By ALAN FARAGO /
A week ago, on the day President Bush disavowed government
intervention in financial markets, the Federal Reserve announced the
fruit of its weekend labor: essentially guaranteeing hundreds of
billions in toxic financial derivatives owned by banks. Money
laundering has become the de facto standard of Federal Reserve policy.
The financial press has been filled with praise for the US government
rescue of Bear Stearns, one of the worst offenders of reason and logic
in the issuance of securitized mortgage debt. You have to turn to
blogs to get a sense of the malfeasance.
Excerpt from the Hussman Funds' Weekly Market Comment (3/24/08)
regarding the Fed's involvement on JPMorgan's (JPM) deal to buy out
Bear Stearns (BSC):
In effect, the Federal Reserve decided last week to overstep its legal
boundaries =AD going beyond providing liquidity to the banking system
and attempting to ensure the solvency of a non-bank entity.
Specifically, the Fed agreed to provide a $30 billion "non-recourse
loan" to J.P. Morgan, secured only by the worst tranche of Bear
Stearns' mortgage debt. But the bank =AD J.P. Morgan =AD was in no
financial trouble. Instead, it was effectively offered a subsidy by
the Fed at public expense. Rick Santelli of CNBC is exactly right. If
this is how the U.S. government is going to operate in a democratic,
free-market society, "we might as well put a hammer and sickle on the
flag."
What is a "non-recourse loan"? Put simply, if the homeowners
underlying that weak tranche of debt go into foreclosure, they will
lose their homes, and the public will lose as well. But J.P. Morgan
will not lose, nor will Bear Stearns' bondholders. This will be an
outrageous outcome if it is allowed to stand.
=2E.. =AD it's a picnic for insiders, bought and paid for through the
abuse of public funds by government officials too unprincipled even to
recognize the abuse. The only good thing about this deal is that it
buys time while principled ways of busting and restructuring it can be
settled.
At a moment in history when the US treasury is hemorraging ($5000 per
second in Iraq), the Bush White House is setting up to do something
that can be understood only through a corrective lens that takes every
sighting and reverses it: the party of laissez faire, free markets and
minimal regulation sup****ts the costliest nationalization of industry
in US economic history.
Last week, in addition to rescuing Bear Stearns, the shadow financial
system intervened in metals and commodity markets-- beating down
anxiety indexes more sharply than at any time in the past half
century. At the same time, the coordinated release of quarterly
re****ts whose numbers ever so slightly "exceeded expectations" was
enough justification--along with massive buying by US government
operations that can only be faintly glimpsed--to send world stock
markets back upwards.
Various metaphors have been used to describe US government
intervention in the markets, like band-aid solutions to cure a gaping
wound. In fact, the US government's attempts to calm investor anxiety
at the observable financial disarray is like using chemical foam at
the surface to kill a deep-burning coal fire.
There was more micromanaging of the news cycle by the money launderers
this morning:
March 24 (Bloomberg) -- Forget lower interest rates. For the Federal
Reserve to keep the financial markets from imploding it needs to buy
troubled mortgage bonds from banks and securities firms, say the
world's biggest Treasury investors.
Even after cutting rates by 3 percentage points since September,
expanding the range of securities it accepts as collateral for loans
and giving dealers access to its discount window, the Fed has been
unable to promote confidence. The difference between what the
government and banks pay for three- month loans doubled in the past
month to 1.92 percentage points.
The only tool left may be for the Fed to help facilitate a Resolution
Trust Corp.-type agency that would buy bonds backed by home loans,
said Bill Gross, manager of the world's biggest bond fund at Pacific
Investment Management Co. While purchasing some of the $6 trillion
mortgage securities outstanding would take problem debt off the
balance sheets of banks and alleviate the cause of the credit crunch,
it would put taxpayers at risk.
The US taxpayer is about to be force fed bad mortgage debt, that
honest people didn't ask for-- created by Wall Street where incomes
average $387,000 (NY Times, March 24, 2008 "With Economy Tied to Wall
St. New York Braces for Job Cuts") and fostered by a culture of
corruption rippling all the way down through mortgage brokers,
appraisers, and local zoning officials for whom the hard currency of
fraud is as likely Bahamian poker chips as dollars.
Poor America.
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Alan Farago of Coral Gables, who writes about the environment and the
politics of South Florida, can be reached at alanfarago@[EMAIL PROTECTED]
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