Fed Actions are Creating Federal Default Risk
Today (March 11th) the Federal Reserve announced it would lend as much as $200 billion of Treasury notes in exchange for debt including private mortgage-backed bonds (which have been crashing in value as of late) to try to avert a flight from the securities that were expanded to an unprecedented degree during the recent housing bubble. The Fed is providing this unique shot of liquidity in hopes of stemming the relative carnage recently being observed in the housing and mortgage markets. Upon announcement of the strong shot of liquidity to banks’ and brokers’ balance sheets, the American stock markets surged. Today the Dow Jones Industrial Average rose by over 400 points.
Along with previous announcements of another $200 billion in various forms of Federal Reserve stimulus to the credit markets and banking system, this new form of stimulus is creating a form of stealth nationalization of credit market risk. Previously, the Fed only accepted treasury securities in exchange for cash on a short term basis. Now they are accepting lower quality securities in exchange for treasuries. Certainly, many self-interested banking institutions will line up to secure the financing options provided by the Fed.
Although these measures are being presented as acts to save the crashing credit markets in the United States, and therefore the currently credit-addicted U.S. economy, all this amounts to is a transfer of risk from the nation’s private banks to the taxpayers through the acceptance of lower-quality assets into the Federal Reserve balance sheet. The risk does not disappear from the system, it is simply passed around like a hot potato. Right now, as usual, the U.S. taxpayer is being handed a circumstance where he or she will be much more likely to be forced to foot the bill.
As a result, credit default swaps, a form of quasi-insurance on fixed income securities, now show that the debt of the United States is more at risk than the debt of its counterparts in Germany. Bloomberg reports on this new reality. Essentially, market participants are now viewing investment in the United States as more risky than investment in comparable German securities.
Quoting the Bloomberg article:
“The U.S. government is not immune from the consequences of the credit crisis,” said Fabrizio Capanna, BNP’s head of high-grade corporate trading in London. “Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”
Along with a crashing US Dollar (Federal Reserve Note), this activity is pointing to growing global awareness of the decadence of the collective balance sheet of the United States government as well as the burden that is being placed on American taxpayers.
As usual, the average individual citizen is being attacked to subsidize the risk that was foolishly taken on by greed-driven investors of many stripes, from bankers, to investment pros, to hedge fund managers, to over-leveraged home buyers, to mortgage lenders and pension funds. When all is said and done, the risk is transferred out of the hands of those who took it and into the hands of the collection of individuals who lived within their means and prudently avoided undue risk.
What is now happening is that the world is beginning to wake up to the reality that American policy makers are debasing the balance sheet of the country in order to secure the safety of a politically well-connected group. Given the unfairness, immorality and impracticality of the current situation, as well as the inherent propensity of the Federal Reserve System to encourage such behavior, the only sensible answer is to dismantle the intellectually bankrupt Federal Reserve System, end the fiat currency monopoly and move towards the sound dictates of free market credit, banking and currency issuance. The federalized cartel of such has been an unmitigated disaster.
Filed under: Politics, Social Mood, Economics
Excellent piece my sagacious friend.
Can’t someone file a case or something against this move by the Fed to accept these securities?
I would think so. We need more united activity amongst concerned taxpayers and normal citizens. Right now the rug is being pulled out from underneath us for the benefit of people who made bad decisions and it is really undermining our future. If we don’t begin to act more aggressively to turn the tide against such insanity, we will rapidly find ourselves boxed in the corner. I cannot tell whether our policy makers are just really stupid or ill intended and greedy or all of the above. However it goes, common Americans need to act to save our country and our own selves.
This sickens me, really. No MSM outlet is reporting the fact that WE, the taxpayers, are funding this 200B “infusion.” Kemp, I agree, we need to act and get involved, but how? Writing your reps a letter? They don’t care - they are a part of the problem more often than not. What is a viable way to get some momentum behind a movement to stop this kind of thing from happening?
I think awareness is increasing. I do not know if organizations such as the National Taxpayers Union are looking into issues such as these. Needless to say, such an organization likely has its hands full. One resource I would highly advise becoming acquainted with is www.downsizedc.org They are providing quality work in terms of cutting back government largess. As far as the Fed goes, we have an uphill battle, but education is one major key. As far as an explicit strategy, I do not know where one would begin.
How, indeed!
Attend the March on Washington on June 21, 2008.
www.revolutionmarch.com
Yes, the march and associated ideas and movements are certainly a great thing to be a part of. Thank you for spreading the word here.
I have dugg this story. Add yours, so it gets more exposure:
http://digg.com/business_finance/Fed_Actions_are_Creating_Federal_Default_Risk
The Fed cannot defraud the Public with this fraudulent conveyance of contract obligations based on private debts. The Attorney General must indict the Fed’s individuals committing these numerous felonies. THE PRESIDENT IS THE ULTIMATE CO-CONSPIRATOR IN THIS MASSIVE NIXONESE SERIES OF CRIMINAL LOAN CONVEYNCES. A federal indictment will be simple to do.
The Fed is an unconstitutional and unlawful creation of the 1913 Congress. See Clayton antitrust Act, the Mann Act, fiat money used across state lines to acquire unlawful services. “Only Gold and Silver “are “Lawful Money” to satisfy “lawful debts” see Constitution of the United States. Governor Spitzer paid nothing for his “fun” using fiat money.
This is excellent news for me, because I have a lot of debt. Since the Fed has the printing presses at full blast, my debt is mattering less and less every day. Thanks so much Bernanke. In this country, being in debt is truly a great thing, while worthless green confetti “notes” are the worst asset to hold on to.
Any time “being in debt is truly a great thing” you know your economy/society is in serious red alert danger of heading to collapse. Let the record be noted.