Collateral in lending to eligible financial

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collateral in lending to eligible financial institutions, but the current range under FRA includes market debt and securities issued by the GSEs. 41 In essence, the Fed has substantial flexibility in expanding its interventions in GSE-related mortgages, and it has employed this flexibility by engaging in substantial purchases of the same. These purchases by the Fed have amounted to about 8% of the economy’s gross domestic product (GDP) and have become a central instrument of its “quantitative easing” monetary policy. The Bank of England followed a similar policy in the United Kingdom. Through these purchases, as well as massive purchases of Treasury debt, the Fed has kept long-term Treasury and mortgage rates historically low. The basic idea behind quantitative easing is that by reducing the supply of a set of securities floating around in the economy, the central bank can raise their prices, making those securities more attractive for investors to hold. The rise in prices can relax investors’ financing constraints, allowing them to hold with ease other assets as well -- e.g., corporate bonds -- and in turn raise their prices too. 42 In August 2010, the Fed announced its intention to avoid any “passive” unwinding of this program by purchasing Treasury debt with the monies that become available as its MBS portfolio matures due to normal repayments and prepayments. Chairman Bernanke also offered further quantitative easing as
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78 its preferred intervention tool in case the Federal Reserve needed to stimulate the United States economy further (given that nominal interest rates are at the “zero bound”). Figure 6-1: Securities Holdings of the Federal Reserve Source: Federal Reserve Statistical Release (Table 3: Factors supplying reserve balances: detail for securities held outright); all numbers in millions of dollars The purchases have more than doubled the Federal Reserve’s balance sheet from August 2007 to August 2010. They are an order of magnitude larger than the Fed’s involvement in the rescues of Bear Stearns, AIG, and Citigroup. To provide a perspective: The Fed owns in its “Maiden Lane” portfolios $80 billion in assets ($30 billion from Bear Stearns and $50 billion from AIG), and it has guaranteed $306 billion of Citigroup’s assets and $118 billion of Bank of America’s. Taking account of the various first-loss pieces that were retained by the rescued institutions (or by JPMorgan Chase in the case of Bear Stearns) and some additional risk- sharing in the cases of Citigroup and Bank of America, the Fed’s net maximum exposure is
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79 around $420 billion, of which only $74 billion is on balance-sheet -- that is, purchased in exchange for reserves. While the public ire against the Fed is driven by its actions taken with respect to these private firms, the Fed’s involvement here has been relatively small compared to the role that its balance sheet is playing for the GSEs.
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