The Arbitrage Machine Revs Up
In April, we alerted you to a Cleveland Fed study arguing that the GSEs, especially the Home Loan Banks, fuel billions in profitable arbitrage trading by foreign banks. A new Fed staff study uses confidential data to reach a still more damning conclusion. The Fed can’t do much about GSE lending, but it sure can do something about foreign-bank demand for it. If it does, the FHLBs will need a new gig.
