1) All this new cash was supposed to enable the global banks to lend to desperate consumers and cash-starved businesses. But the money did not go out as loans. So where did the money go?
2) Most of it was deposited, by the big banks, back into the Fed, there to be proclaimed as excess reserves. The Fed had purchased trillions of dollars worth of toxic waste, and this "money" (now merely entries on the Fed's books) that these global banks had deposited, was treated by the Fed as "Excess Reserves." This provided the ILLUSION that the banks were cash-rich and that they would be able to lend out trillions in loans. But they did not loan out anything like that amount. Why not? Because the global banks still secretly have trillions of dollars worth of remaining toxic waste on their balance sheets. They are still insolvent under the fractional reserve banking laws. However, the public must not be allowed to know this because if they did, it would trigger a massive run on all global banks.
Bernanke, the US Treasury, and the global central bankers have consequently all been praying that, given enough time (their estimation was 12 to 18 months), the housing market would recover and that housing asset prices would again rise to the levels they were at before the crisis, thus magically transforming the banks' remaining toxic waste into real, salable assets. .
Why this hope and/or belief is pie in the sky
Say a house was purchased for $500,000. The borrower has a mortgage of $450,000, but the salable, market value of the house is now $200,000. Now multiply this discrepancy between 450K and 200K by the millions of houses sold between 2000 and 2008 and you will appreciate the extent of the financial black-hole the big banks (and thus we as a nation) are in. There is no way that any of the global banks can get out of this gigantic mess unless housing prices come back to what they were. And despite the prayers of Bernanke and the owners of the big banks, those prices are not coming back to what they were. In addition, there is no way that the Fed and the global central bankers, by way of Quantitative Easing (QE), can continue to buy such toxic waste without tipping their hand to the public and exposing as a lie the claim that these banks are solvent.
To fully bail out the big banks, the Fed would have to QE up to $20 trillion at a minimum. But neither the Fed nor any other central banker could "create such a huge amount of money out of thin air" without arousing suspicion, and complete panic, among sovereign creditors, investors and depositors. It would be tantamount to officially declaring that all the big banks are BANKRUPT!
Problem is, there is no other solution, in the short- or middle-term, except another bout of quantitative easing, i.e. QE II. However, given the above caveat, QE II cannot exceed the amount of the previous QE without opening the proverbial Pandora's Box just described.
But it is also a given that the Fed will embark on QE II, for if the Fed did not purchase additional toxic waste, the big banks (faced with mounting foreclosures, etc.) would fall short of their reserve requirements. Hence the dilemma.
You will also recall that the Fed, at the height of the crisis, announced that interest will be paid on the so-called "excess reserves" of the big banks (which these banks had deposited in the Fed), thus enabling these banks to "earn" appreciable amounts of interest. So what we have here is a merry-go-round of monies moving from the right pocket to the left pocket at the click of a computer mouse.
To summarize
The Fed creates money out of thin air, uses it to buy toxic assets from the big banks, and a good portion of this money is then returned by the big banks to the Fed, as deposits, where it earns large amounts of interest for the big banks, courtesy of the American tax payer. The rest of the money received from the Fed is used by these banks to gamble (successfully so far) in the stock and derivatives markets. And so it is that the big banks declare record profits even though their books are still (secretly) replete with the remaining toxic waste (which they expect to disappear when housing values return to the levels they had achieved prior to the mortgage market meltdown and housing value crash).
The big banks get rid of some of their toxic waste (claiming and receiving full value), and then actually get paid for unloading that toxic waste (paid via the interest payments they receive from the Fed, for the deposits into the Fed that they make, using the money they received from the Fed for the toxic waste). Additionally, some of the "monies" paid to the big banks by the Fed are used by these banks to purchase US Treasury bonds (which also pay interest), which in turn helps the US Treasury to continue its deficit spending (thus allowing the US to continue living off of borrowed money). Who is ultimately going to have to pay for all this borrowing? Why the increasingly impoverished and beleaguered U.S. taxpayer of course. And so it is that this scam should be called out for what it is: THE BAILOUT RIP-OFF OF THE CENTURY.
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