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Fed to Likely to Intervene in Economy- More Banks Sued by Bond Investors

Written By:
December 11, 2012 at 7:57 PM

Ben Bernanke Deficit Reduction Vote

If all goes as expected on Wednesday, the Federal Open Market Committee will vote to increase its purchase of Treasury Securities to give a badly need stimulus to U.S. economic growth as we enter the new year. The Feds announced after the close of its September policy meeting that it would start buying an additional $40 billion worth of bonds-- starting that same month.

It also left open the possibility that it would take further action if the labor market did not improve.

As we border on a new year, the housing market seems to finally be in recovery with inventories falling across the nation, demand up, a high mortgage refinance applications, more ground-breaking for new homes, and home prices appreciating after five years of decline.

The labor market also has shown slight improvement with the unemployment rate falling to 7.8 percent in September, up slightly to 7.9 percent in October and falling to 7.7 percent in November, according to the latest job situation report.

Feds Efforts Not Creating Jobs

By making its intention known well in advance, the Feds have avoided causing the uncertainty and debate that usually comes prior to an announcement about changes in monetary policy. One of the major criticisms of the Feds other intervention efforts have been their failure to create jobs at the pace many expected. The anemic expansion of the economy has millions of people still looking for jobs.

Ben Bernanke and other Federal Reserve Board members have warned politicians of the damage to the economy that could occur if they fail to resolve the fiscal cliff crisis. If it goes into effect at the beginning of 2013, the economy will suffer massive tax hikes and huge spending cuts in federal programs. The housing market could also go into another tailspin as the country falls back into a double-dip recession.

However, whether the Fed act or not does not depend on how Congress and President Obama resolve the matter.

Working Out Details of New Policy

The president of the Federal Reserve Bank of Atlanta Dennis P. Lockhart, reveal in a recent speech that he anticipated the Fed to continue “use of balance sheet monetary tools will be appropriate and justified by economic conditions for some time, even if fiscal cliff issues are properly addressed.”

Tuesday and Wednesday Federal Market Open Committee meeting will have less debate and more effort at hammering out the details of the new buying initiative, including what instruments to purchase and how much to spend. The Fed will probably discuss how long it should continue its buying program.

Before Wednesday announcement, in addition to the $40 billion a month purchase started in September, they also buy $45 billion in Treasuries each month for a total of $85 billion. The programs have been a key reason for historic low mortgage interest rates and a record volume of mortgage refinances. The Fed does not have any plans to raise interest rates before mid-2015.

Some market analysts believe the Fed should reduce total purchases to $80 billion a month or buy a higher percentage of mortgage-backed securities (MBS).

Banks Sued for Bad MBSs

Investors have picked up the pace of filing lawsuits against the nation’s largest banks for the slew of mortgage bonds that were falsely packaged as AAA quality investments. Many of these investments consisted of subprime mortgage that quickly exploded during the financial crisis in late 2008.

The litigation against the banks includes JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America. The banking industry claims the final settlement amount for the cases could reach as high as $300 billion. This would be on top of the tens of billions paid to settle other mortgage security cases.





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