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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