In another excellent piece from Paul Kasriel, you can read that
The recently-released flow-of-funds data from the Fed for the first quarter show that U.S. commercial banks continued to increase their relative exposure to the mortgage market....mortgage-related assets accounted for 60% of U.S. banks’ total earning assets – a post-WWII record high.
The banks purchase this credit through mortgage-backed securities which have been underwritten by Fannie and Freddie, the government "sponsored" housing finance enterprises, who have surgically removed the default risk from these bonds, courtesy of their government guarantee. So banks are in a convoluted sense recycling government-backed debt from by borrowing at the rediscount rate and purchasing these securities. Kasriel closes:
Leverage is wonderful when the price of the levered asset is going up; it is a bear when the price of the asset starts to fall. Excessive “counterfeit” central bank credit is the catalyst for leveraged asset price inflation. The withdrawal of leveraged counterfeit central bank credit is the catalyst for asset price depreciation.
