by Juan Moment
lifted from a comment
From fool’s highly informative link in the Wild Ride thread :
In addition, The Fed has announced that it will take equities as collateral for loans. "Equities" is a fancy name for stocks.
That’s right – for the first time in history, now banks can take stocks to the discount window. Maybe even their own stocks.
The Fed has gone from taking only the highest-quality securities –
"AAA" rated debt instruments – to taking everything up to and including
the most dangerous (common stock) all at once!Now I may be blind but I’ve read The Federal Reserve Act multiple
times and nowhere do I see where equities can be taken to the window
(or anywhere else for that matter) for Fed Credit.If they intend to actually do this, its quite clear they don’t care
what the law says. They’re going to do it anyway, and their precedent
is that you sat back and allowed them to take equity when they bailed
out Bear Stearns, and said nothing! They will do anything they want by
citing "exigent circumstances" and claim blanket authority.What’s worse, this effectively makes The Fed a margin lender on
the equity markets! You think they don’t have a reason to interfere in
the market eh? Oh boy, now they have billions of reasons, all of them
sitting on their balance sheet! Fair and open markets? Bah!Note carefully folks – this effectively makes The Fed LONG (that is, a "buyer") of STOCKS.
What’s even better is that they don’t eat their own losses if there are any – they’re yours!
That’s because The Federal Reserve Act says that the profits (or
losses) from The Fed flow through to the Treasury (after operating
expenses) which means that now, suddenly The Federal Government is
potentially directly exposed to losses in the stock market!Now it has always been true that The Government "loses" when the
market goes to hell as it gets less in the way of tax receipts. But
that’s different than suffering an actual capital loss – and that is
now possible.
The implications of this tectonic shift
within the banking framework are as yet to be seen, but this lowering
of securities standards by the Feds is essentially the transfer of risk
for shonky investments in equities from the commercial money houses to
the US taxpayer, and with the risk the obligations to cover the losses.
In times when the S&P could easily fall another 20% by years end,
this will have grave consequences, possibly triggering a ruinous domino
effect throughout the US and entangled nations.
Although AIG has an alleged $1 trillion in assets, it can’t raise
$50 billion. Who would have this sort of money at this point in time
anyway? Certainly not people who can afford to loose it. So they wonder
how much the assets are really worth. How much risk have they insured
for loans which will or have already gone bad? When you hear
announcements of “imminent death if $75 billion aren’t raised within 48
hours”, then one doesn’t have to be a rocket scientist to predict the
future of this company in a downward spiraling economy. Too big to
fail they say. Hah, too big to succeed I say, the giant has already
stumbled and lost its balance, and no arm will be extended for fear of
being dragged down with the helpless giant. So instead the Fed roles
out the safety blanket to catch the falling juggernaut, taking on a 80%
stake in the insurance colossus, in effect becoming the insurer of many
commercial risks across the world. The costs of this venture could
potentially be catastrophic for the US treasury.
The US government coffers, already running on empty, hemorrhaging
from ridiculously expensive wars on foreign shores and tax cuts to the
high income earners, will have to cop further billions of dollars in
losses. The thrashing of equity values, the current implosion of global
stock markets will continue for quite some time, but from now on the
losses will be crystallizing in the US treasury’s P&L. Where
exactly is the treasury going to get the money from that will be needed
to cover the deficits?
Tax increases? Sell the Empire State to China? Reduce the public
service budget by 5% and start laying of employees? With an at best
stagnating economy, falling corporate earnings, the tax revenue will
decrease. A rise in unemployment figures means more social security
outlays. The foreign capital drip which keeps the patient alive for the
moment, apart from positioning the US in a dependency that could easily
translate into being controlled by foreign powers, is under current
global conditions slowly drying up and shouldn’t be taken for granted.
Who ever wins the next election will have to make some tough
decisions, but won’t. The mugs in congress, no matter which tentacle
they belong to, motivated by self-interest, have been sitting on their
hands forever. Stooges, most if not all of them, people who taught us
for decades that we best expect nothing so we won’t be disappointed.
And that all talk-no action squad, strikingly ignorant and lame for as
long as they’ve been in office, are representing us in the battle with
the conglomerates. Shudder.
The consolidation happening on Wall Street will leave even less
people in control over even more money. One has to wonder if this
wasn’t the name of the game in the first place. The incestuous
relationship between the oligarchs we have become used to, is lately
presenting its more ferocious side, showing that in their passionate
love they are not afraid of devouring each other. And this mounting
concentration of financial power is producing gorillas too large to
measure in pounds.
Even without a degree in business law or economics, people should be
starting to see the writing on the wall. Judging by the euphoria
generated by both parties’ presidential candidates, I doubt that this
awakening is taking place though. All this talk now by Obama &
McCain about how they will reform the financial sector, introduce
regulations and enforce them, is warm air, blown into the sails
of their respective election ships on the swelling oceans of public
fears and disillusionment. The crucial decisions in the landscape
gardening project on Wall Street will be made by the same tweed suits
who caused this mess in the first place, and the conditions imposed on
the banking orgs will have loopholes big enough to push in 4 years the
next election ship through.
As B pointed out, in terms of interest rates, the Fed has become
irrelevant. In the current climate banks will be hording cash and offer
interest rates way above the fed rate. Following a predestined path,
the flight from falling equities into securer cash assets means
interest rates will eventually come down again, allowing the businesses
that will survive the current squeeze, bruised but alive, to slowly
rebuild their balance sheets. Lower rates would also help to jump start
the mangled housing sector, however for that to happen, house prices
will have to drop further. Much further. Unrealistic expectations of
asset values will need to be adjusted, not just in board rooms but also
around kitchen tables.
A painful process, for sure. Financial stress causes marriages to
break up, children being yelled at, depression and despair. And so this
financial melt down will bring about social hardships for the many
caught up in this spider web of too closely related business interests.
The anger and frustration will not be helped by the realization that
their perceived worth didn’t just disappear into thin air, but that it
has been in scandalous fashion redistributed up the pyramid and the
perpetrators are buying up foreclosed villas.
The real tragedy though becomes apparent when one puts the figures
in context. While the Feds pours $80 billion into the bottomless pit
Wall Street has become, people all over the world are starving to
death, starvation that could be prevented by a fraction of that money:
UNITED
NATIONS (AP) — The United Nations blamed the global food crisis
Wednesday for a $3.4 billion global shortfall in emergency humanitarian
aid for 34 nations.
U.N. officials said that higher food and fuel costs, along with natural
disasters and worsening conflicts, are making it more difficult to
raise funds from donor nations, mostly Western governments.
"The donors will need to dig deep into their pockets to try to find
that money," said John Holmes, the U.N.’s humanitarian chief.
So far this year, $2.9 billion has been raised, representing about 46%
of what’s needed to respond to the world’s most severe crises, Holmes
said…
What a shame.