There are two very relevant statements in there that contradict the argument and put a nail in the idea.
1) The Fed is trading some U.S. Treasurys for mortgage-backed securities to arrest the decline in prices that is pushing up mortgage-interest rates.
These are only temporary trades or swaps. The Fed cannot permanently trade U.S. Treasuries representing it's own assets for junk securities. The bond market would make them pay dearly for this. The swap occurs since the U.S. Treasuries need to be traded back to the Fed at maturity and then the Fed can reinitiate the trade again (likely accepting securities backed by assets of even less value).
2) One big caveat: This works only if assets truly are worth more tomorrow than they'll fetch today.
Who at this point thinks that any lending banks assets will be worth more in the near future than they are today? (Hint: That's why the S&P and Banking Index have been doing so well over the last year!) An even bigger and easier question at this point… Who thinks that the assets backing all of this paper being passed around will be worth more tomorrow than currently? Anyone looking at an ABX, CMBX or CDO spread chart or Case/Schiller HPI can answer this… actually I don't think anyone even has to look anymore!!
The Fed and the Govt' cannot bailout the housing and credit markets at this point without BKing both entities and causing post WWI German-style inflation. Not going to happen! 😉
