In a meeting yesterday at the American Enterprise Institute (AEI), a public policy thinktank, the Shadow Financial Regulatory Committee (SFRC) urged quick action to unwind the massive amount of mortgage-backed securities (MBS) held by the Federal Reserve. The Fed program ended last month with $1.2trn in MBS acquired from Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae. The SFRC is arguing that these purchases, coupled with US Treasury Department obligations, is contributing to large amounts of excess reserves being held by banks at the Fed. “[These] associated reserves will ultimately have to be extinguished before they result in a potentially huge increase in bank credit and money supply, which could lead to a serious inflation problem,” said the SFRC in a statement. The SFRC is made up primarily of academics and financial advisers. They conclude that the best option for combating this potential inflationary threat is to capitalize on the conservatorship status of government-sponsored entities Fannie and Freddie, since GSE debt is guaranteed by the United States. “The Treasury could simply issue Treasury debt to Freddie and Fannie with the offsetting accounting transaction being an IOU to the U.S. Treasury,” the SFRC recommends. “Freddie and Fannie could then swap the acquired Treasury debt for MBS held by the Federal Reserve.” The result would put these assets back on the GSE’s books, thus freeing the Fed from the Treasury and related fiscal policies, in order to focus on its monetary responsibilities. The end result, in this scenario, would be a de-politicized Federal Reserve. Other options, such as repurchase agreements, only temporarily reduce the debt burden on the Fed, they say. Also, the private market, for selling these securities off, is relatively thin given the size of the MBS purchases. Under this last option, “sales would have to be gradual to avoid raising mortgage rates that might adversely affect the housing market,” the SFRC said. Write to Jacob Gaffney. The author holds no relevant investments