[THS] Mike Whitney: Bernanke`s Biggest Bailout

[The Harder Stuff in news and commentary]

http://www.informationclearinghouse.info/article25380.htm

Bernanke's Biggest Bailout

By Mike Whitney

May 03, 2010 "Information Clearing House" - -The right-wing think-tank, the
American Enterprise Institute, is helping the Federal Reserve to develop a strategy to
transfer $1.25 trillion in toxic mortgage-backed securities (MBS) and non performing
loans onto the public's balance sheet. Although it's unknown whether Fed chair Ben
Bernanke will act on the AEI's recommendations, it does show that the Fed's
Quantitative Easing program (QE)--which moved the bulk of garbage assets from the
banks to the Fed's balance sheet--poses long-term problems that will need to be
addressed. Bernanke never intended to keep these assets any longer than necessary.
Now he is actively exploring options for getting rid of them.

Ostensibly, the QE program was designed as the first leg in a two-step process to
remove the bad paper from the banks balance sheets and then dump it on Fannie
Mae and Freddie Mac as discreetly as possible. So far, Bernanke has been relatively
successful in convincing people that he was buying the assets to increase lending,
which was clearly never the objective. Quantitative Easing was a fraud from the get-
go. Here's an excerpt from the AEI's web page by the eerily-named "Shadow
Financial Regulatory Committee" which explains what's going on:

"Freddie and Fannie have been placed in conservatorship and the Treasury has
confirmed that their debt is now guaranteed by the U.S. Government. This means
that their debt is essentially identical to Treasury debt. The Treasury could simply
issue Treasury debt to Freddie and Fannie with the offsetting accounting transaction
being an IOU to the U.S. Treasury. Freddie and Fannie could then swap the acquired
Treasury debt for MBS held by the Federal Reserve. This transaction would have
several desirable features. It would place housing debt on the books of Freddie and
Fannie where it belongs and remove the Fed from financing U.S. housing policy,
which is appropriately a fiscal policy and not a monetary policy function. This would
also help to re-establish Federal Reserve independence from the Treasury and fiscal
policy. Finally, it would free the Fed to device strategies to reduce its balance sheet
by engaging in more traditional asset sales in the much deeper Treasury market
where the pricing impacts would be smaller and would accommodate a more rapid
reduction in excess reserves." ("Mortgage Backed Securities in the Federal Reserve’s
Portfolio" Shadow Statement No. 294, American Enterprise Institute)


So, there it is in black and white; the committee believes that the "transaction would
have several desirable features. It would place housing debt on the books of Freddie
and Fannie where it belongs and remove the Fed" from any further obligation.
Naturally, the Fed will need an excuse to justify what-amounts-to another gigantic
bailout. The AEI thinks that the fear of inflation will do the trick, and they are
probably right. Expect the Fed to mobilize its allies in the media to launch a public
relations campaign that focuses on the imminent threat of hyperinflation. That way--
when Bernanke dumps more than a trillion dollars of toxic sludge into Uncle Sam's
mortgage-recycling center--he'll only be performing his statutory duties to maintain
price stability.

There's nothing fancy about the AEI's strategy; it's a pretty straightforward "no frills"
ripoff. Bernanke buys the garbage from the banks and then transfers it to the GSE's.
No muss, no fuss.

It's a shame that congress can't figure this stuff out. Bernanke is merely acting as
one would expect. He's bent-over-backwards to save the banks from nationalization
and to keep their political and financial power intact. He's also usurped congress's
power over the purse-strings by initiating fiscal policy (in the purchasing of the toxic
assets) which is well-beyond the Fed's mandate. Now he's putting the finishing
touches on another giant bailout so he can clear the Fed's books and resume the
arduous task of bubblemaking.

Is it really that hard for congress to figure out what's going on?