Don't Call It Capitalism: The Fed's $8 Trillion Hoard of Financial Assets
By Ryan McMaken - 01/19/2023

It’s a sure bet that as the economy worsens, unemployment surges, foreclosures rise, defaults climb, and economic misery ensues, we’ll be told it’s all capitalism’s fault. The question one must ask, however, is, “What capitalism?”

The claim that “too much” capitalism drives every economic calamity is standard among anticapitalists on both the left and the right. They have many bullet points claiming government programs and government spending are everywhere retreating while free-market capitalism is experiencing a resurgence. This can be easily shown to be empirically false. Evidence can be found in everything from the continual flood of government regulations to rising per capita taxation and spending to the growing army of government employees. That’s all in the United States, mind you, the supposed headquarters of “free-market capitalism.” We might also point to how the US welfare state, including the immense amounts of government spending on healthcare and pensions, is on a par with European welfare states in terms of size. The supposed lack of social benefits programs in the US has long been a myth. The trend in spending, taxation, and regulation is unambiguously upward.

In recent years, though, one additional indictor of just how little capitalism is actually going on has surfaced: central banks around the world are buying up huge amounts of financial assets in order to subsidize certain industries, inflate prices, and generally manipulate the economy. This is certainly true of the American central bank, the Federal Reserve.

How the Federal Reserve Came to Dominate Financial Asset Markets

While the Fed has long bought government debt in its so-called open-market operations to manipulate the interest rate, wholesale buying of financial assets began in 2008. This included both US government Treasurys and—in a new development—private-sector mortgage-backed securities (MBSs). This was done to prop up banks and other firms that had bet on the lie that “home prices always go up.” The value of mortgage-backed securities was falling fast, so beginning in 2008, the Fed bought up MBSs to the tune of $1.7 trillion. That was all before covid.
... in 2020: the federal government began a spree of deficit spending, and the Federal Reserve hoarded even larger amounts of assets, bringing totals to new record-breaking highs.

The MBS portfolio climbed to $2.7 trillion.

These sorts of volumes of assets are not an insignificant part of the overall market, either. Since 2020, the Fed’s MBS stockpile has equaled at least 20 percent of all the household mortgage debt in the United States. In early 2022, Fed-held MBS assets peaked at 24 percent of all US mortgage debt, but they still made up over 20 percent of the market as of late 2022.
One can only speculate as to the full extent to which markets are distorted by the central bank holding one-fifth of mortgage debt, but one thing is for sure: one cannot say that this is any sort of “capitalism” at work.

The story is similar with Treasury debt, and the timeline is largely the same as with the MBS assets. The Fed bought up about $2.5 trillion in US government bonds from 2008 to 2015. An attempt at scaling this back was aborted when the economy proved to be too fragile in late 2019. Then, the Fed gorged on Treasury debt in 2020 and 2021, bringing its government bonds total to nearly $6 trillion.

As a percentage, the Fed’s share of all Treasury debt has totaled more than 15 percent since 2020. It peaked at 19 percent in 2021. All foreign holders combined hold 33 percent of Treasury debt. This makes the Fed, by far, the largest domestic holder of US government debt: the Fed holds nearly 40 percent of all domestically held Treasury debt, putting it far ahead of entire sectors, such as mutual funds, which hold “only” around 22 percent of this debt.
Of course, it would be absurd to call this situation anything resembling even “mostly” laissez-faire, let alone a free market. Imagine if a federal government agency—which is all the Fed is—owned 10 percent of all supermarkets or 10 percent of all Wal-Marts or 10 percent of all stocks. We would say that the agency in question possessed an enormous amount of power to move and manipulate markets as it willed.