"Fed" Buys Bad Debt
(Conspiracy Nation, 05/09/08) – It was on March 13th of this year that British journalist Ambrose Evans-Pritchard announced that Ben Bernanke, chief of the “Federal” Reserve, had crossed the Rubicon. The “Fed” began accepting mortgage debt as collateral. “The Rubicon has been crossed,” reported Evans-Pritchard. (“Caesar Bernanke Crosses Rubicon,” http://www.shout.net/~bigred/CaesarBernanke.html)
Then, on May 2nd, just one week ago, we learned the “Federal” Reserve had crossed the Tiber river. The “Fed” began accepting auto-loan and credit-card debt as collateral. (“Jubilee At The 'Federal' Reserve,” http://www.shout.net/~bigred/Jubilee.html)
How this works is, (1) some bank is short on cash; (2) banks don't trust each other so short-term interbank loans are hard to get; (3) so the bank needing cash takes IOUs it holds to the “Fed” and the central bank accepts these as collateral for a 28-day cash loan.
Now, the “Federal” Reserve owns the pledges-to-pay, the bonds, which represent mortgage-backed loans, auto loans, and credit-card debt.
At the end of 28 days, the bank which had received dollars in exchange for the bonds asks for an extension. “Could we keep the loan for another 28 days?” they ask Ben Bernanke. He agrees. Then, 28 days later, Bernanke agrees to extend the time limit again. Extensions get piled on to extensions. For all intents and purposes, the “Federal” Reserve has purchased bad debt which the free market doesn't want.
The free market did not want to pay cash at the assumed value for mortgage-backed, auto loan, and credit-card bonds. The free market would only have paid pennies-on-the-dollar for those bonds. But the “Fed” has paid the full assumed value for such bonds.
The big banks are off the hook. They were holding billions of dollars in assets that the free market was saying were greatly over-valued. Those big banks might have crashed, except for the “Federal” Reserve paying the full inflated price for the bonds.
But to pay full inflated price for the bonds, the “Fed” had to create billions of dollars worth of paper money. Do you remember “Supply and Demand”? The greater the supply, the less the demand? Did they teach you that in school?
The “Federal” Reserve created billions of dollars worth of fresh paper, called dollars. This hugely increased the supply of paper dollars. Thus, there was less demand for those paper dollars. Less demand for the paper dollars meant you had to trade more of those dollars to “buy” things.
People went to gas stations. They wanted to trade dollars with the station owner in exchange for gasoline. The exchange rate at the gas station had been under three dollars for a gallon of gasoline. But then, to buy bad debt from banks, the “Federal” Reserve had created a huge supply increase of paper dollars. The demand for dollars became less. So the gas station owner told people, “Those dollars you have aren't worth quite so much lately.” The gas station owner upped the exchange rate. People wanting to trade dollars for gasoline had to give the station owner more of those dollars in trade for gasoline.
People were angry at the gas station owner. “How dare he demand more dollars for gasoline!” But it wasn't the owner's fault the exchange rate had gone up. The “inflation” had begun when the “Fed” began buying bad debt.
Conspiracy Nation
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