I absorbed the government sponsored enterprise (GSE) doctrine like any other MBA student. These twins existed to provide liquidity to an otherwise illiquid market in real estate, right? Those millions of mortgage payments aggregated into pools would provide regular income for anyone who bought a Freddie or Fannie security, right? Hey, it all looked so brilliant. What could go wrong? Everything could go wrong, and it did.
People with no assets or income got loans they could never pay back to buy homes they did not need. Bankers packaged these loans into securities that they knew Fannie and Freddie could resell to sucker investors. Policymakers kept the carousel ride going because making McMansions available to slobs was good PR and got votes. Everybody messed up big time and America is poorer for it all.
The Fed is now the buyer of last resort for MBS. Reinvigorating the private investment market for all of the garbage on its balance sheet is the only thing standing between the US and hyperinflation. The thing you need to remember is that investors who buy whatever the Fed has to sell will counteract its monetary stimulus and force up real interest rates. Maybe that's the big plan after all. You buy the MBS, Fannie and Freddie shut down, rising mortgage rates make your next home unaffordable, and the Fed's loose monetary policy is neutralized so the economy can resume its controlled slide down through stagflation to a lower but sustainable level of activity. Eventually the MBS either disintegrates when its underlying mortgages go into foreclosure or its principal value is eroded from persistent inflation. It's all so brilliant I wish I'd thought of it myself. Wait a minute . . . I just did.