The Newest Mortgage Bailout - $200 Billion for the Banks, $0 for the Homeowners
A recent article I wrote discussed the help that government programs have been providing to homeowners facing foreclosure, and if the programs being offered compare favorably to the direct bailouts that have been given to the banking system.
Obviously, most homeowners would rather receive a portion of $10 billion of newly-created money, instead of working with their mortgage company on a plan that was completely voluntary for the bank.
The federal government has a long history of creating new problems to solve old problems and socializing financial losses while allowing companies to privatize profits from shaky deals.
Now, in another effort to prop up the banking system at the expense of the homeowners whose defaulting loans are harming that system, the Federal Reserve and other central banks worldwide have announced another $200 billion expansion of their lending program.
None of the previous injections of money into the system have solved the liquidity and credit crunches, but central banks do not have very many alternative tools.
Manipulating interest rates and destroying currency values through inflation have worked in the past to steal money from the public and give it to the banks.
The lending program allows banks to trade in their failing mortgage-backed securities for loans from the Federal Reserve.
Since the Fed actually holds no reserves of dollars, though, the money is created out of thin air.
This has the predictable result of diluting the money supply and giving the banks the opportunity to use the new money first, when it is at its most valuable.
Banks give their worthless mortgage securities, the values of which were always highly inflated and are now in complete doubt (with many of them being worth nothing at all anymore), and receive brand new cash in return.
This gives the banks the incentive to continue making poor loans and removes any real desire to work with homeowners to stop foreclosure from taking these homes.
If they can count on periodic bailouts from the Federal Reserve, not under the control of Congress, the courts, or the Executive Branch, there is little reason for them to play along with the government programs to help homeowners.
After all, they can simply keep trying to collect money from homeowners, foreclose on houses, and allow the Fed to keep them afloat until they can sell the properties in a better market.
So the Fed will be holding all of the toxic mortgage securities while providing new money to banks at preferentially-low interest rates.
This will, at best, only postpone the collapse of the banking system and will more likely prolong it.
A central bank loaded down with nonperforming debts should lose all legitimacy in printing the currency of the nation.
The dollar has already lost much of its value compared to other currencies, due to the out of control spending of government and doubts about the American economy.
Combine overspending and an economy that no longer produces much with loads of bad debt, inflation, and artificially low interest rates, and the outlook appears very bad for the banking system this year.
The Federal Deposit Insurance Corporation and a regional branch of the Federal Reserve are already warning and preparing for bank failures.
The government will be unable to prevent or reverse the coming failures without further selling out the public to the banking system, which may lead to even higher inflation in food and energy prices for homeowners already struggling to keep on top of their mortgages and feed their families.
Obviously, most homeowners would rather receive a portion of $10 billion of newly-created money, instead of working with their mortgage company on a plan that was completely voluntary for the bank.
The federal government has a long history of creating new problems to solve old problems and socializing financial losses while allowing companies to privatize profits from shaky deals.
Now, in another effort to prop up the banking system at the expense of the homeowners whose defaulting loans are harming that system, the Federal Reserve and other central banks worldwide have announced another $200 billion expansion of their lending program.
None of the previous injections of money into the system have solved the liquidity and credit crunches, but central banks do not have very many alternative tools.
Manipulating interest rates and destroying currency values through inflation have worked in the past to steal money from the public and give it to the banks.
The lending program allows banks to trade in their failing mortgage-backed securities for loans from the Federal Reserve.
Since the Fed actually holds no reserves of dollars, though, the money is created out of thin air.
This has the predictable result of diluting the money supply and giving the banks the opportunity to use the new money first, when it is at its most valuable.
Banks give their worthless mortgage securities, the values of which were always highly inflated and are now in complete doubt (with many of them being worth nothing at all anymore), and receive brand new cash in return.
This gives the banks the incentive to continue making poor loans and removes any real desire to work with homeowners to stop foreclosure from taking these homes.
If they can count on periodic bailouts from the Federal Reserve, not under the control of Congress, the courts, or the Executive Branch, there is little reason for them to play along with the government programs to help homeowners.
After all, they can simply keep trying to collect money from homeowners, foreclose on houses, and allow the Fed to keep them afloat until they can sell the properties in a better market.
So the Fed will be holding all of the toxic mortgage securities while providing new money to banks at preferentially-low interest rates.
This will, at best, only postpone the collapse of the banking system and will more likely prolong it.
A central bank loaded down with nonperforming debts should lose all legitimacy in printing the currency of the nation.
The dollar has already lost much of its value compared to other currencies, due to the out of control spending of government and doubts about the American economy.
Combine overspending and an economy that no longer produces much with loads of bad debt, inflation, and artificially low interest rates, and the outlook appears very bad for the banking system this year.
The Federal Deposit Insurance Corporation and a regional branch of the Federal Reserve are already warning and preparing for bank failures.
The government will be unable to prevent or reverse the coming failures without further selling out the public to the banking system, which may lead to even higher inflation in food and energy prices for homeowners already struggling to keep on top of their mortgages and feed their families.
Source...