Wednesday, May 5, 2010

Mike Whitney: Bernake's "Big Con"

They're back again with the second in the old two step. The final step to bailout the big banks that created all that toxic "securitized" mortgage debt.  

Step two is: stick the taxpayers with another $Trillion$ in worthless paper the Fed (that's a private institution remember) bought from the banks.  

Will they fool congress?  Will they fool the taxpayers?  Let Mr. Whitney explain just how they will. (editor)

The right-wing white paper mill, the American Enterprise Institute, is helping the Federal Reserve to develop a strategy to transfer $1.25 trillion in toxic mortgage-backed securities (MBS) and non performing loans onto the public's balance sheet. Although it's unknown whether Fed chair Ben Bernanke will act on the AEI's recommendations, it does show that the Fed's Quantitative Easing program (QE)--which moved the bulk of garbage assets from the banks to the Fed's balance sheet--poses long-term problems that will need to be addressed. Bernanke never intended to keep these assets any longer than necessary. Now he is actively exploring options for getting rid of them.

Ostensibly, the QE program was designed as the first leg in a two-step process to remove the bad paper from the banks balance sheets and then dump it on Fannie Mae and Freddie Mac as discreetly as possible. So far, Bernanke has been relatively successful in convincing people that he was buying the assets to increase lending, which was clearly never the objective. Quantitative Easing was a fraud from the get-go.

Here's an excerpt from the AEI's web page by the eerily-named "Shadow Financial Regulatory Committee" which explains what's going on:

"Freddie and Fannie have been placed in conservatorship and the Treasury has confirmed that their debt is now guaranteed by the U.S. Government. This means that their debt is essentially identical to Treasury debt. The Treasury could simply issue Treasury debt to Freddie and Fannie with the offsetting accounting transaction being an IOU to the U.S. Treasury. Freddie and Fannie could then swap the acquired Treasury debt for MBS held by the Federal Reserve. This transaction would have several desirable features. It would place housing debt on the books of Freddie and Fannie where it belongs and remove the Fed from financing U.S. housing policy, which is appropriately a fiscal policy and not a monetary policy function. This would also help to re-establish Federal Reserve independence from the Treasury and fiscal policy. Finally, it would free the Fed to device strategies to reduce its balance sheet by engaging in more traditional asset sales in the much deeper Treasury market where the pricing impacts would be smaller and would accommodate a more rapid reduction in excess reserves." ("Mortgage Backed Securities in the Federal Reserve’s Portfolio" Shadow Statement No. 294, American Enterprise Institute)

So, there it is in black and white: the committee believes that the "transaction would have several desirable features. It would place housing debt on the books of Freddie and Fannie where it belongs and remove the Fed" from any further obligation. Naturally, the Fed will need an excuse to justify what-amounts-to another gigantic bailout. The AEI thinks that the fear of inflation will do the trick, and they are probably right. Expect the Fed to mobilize its allies in the media to launch a public relations campaign that focuses on the imminent threat of hyperinflation. That way--when Bernanke dumps more than a trillion dollars of toxic sludge into Uncle Sam's mortgage-recycling center--he'll only be performing his statutory duties to maintain price stability.

There's nothing fancy about the AEI's strategy; it's a pretty straightforward "no frills" ripoff. Bernanke buys the garbage from the banks and then transfers it to the GSE's. No muss, no fuss.

It's a shame that congress can't figure this stuff out. Bernanke is merely acting as one would expect. He's bent-over-backwards to save the banks from nationalization and to keep their political and financial power intact. He's also usurped congress's power over the purse-strings by initiating fiscal policy (in the purchasing of the toxic assets) which is well-beyond the Fed's mandate. Now he's putting the finishing touches on another giant bailout so he can clear the Fed's books and resume the arduous task of bubblemaking.

Is it really that hard for congress to figure out what's going on?