Bernanke's Trillion Dollar Parlor Trick

The American Enterprise Institute is helping the Federal Reserve develop a strategy to dump $1.25 trillion in mortgage-backed garbage on the U.S. taxpayer. If the toxic transfer goes forward, the losses will be greater than all of the other bailouts combined. This is really big and it will require public vigilance to make sure the plan does not succeed.

There's nothing fancy about the AEI's strategy; it's a straightforward "no frills" ripoff. Bernanke buys the toxic assets and non performing loans from the banks (which he's already done) and then transfers it to the GSE's (Fannie Mae and Freddie Mac). It's that simple. The Fed merely acts as a middle man to create a paper-trail long-enough to confuse the public about what's really going on. And, what's going on is another sleazy looting operation. 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 dumping the red ink on the public would have "several desirable features." Indeed. It would move the bank's private losses off the Fed's books and onto Freddie and Fannie's "where it belongs". That would remove the Fed from any further obligation.

Naturally, the Fed will need a way to cover its tracks, so the AEI recommends that they ratchet up the fear of inflation. That said, we can expect the Fed to mobilize its allies in the media to launch a public relations campaign that focuses on the imminent (and imaginary) threat of hyperinflation. That will create the diversion Bernanke needs to carry out his trillion dollar sludge-dumping operation.

According to the Wall Street Journal, Fannie and Freddie's total debt outstanding, at the end of 2009, was already a whopping $8.1 trillion, which is slightly higher than "the $7.8 trillion in total marketable debt outstanding for the entire US government." The off-balance sheet debts of the GSE's have mushroomed since the beginning of the financial crisis, because the banks and other financial institutions have used the two mortgage giants as a toxic recycling center for their sour investments. Bernanke's ginormous transfer of red ink just follows that same pattern.

It's a shame that congress can't figure this stuff out. As an agent of the big banks, Bernanke is merely acting as one would expect. He saved the banks from nationalization and kept their political and financial power intact. He also usurped congress's authority over the purse-strings by purchasing the notorious toxic assets and dabbling in fiscal policy. Now he's putting the finishing touches on another behemoth swindle so he can clear the Fed's books and resume the arduous task of bubblemaking.