Every Trick in the Book

[Crewleader]

by Mike Whitney / December 2nd, 2008

Conditions have deteriorated on a scale and with a speed that no one could have predicted just a few months ago. Market conditions of unprecedented strength are roiling the world’s financial markets. The global economy is either in, or close to, recession and 2009 is not likely to be a year of great recovery.

– Brett White, chief executive officer of CB Richard Ellis, LA Times

Without any public debate or authorization from Congress, the Federal Reserve has embarked on the most expensive and radical financial intervention in history. Fed chairman Ben Bernanke is trying to avert another Great Depression by flooding the financial system with liquidity in an attempt to mitigate the effects of tightening credit and a sharp decline in consumer spending. So far, the Fed has committed over $7 trillion, which is being used to backstop every part of the financial system including money markets, bank deposits, commercial paper (CP) investment banks, insurance companies, and hundreds of billions of structured debt-instruments (MBS, CDOs). America’s free market system is now entirely dependent on state resources.

With interest rates at or below 1 percent, Bernanke is “zero bound”, which means that he will be unable to stimulate the economy through traditional monetary policy. That leaves the Fed with few choices to slow the debt-deflation that has already carved $7 trillion from US stock indexes and another $6 trillion from home equity. Bernanke will have to use unconventional means to stabilize the system and maintain economic activity in the broader economy.

Last Tuesday, Treasury Secretary Henry Paulson announced that the Fed would buy $600 billion of toxic mortgage-backed securities (MBS) from Fannie Mae and Freddie Mac, in effect, buying up its own debt. This is one of the unconventional strategies that Bernanke outlined in a speech he gave in 2002 on how to avoid deflation. By moving the MBS from Fannie’s balance sheet to the Fed’s, Bernanke was able down interest rates by a full percentage point overnight, creating a powerful incentive for anyone thinking about buying a home. But Bernanke’s plan is not risk free; it increases the Fed’s long-term liabilities, which in turn undermines the dollar. This calls into question the creditworthiness of the US Treasury, which is becoming more and more uncertain every day.

http://www.dissidentvoice.org/2008/12/every-trick-in-the-book/