Since QE3, the Fed's program of quantitative easing now involves two separate bond purchases: (1) government bonds, and (2) mortgage-backed securities. This article does a good job of explaining the first part, but doesn't even mention the second. The whole purpose of having the Fed buy MBS debt was to prop up the value of securities that were backed by mortgages on real estate that couldn't be "written down" at all. In other words ... if I buy a home for $500,000 with a $400,000 mortgage and I immediately default on the loan, then the bank takes possession of the home. If the home is only worth $300,000 after my default, then I am out my $100,000 and someone else(the bank or the holder of the security instrument that was created and backed by the mortgage) is out another $100,000. But the problem here is that someone (the prior owner) has the original $500,000 that I paid for the home. I have said for several years now that the whole purpose of having the Fed buy the MBS that was created out of my $400,000 was to restore the original value of the mortgage and "legitimize" the dollars that had been created out of thin air when I took on the mortgage.
Why is thaat a "problem"?
I have said for several years now that the whole purpose of having the Fed buy the MBS that was created out of my $400,000 was to restore the original value of the mortgage [agreed]
......and "legitimize" the dollars that had been created out of thin air when I took on the mortgage.
Not sure what you mean here.