Toddsterpatriot
Diamond Member
Interesting claim. How does the Fed purchase of a Treasury or MBS reduce bank liabilities?
Because the fed didn't just buy US treasuries with money created via QE:
Under "Assets" see the $1.769 trillion in Mortage backed securities?
When the Fed purchased them they were worth less than banks we're liable for. In other words a $300k mortgage on a property now worth $200k. When the borrower defaulted on this particular mortgage the bank's asset for $300k was not worth $300k, it was now worth $200k. If the balance on the loan was more than $200k (let's say $250k, because the borrower made a few years of payments) then the bank was out $250k.
The Fed swoops in and adds $250k in reserves to the bank's account and removes the mortgage from the bank's ledger. The net is the bank has removed the negative equity of $50k and transferred it to the Fed. The bank's assets increase by $50k.
Of course, banks did this as part of MBS's (not individual mortgages) that were worth 1's 10's or 100's of millions, so the numbers would have been much larger, but everything else is the same.
The Fed didn't buy any bad debt.
It purchased MBS' for more than they were worth at the time they purchased them.
What is "negative equity"?
Negative equity is when the value of an asset falls below the outstanding balance on the loan used to purchase that asset. Negative equity is calculated simply by taking the value of the asset less the balance on the outstanding loan. - Investopedia
You are much more patient with Toodles than I can muster, but I fear he may be trolling on this thread a bit, so don't get sucked in to deep.
Is pointing out your errors.....trolling?