First, some excerpts from Mike Whitney's excellent article at http://informationclearinghouse.info/article23214.htm click click here
The Fed has complete control over monetary policy and, thus, the country's economic future. Bernanke doesn't even pretend to defer to Congress anymore. The $13 trillion the Fed has committed to the financial system since the beginning of the crisis -- via loans and outright purchases of mortgage-backed garbage and US sovereign debt -- was never authorized by Congress. In fact, the Fed stubbornly refuses to even identify which institutions got the "loans," how much the loans were worth, what kind of collateral was accepted for the loans, or when the loans have to be repaid.
In truth, the loans are not loans at all, but gifts to the industry to keep asset prices artificially high. Asset prices are kept artificially high so that the entire financial system does not come crashing down. To wit:
In an analysis written by economist Gary Gorton for the Federal Reserve Bank of Atlanta's 2009 Financial Markets Conference, he states:
"All told, more than $20 trillion in securitized debt was sold between 1997 and 2007."
$20 trillion! How much of that feces paper -- which is actually worth just pennies on the dollar -- is sitting on the balance sheets of banks and other financial institutions just waiting to blow up as soon as the Fed asks for its money back?
The Fed's lending facilities are designed to pump liquidity into the system and inflate another bubble by generating more debt. Unfortunately, most people accept Bernanke's feeble defense of these corporate-welfare programs and fail to see their real purpose. An example may help to explain how they really work:
Say you bought a house at the peak of the bubble in 2005 and paid $500,000. Then prices dropped 40% (as they have in Calif) and your house is now worth $300,000. If you only put 5% down ($25,000), then you are underwater by $175,000. Which means that you owe more on the mortgage than your house is currently worth.
And this is essentially what has happened to the entire financial system. The equity has vaporized, so institutions are using dodgy accounting tricks instead of reporting their real losses. It's as if Bernanke came along and gave you a $175,000- no-interest, rotating loan so that no one would know that you are really busted. Now you can continue spending just as you had before, maintaining the same life style as before "" even though in secret you are really still busted. Not bad, eh? And this is, in essence, what the big lending institutions are doing. It is a charade to conceal the fact that a large portion of the nation's financial institutions are insolvent and propped up by state largess. But there's more.
Now that Bernanke has given you $175,000- no-interest, rotating loan, you expect that eventually he will ask for his money back. Right? So your only hope of saving your home, in the long run, is to engage in risky behavior, like dabbling the stock market. It's like playing roulette, except you really have nothing to lose since you are underwater anyway.
This is exactly what the financial institutions are doing with the Fed's loans. They're betting on equities and hoping they can that way avoid the Grim Reaper.
Here's how former hedge fund manager Andy Kessler summed it up last week in the Wall Street Journal: "By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market, but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradeable assets."
Bernanke's back is against the wall. The only thing he can do is print more money, shove it though the back door of the stock exchange, and keep his fingers crossed. The rest (hiding the terrible truth from us) is up to CNBC and the small army of media cheerleaders.
Yes there is some truth to the claim that Bernanke saved the financial system from a Chernobyl-type meltdown. But that doesn't change the underlying reality:
The economy is now balanced on the rickety scaffolding of the dollar. As the Obama stimulus wears off, the rot in the economy will become more apparent. Household red ink is at record highs, so personal consumption will not rebound. That means US assets and US sovereign debt will become less attractive. Foreign capital will flee. The dollar will lose a lot of its value in comparison to other currencies. Ever fewer investors will be inclined to buy our Treasury certificates, and the return offered to those who purchase them will have to be increased. But this will drive up interest rates in the US, causing our recession to ramp up worse than ever.
In its role as the policy arm of the big banks and brokerage Houses, the ultimate task of the Fed is to continue shifting wealth from one class to another. And it succeeds at that task admirably. http://informationclearinghouse.info/article23214.htm click here