Some excerpts I found significant:
Is there a potential bond bubble now? Absolutely.
If the Fed weren’t buying and if the Chinese achieved their trade goal, ceasing to have a current account surplus (as they have said in their five-year plan) … they will not have the ability to buy our bonds. In fact they would have to sell bonds if they want to go around buying other things.
In a similar fashion, if the Japanese economy begins to pick up, they could also be in a position where they’re no longer buying our bonds.
Put all that together, and you could see interest rates returning to more normal levels. This spills over into equity markets, and if longterm bonds go up, mortgages go up, and the housing market gets hurt.
We would all be the victims.
If they’re sitting there holding longterm bonds, the Fed is at risk of a capital loss. In a sense, that doesn’t matter. It’s a paper loss, they haven’t sold it, they’re just holding it — so I guess in that sense, there is no loss.
But their opponents in Congress will say the Fed just lost $200 billion and in an accounting sense, that will be true. It’s an extra risk that the Fed takes about its own longterm authority.
This is worth a read, Captain Rick
Martin Feldstein, an economics professor at Harvard, is an adviser to Republican nominee Mitt Romney. He served as the chairman of the Council of Economic Advisers under President Ronald Reagan.
We spoke with him at the Federal Reserve’s economic symposium in Jackson Hole, Wyo., shortly after Ben Bernanke seemed to make a case for more stimulus from the central bank. Here’s what Feldstein said were some of the potential risks:
The risk that worries me most is the risk about the exit strategy.
We don’t have a clear idea of how far they would have to raise rates to deal with banks that have more than a trillion dollars of excess reserves deposited at the Fed. When the time comes, they may have to raise rates a lot, and at that time unemployment may be higher than it normally is when the Fed normally wants to raise rates —…
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