FED ALLOWING INSTITUTIONS TO ACQUIRE NEW, PUBLICLY BACKED TREASURY SECURITIES BY USING MORTGAGE BACKED SECURITIES AS COLLATERAL
March 11th, 2008How many chainsaws can the jugglers keep in the air at once?
This is just creating another chunk of publicly backed credit to enter into a balance sheet while the toxic waste (now being referred to as “collateral”) smolders away at the Fed.
In other words, the Fed is about to became the buyer for $200 billion worth of this crap that everyone is pretending is AAA rated. “Fed,” in the previous sentence means, U.S. Dollar holders, Canadian Dollar holder, Pound Sterling holders, Euro holders and Swiss Franc holders.
Do you see the swindle!? The firms get to pledge the bogus AAA rated Fannie/Freddie paper in order to get these shiny new TSLF ones and zeros to pad their reserve requirement books. Now, take a look the following Reuters piece: Wells Fargo: Over 200 Markets Face Housing Trouble:
Wells Fargo & Co, the second-largest U.S. provider of home loans, has identified more than 200 troubled housing markets nationwide, showing how the mortgage crisis has spread beyond a few select U.S. regions.
In a February 25 document sent to mortgage brokers, San Francisco-based Wells Fargo said it had identified “soft,” “distressed” or “severely distressed” housing markets in 24 states and Washington, D.C. Most of the markets are counties, while a handful are cities.
Blown Mortgage hosts the Wells Fargo document. Look through those troubled locations.
How much of that AAA rated paper, excuse me, “collateral,” is made up from crap in those Severely Distressed, Distressed and Soft columns… That’s A LOT of territory!
But the Fed is going to take that stuff as “collateral” while issuing the firms even more credit… As home prices fall, inventory piles up and people go bankrupt.
Via: AP:
“Pressures in some of these markets have recently increased again,” the Fed said in a statement. “We all continue to work together and will take appropriate steps to address those liquidity pressures.” The other banks involved are the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.
The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers — big Wall Street investment firms and banks that trade directly with the Fed — with 28-day loans of Treasury securities, rather than overnight loans. They would pledge other securities — including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannnie Mae and Freddie Mac — as collateral for the loans of Treasury securities.
Research Credit: Scott
Yeah, well, we’re in the final stages of what the great economist Ludwig von Mises (1881-1973) termed a “crack-up boom”. He had described in detail, in _Human Action_, all the phases of a classic inflationary cycle. He wrote: “The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.” “If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.” “The final outcome of the credit expansion is general impoverishment.” “Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.” “Accidental, institutional, and psychological circumstances generally turn the outbreak of the crisis into a panic. The description of these awful events can be left to the historians.” http://www.mises.org
Unfortunately for all of us, Mises and the Austrian school of economics were largely ignored, and John Maynard Keynes (who famously said, “In the long run, we’ll all be dead”) supplied the theoretic ammo for governments to spend and inflate endlessly. So, in short, we’re screwed.