Banks, the Fed, and the bailout

We hear about leveraging money and how that works. Most people don’t understand how that affects their accounts since they believe their money is in the bank and is invested locally.

Not so anymore; your money is out on the town, lent overnight with others at ¼ of 1% and circulated. Banks lent your money repeatedly many times.

Where is your money? Maryland, California, Canada, Germany, in stocks and bonds, other banks, many with subprime and alt-A mortgages and some with Bernard Madoff. Paulson has your money and soon GM will squander it too.

To simplify this image, picture a very large railroad roundhouse with peepholes all around the circumference. In the center is a spotlighted single silver dollar, viewed by all depositors, each saying, “That’s my money!”

That’s what exists after all the leveraging of money. Now, they’re printing even more money, lowering interest rates to boost credit, which is producing more money that doesn’t exist expanding the money supply further.

What do you think will happen when depositors decide to get their “silver dollar?”
It won’t be a Wonderful Life.

For those schooled in our public institutions, perhaps this explains the subprime mortgage mess more clearly and just who is getting the coated end of the stick.

The Brits do have a dry way of getting the point across.

Then there is this SNL skit that has been pulled which actually lays the blame where it belongs.
Go here to see this beaut. This is one they don’t want you to see!

Congress depleted this weekend administering anesthesia to the taxpayers; the actual fiscal bailout device is a suppository wrapped in #60 grit sandpaper.

Please use these to prevent severe lower back injury from sudden attempt to stand erect. Secure wrists and ankles before BAILOUT is administered!

No irritation protection necessary, this will take your mind off the insertion!

For this, what do we get? Bad paper, paper the banks don’t want and no ONE can sell. What anchors this paper? Foreclosed houses, which cannot be sold now, will not be sold in the near future and after standing empty, become even more desirable, correct.
Has anyone ever seen abandoned or closed government property? Slums have higher resale value. What do you think a stripped house is worth as collateral to John D. Taxpayer?
This is what your collateral will look like, euphemistically called a “fixer-upper” by your friendly Realtor.

Imagine a $400,000 mortgage securing this wonderful three story country farmhouse with mountain views on a country lane.

Listen to Chris Dodd or Barney Frank, or your congressman/woman entertain you with caring tales of past sensitivity to taxpayer plight. In a pig’s brown eye they do. Paulson certainly doesn’t. Bush read his idea of a good deal off the teleprompter. Bail out my buds and all is swell. (Paulson’s idea of getting along)
However the mushwits in DC tell us we need to jumpstart the housing industry, get them going to put the economy “back on track.”

” HUH?” What are they smoking?

Call your congress critter; tell him/her to be generous. Let the banks and Wall Street keep their great deals for themselves. We need this crash to get people off this insane living on this house of credit cards. Credit tightens up, people drive beaters (just like the Jones’) and they’ll take jobs the illegals won’t do.
Let Paul pay for his sins now. Leave Peter’s pockets alone.

Senate Banking Committee at Work

After thoroughly stinking up the U.S. banking system, the Senate Banking Committee met behind closed doors and converted their holdings to gold. The U.S. taxpayers will be notified after finalizing all congressional transactions.
(photo supplied)

Some of my erstwhile friends think it is well worth working.

Every quarter century or so, a superb method of making money comes by. One has to be a target rather than a sting not to take advantage of it. The best part, it is legal.

Here’s the mechanism in all its simplicity.

After gathering all my capital together, I induce others to invest their money with me for which I promise to pay a rate of return agreed upon in writing beforehand. If necessary, I might bend the truth a bit to get sufficient funds such as pledging higher than current interest rates. However, with this unquestionable technique, that isn’t a disadvantage. Calling the investments something non-risky like money market funds or CD’s, anything that doesn’t alarm investors or regulators, allays fears.

First, I take some of this money and buy known winners to show a rate of return to the regulators and investors and giving me funds to pay the interest on current notes. As the word gets out and more capital comes in, I take the whole bankroll and put it on house flipping or a 300-1 shot in the 7^th at Yonkers to win. When the house or horse comes in I pay off the investors their deposits plus interest and I keep the rest.

Tell me this isn’t a fantastic enterprise.

I know, you’re asking, suppose the nag doesn’t come in. Who cares!!!

This is the wonderful part, the part that guarantees I cannot lose. With all that capital gone, I merely expect the government to require everyone in the country to give money until I have all MY capital back. Thusly I’m made complete again, allowing me to proceed anon with nary a worry.

Did I not say it is an indubitable formula for investing success. You win some…and you win some!

Is there anyone disagreeing with my plan? Do you think I is an out right rip off of consumers? So, tell me why.

Perhaps some of the liberals that comment here, can tell me what’s wrong with my idea. Or any other commenter for that matter.

Four score and 14 annum has passed since the passage of the Glass-Owen law. This piece of legislation rushed through a holiday absent Congress; President Wilson affixed his signature one hour later. We live with the results today.

Junk-Grade Fed?

What caught our eye in the markets last week was the verdict by Grant’s Interest Rate Observer that, by its lights, the Federal Reserve Bank of New York was no longer a “presumptive triple-A” credit but rather one of “mid-grade junk” quality. [snip]

Grant’s was reacting to the sudden appearance on the Federal Reserve’s balance sheet of $60 billion in lending under the new Term Auction Facility. The New York Fed’s share of that $60 billion is no less than $44.9 billion. The TAF is a credit facility. Its purpose is to lend to banks under stress in the sub-prime credit crisis. The banks front collateral against which the Fed advances money. “The rub,” Grant’s writes, “is the quality of the collateral.” It quotes a Financial Times interview with one financial strategist, Christopher Wood, as saying that banks “are increasingly giving the Fed the garbage collateral nobody else wants.” [snip]

The overleveraged commercial real estate market of the late ‘80’s through the leveraging of the dot com extravaganza to this housing problem is a text book example of “Better Investing Through Leveraging.” These is another name for leveraging; it’s called margin, google that and the Great Depression.

It’s a little-noted irony that the Federal Reserve, the supposed conscience of the American banking system, is itself an exceedingly highly leveraged institution. At the latest weekly tallying up, $881 billion in assets rested on just $38.5 billion in capital, As for the New York branch office, $312 billion in assets (including those $44.9 billion in TAF credits) were balanced on a little less than $10 billion in capital. The scant showing of capital was of no especial concern when the Fed owned nothing but Treasury securities. But now that it’s in the business of lending against what may well be mongrel mortgages, that extreme leverage introduces real risks. (emphasis added) As Grant’s points out, it’s not so farfetched to imagine the Fed itself needing a bailout one of these days. We wonder how a headline on the order of “Fed insolvency fears” would play in the already skittish world currency markets.

Rename those so-called assets collateral and view the Fed’s position. They cover between 3% and 4% of outstanding LOANS.

[snip]…It carries slightly more than $4 billion of gold on its balance sheet at the early 1970s price of $42.22 an ounce. At today’s prices, that works out to more than $90 billion. On that basis, as the editor of Grants, James Grant, sketched it for us, “the hometown central bank would be in the clover, credit-wise.” He goes on to say that “the Fed is unlikely to acknowledge the great bull market in gold bullion for the obvious reason that it, itself, is largely the author of it.” Or, to put it another way, if the salvation of the Fed is all the gold it has in its basement, what does that tell us about the monetary system on which the rest of the world is relying?

Now do you understand why gold is selling for close to $1000.00 a troy ounce? Two fiscal gurus named Hillary and Barack are going to spend our way out of this mess while raising taxes. Com’ere, I’ll show you how to make fast money in the Three Card Monte game.