, for profit system. The government handed out the money to the wrong end of the economic ladder simply because the banks did not have to lend out anything if they didn't want to.
"Just how is this bad because it's a straight asset swap of reserves for toxic MBS, and no bouses can be paid out."
Maybe your right Upsidown, its not bad, at least not until you need 2 carts of cash to buy 1 cart of groceries. Think this is something that happened in a bygone era? Think again. I witness first hand the bread basket of Africa (Zimbabwe) collapse to the point people now forage for food and the national parks have been hunted to extinction. Just add a few zeros to a dollar every time you go shopping, well then house prices will certainly increase but their relative value will not.
Printing 40 BILLION a month that you don't have. Well, if anyone else does it its considered fraud.
So you're on the hyper-inflation wagon to nowhere? You know as well as I do that the US could never go the way of Zimbabwe or even the Weimar Republic because of the differing circumstances. ALL the debt that we do owe is denominated in our own currency. And, the bond dealers are REQUIRED to bid on our bonds(debt). China? They own about 8% of outstanding debt and is somewhat falling, but the rest is owned by us. Gold prices increasing? Look who's buying it and the percentages and coupled with the hysteria of doom and gloom. We can't go broke, or we aren't revenue constrained, (Greenspan and Bernanke will agree with that, and have)our only negative option is inflation, and we're nowhere near that point with a significant part of our economy not even participating.
Food inflation? Aggregate demand didn't change nor is inflation on the climb, so what is it then.
There aren't going to be any toxic mortgage bonds.
I don't know where you people get this crap from. Mortgages written from 2009 on are extremely reliable. Most of the toxic debt was booked in 2008 and 2009. NONE of the current fed spending will be for 'worthless bonds'.
Neither one of us know the makeup of any of those MBS and the rating of all the bundled mortgages. And, neither of us know when any of those mortages originated within those MBS. It's immaterial anyway.
My main point was after the Fed receives them, then what? Do they then sell or trade them or leverage against them? Do they eventually return to the bank in some type of repurchase agreement?