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When Paulson couldn't achieve one of his objectives during the crisis, he typically called on Ben Bernanke to see if the Fed could be of assistance. Paulson was in a difficult position and needed Bernanke's help. He had, just two weeks earlier, told Congress that if they didn’t approve TARP and deal with the banks' toxic assets, the entire financial system would collapse. Now he was about to be exposed as either a liar or just completely wrongheaded, because the toxic assets were still on the banks’ books and he was using TARP money elsewhere. What I believe the Fed did next was fraudulent and deceitful, its full impact still hidden from the American public.
The Fed, I am convinced, went to these commercial banks and offered to take many of their toxic mortgage assets off their books, often accepting them as collateral for loans to the banks. In exchange, the Fed credited the commercial banks with an increase in the reserves held at the Fed, so long as the banks agreed not to withdraw the excess reserves immediately. Magically, the Fed was able to take a bad asset like a CDO and transform it into a sparkling good asset: bank reserves at the Fed. The irony is that the CDO itself began as a compilation of leaden BBB subprime mortgages and had been transformed into a golden AAA security only through the alchemy of the CDO process. And I think the record will show that the Fed intentionally overpaid for these securities, so that the banks wouldn't have to acknowledge life-threatening losses on the sales or the remarking of their inventory of similar assets. The Fed also began buying mortgage securities directly in the marketplace in an attempt to create demand in the absence of a healthy securitization program.
So the Federal Reserve, with no approval by the president, the Congress, the people or their elected representatives, ended up purchasing $1.5 trillion of new assets of unknown quality. The Fed is controlled by our nation's banks, and so it shouldn't surprise us when it uses taxpayer money to save these very same commercial banks.
What concerns many knowledgeable investors is that the Fed doesn't have the money needed to purchase these assets and instead prints new money. As of March 2010, there was approximately $1 trillion of currency outstanding in the country, not including the more than $1 trillion of bank reserves at the Fed. So if the Fed doesn't shrink its balance sheet, we can expect inflation to come roaring back as banks increase lending in the future.
Originally posted by boondock-saint
the way I read this
it's clear that this was a debt laundering
scheme which is illegal in any country.
IMO, somebody needs to go to prison
and we need a new system without
the Fed and without the IRS.
That's the ONLY way to prevent
this from happening again in the future.