What is about to happen in our financial markets is surreal, not very entertaining, and largely made up of the same stuff as magic and alchemy.
In a continuing effort to "free up the frozen credit markets," the Treasury and the Federal Reserve are conspiring to inflate the money supply, by up to a trillion dollars, without one new action from congress; and all the while dropping the caps on executive pay that everyone is screaming about in the case of AIG.
Named TALF (the magic word), this plan hatched first by team Bernanke and Paulson, and now promoted by Bernanke and Geithner, these two institutions will soon purchase up to one trillion dollars in bundled and securitized debt made of credit card loans, student loans, RV, fleet lease loans, and any other thing the agencies intend to buy; and all with money that has not been appropriated or in any way approved by congress or the people; and they are doing so by relying on a catch-all clause in the Federal Reserve Act which the Treasury and the Federal Reserve are now interpreting to allow the creation of, essentially, a Federal Reserve bank.
Here is the deal.
Right at Thanksgiving last year, the Treasury (Paulson) and the Federal Reserve (Bernanke) announced a new program to buy loan portfolios made up of student loans, credit card loans, RV loans, and other loans. The idea was to first buy up to $200 Billion of these assets from private lenders (that is, hedge funds). The money was to come mostly out of thin air.
The Treasury's (Paulson) part was to contribute $20 Billion in actual money, and the Federal Reserve would multiply this ten times up to $200 billion by simply issuing credit to the sellers of these loan packages to the Federal Reserve. The difference between the Treasury (Paulson) commitment of $20 billion and the fund of $200 billion comes about from the Federal Reserve's ability to issue a large amount of credit based only on a small cash base, the $20 billion reserve contributed by the Treasury.
It is, in essence, a Federal Reserve Bank. Something new, never done before, and all without oversight by congress.
The program has changed, however, since November, 2008. It has gotten bigger, and any limits on executive compensation included in the first proposal have been dropped.
Yes, the same executive pay caps that are the subject of the hue and cry about the $165 million in bonuses paid out by AIG recently, those same caps have been removed from the new proposal released a few days ago by the Treasury and the Federal Reserve. So, while both agencies scream and wail about the $165 Million in bonuses paid by AIG, they have voluntarily removed those limits from the $1 trillion to be provided to private lenders under TALF.
As recently announced this month, the Treasury (Geithner) will provide ten times the original amount, now up at $200 billion, which will facilitate initial purchases by the Federal Reserve (Bernanke) of $1 trillion and later up to $2 trillion of these loan portfolios.
This money does not exist now, it is not there. The Federal Reserve will simply print it or, more likely, issue credit to the sellers into their accounts at various banks which are part of the Federal Reserve system. Much easier than printing - just the click of a mouse of the Federal Reserve computer.
All of this raises some obvious questions that few are asking, and certainly our elected representatives are not explaining.
Who is selling these securities to the Federal Reserve?
Well, we really don't know. None of the documents released by the Treasury (Geithner) or the Federal Reserve (Bernanke) detail, in any fashion, who the supposed sellers are, but a recent FAQ on the Federal Reserve website provides some insight into this misty world of private finance.
"InvestcoBermuda is a “master” investment fund organized in Bermuda. It makes joint investments on behalf of InvestcoUS, a U.S.-organized investment fund, and InvestcoCayman, a Cayman Islands-organized investment fund.
InvestcoBermuda, InvestcoUS, and InvestcoCayman are all managed by an investment manager with its principal place of business in the United States. Only InvestcoUS is an eligible borrower because it is the only investment fund that is U.S.-organized.
However, let’s say InvestcoBermuda establishes Newco, a subsidiary investment fund, in the United States and hires its U.S.-based investment manager to manage Newco. Newco would then be an eligible borrower for purposes of the TALF.
In plain language, private off-shore investment funds, commonly called hedge funds, will be able to sell their loans to the Federal Reserve if they have some management relationship to the United States. In essence, we don't know who the sellers are. But based on the example given by the Federal Reserve, it looks like they are anticipating off-shore hedge funds to participate.
Will the assets purchased by the Federal Reserve be good assets or will they be some more sub-prime junk that will end up costing all of us more money?
The program will apparently only buy AAA rated loans portfolios, as rated by some of the nationally recognized debt rating agencies. Moody's, Fitch Ratings, and Standard and Poor's. These, by the way, are the same rating agencies that gave their thumbs up to most of the sub-prime mortgages causing so much trouble.
Not very comforting.
How long will it take to make all of this happen?
Well, the subscription period, when the seller could ask for the money, started March 17, 2009; and the first payouts will be on March 25, 2009. That's fast. The MBA's and the lawyers for the Treasury (Geithner) and the Federal Reserve (Bernanke) have been working overtime to get this in place, and it is obvious that the well-paid MBAs and lawyers for the not-yet-named sellers have as well.
There is no way this could all occur this quickly without lots of communication prior to the event.
But, for sure, we'll get it right this time, and not see any huge bonuses paid to executives of the companies receiving these large payments – right?
No, not at all. The Treasury (Geithner) and the Federal Reserve (Bernanke) have voluntarily removed the executive pay limitations that were in the program as first proposed in November.
So, while they are acting indignant about the payouts over at AIG, they fully expect these kinds of bonuses and huge executive compensation to be paid out at the participating companies.
That, folks, is shameful. And we aren't hearing anything about this from the Obama administration or even one Senator or one member of Congress.
What is the purpose of doing all of this?
The idea is to free-up the frozen credit markets.
Is there any requirement that the companies receiving the money lend it out again for new loans?
No! It is a hope, not a requirement, and without oversight or reporting.
What is the likely long-term impact on the economy? Maybe some renewed lending in the auto, RV, student loan, and credit card industry. Long term, most economists will tell you that a huge increase in the made-up money supply leads to inflation, which is really just a devaluation in the value of money.
Has this program been expressly approved by Congress?
No.
Does President Obama need to sign a law to make this happen?
No.
The Treasury (Geithner) and the Federal Reserve (Bernanke) are simply interpreting the Federal Reserve Act to allow them to do this.
How can the Federal Reserve turn $200 billion contributed by the Treasury (Geithner) into $1 trillion or more?
Magic and Alchemy. Also called fractional reserve banking, or money by fiat. It is how banks operate.
Why should we care?
This is an unprecedented move by the Federal Reserve to inflate the money supply without following the normal course, without our elected representatives actually raising the debt ceiling by positive act of Congress, and because both the Treasury (Geithner) and the Federal Reserve (Bernanke) have said this might only be the beginning.
When I was a young man growing up in Stromsburg a friend of our family, the owner of the local "dime store," used to talk with me about money, business, and the economy. One time, he gave me a small brown envelope and asked me to look inside. In there was a $500,000 ReichMark from Germany. Wow, I thought, that was a lot of money.
He explained to me that this much money wouldn't even buy most things in his "dime store" at the time it was being printed by the government in Germany, before WWII. He showed me that this Reichsmark was printed only on one side, because they had to print them so fast it was easier to do it that way. He told me that this was the biggest threat to our country.
As a 10-year old, I hardly comprehended what he meant.
I still have that Reichsmark.
I hope that the day will never come when I hand a half-million dollar bill to a 10-year-old and tell him a similar story.
From: Pay Close Attention To Unprecedented Action By The Fed And U.S. Treasury
David Hahn is the publisher of Nebraska StatePaper.com He is an attorney and Internet entrepreneur.
