Sunday, May 4, 2008

AT THE FED, DEBT MAGICALLY BECOMES EQUITY

May 2, 2008

Fed Takes Steps to Add Liquidity



WASHINGTON — The Federal Reserve announced new steps on Friday to help ease tight global credit markets by increasing the size of its cash auctions to banks and allowing financial institutions to put up credit card debt, student loans and car loans as collateral for Fed loans.
The Fed also acted in coordination with central banks in Europe to make it easier for European banks to obtain dollars in currency swaps.
In a terse statement Friday morning, announced just before the government reported that 20,000 jobs were lost in April, the Fed said that it was acting to counter “persistent liquidity pressures” in credit markets in Europe and the United States.
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The analogy is as follows: You have been denied credit at your bank (in this case the Federal Reserve) because you
  • lied about how much equity you had in your house,
  • lied about the value of the house,
  • lied about your income and
  • had an independent appraiser lie (your local bond-rating company) about how good that collateral actually was.
Your bank (the Fed), instead of calling the police and having you jailed for fraud, merely looks wistfully disappointed and asks what else you might offer to back the loan. You squirm uncomfortably in your chair.
"I'm tapped out, guys. My credit cards are all maxed, my kids college loans behind in payments and the same with my car loan. Essentially, I'm busted."
"Well now." Your banker breaks out in a broad grin. "How much do you owe?"
"Fifty grand on six credit cards, another fifty on my two kids college loans and twenty-five on the Mercedes, but it needs a muffler. Probably $125,000, but I lost my job last month and the latest wife is pregnant again."
"No problem. We'll just consider all that debt to be equity. By bank rules, you only need to have 10% liquidity, so we can pimp you a million and a quarter."
"Wow, thanks guys. Now I can get approved for more credit cards, a couple extra houses, dump the old Mercedes and put a down-payment on that plane I always wanted."
Not a fair analogy, you say. My argument is that the next big shoe to drop, failure-wise, is credit card delinquencies. Add that to abandoned student-loans (about to be guaranteed by the Fed) and auto loan defaults, as stressed workers find their income dropping. The Fed is already guaranteeing mortgage portfolios in limited (but expanding) circumstances.
So we are exposed to the embarrassment of watching Ben Bernanke's Federal Reserve expand its willingness to accept collateral it is already guaranteeing. This is collateral that has already been offered.
In any business environment, hiding the fact that collateral has already been pledged against a debt is fraud. If that business fraud crosses state lines in interstate commerce, the fraud is a federal offense and an indictable offense under RICO laws.
For the acronym impaired, RICO stands for the Racketeer Influenced and Corrupt Organizations Act. Thus, what I had long suspected appears to be true.
Our federal government has finally been self-defined as racketeer influenced and corrupt. Not by unsubstantiated opinion, not by scurrilous attack, not by offensive partisan accusation, but finally by its own illegal reach.
Do you suppose there is the slightest possibility of inquiry by mainstream media?

* For more in-depth articles by Jim on Washington at Work, check out Opinion-Columns.com