The credit storm which began in July when two Bear Stearns hedge funds were forced to liquidate, has continued to intensify. Last week the noose tightened around auction-rate securities, a little-known part of the market that requires short-term funding to set rates for long-term municipal bonds. The $330 billion ARS market has dried up overnight pushing up rates as high as 20 per cent on some bonds — a new benchmark for short term debt. Auction-rate securities are now headed for extinction just like the other previously-vital parts of the structured finance paradigm.
There is no chance that the economy will rebound until housing prices stabilize and the rate of foreclosures returns to normal. But that could be a long way off. With housing inventory at historic highs and mortgage applications at new lows, the economy could keep somersaulting down the stairwell for a good two years or more. Only then, will we hit rock-bottom.
The country is now headed into a deep and protracted recession. Low interest credit and financial innovation have paralyzed the credit markets while inflating a monstrous equity bubble that is wreaking havoc with the world's financial system. The new market architecture, "structured finance", has collapsed under the stress of falling asset-values and rising defaults. Many of the banks are technically insolvent already, drowning in their own red ink. Public confidence in the nations' financial institutions has never been lower. Monetary policy and deregulation have failed. The system is self-destructing.
Now that the credit crunch has rendered the markets dysfunctional, spokesmen for the investor class are speaking out and confirming what many have suspected from the very beginning; that the present troubles originated at the Federal Reserve and, ultimately, that's where the responsibility lies. In an article in the Wall Street Journal this week, Harvard economics professor and former Council of Economic Advisers under President Reagan, Martin Feldstein, made this candid admission:
"There is plenty of blame to go around for the current situation. The Federal Reserve bears much of the responsibility, because of its failure to provide the appropriate supervisory oversight for the major money center banks. The Fed's banking examiners have complete access to all of the financial transactions of the banks that they supervise, and should have the technical expertise to evaluate the risks that those banks are taking. Because these banks provide credit to the nonbank financial institutions, the Fed can also indirectly examine what those other institutions are doing.
The Fed's bank examinations are supposed to assess the adequacy of each bank's capital and the quality of its assets. The Fed declared that the banks had adequate capital because it gave far too little weight to their massive off balance-sheet positions — the structured investment vehicles (SIVs), conduits and credit line obligations—that the banks have now been forced to bring onto their balance sheets. Examiners also overstated the quality of the banks' assets, failing to allow for the potential bursting of the house price bubble. The implication of this for Fed supervision policy is clear. The way out of the current crisis is not."
How odd. So, when all else fails; tell the truth?
But Feldstein is right; the Fed refused to perform its oversight duties because its friends in the banking industry were raking in vast profits selling sketchy, subprime junk to gullible investors around the world. They knew about the "massive off balance-sheet positions" which allowed the banks' to create mortgage-backed securities and CDOs without sufficient capital reserves. They knew it all; every last bit of it, which simply proves that the Federal Reserve is an organization which serves the exclusive interests of the banking establishment and their corporate brethren in the financial industry.
RLCC: Well, the responsibility lies with the plutocrats behind the Federal Reserve. They are the ones who get the chairman to do what he does. They are the hand that feeds. No chairman will dare bite that hand. No one will ever rise to be selected as chairman who hasn't proved he is very willing to go along with the whole scheme of duping the people to rip them off over and over and over via scientifically created booms and busts and through usury and taxes to pay back interest.
The people should not pay taxes to pay interest to anyone for having printed tender deemed legal by the people's government. It's stupid on top of stupid. There should be no private central bank. Any central bank should belong to all the people and not to the wealthiest and most secretive families. Of course, a central bank is totally unnecessary to running a great economy (household management).
The best economy is simply giving the highest quality of life to all the people forever. That's the measure. Money is not necessary to that end. In fact, money is counter-productive to it. The highest quality of life is only achievable where everyone has everyone else's best interest at heart. That doesn't result from using a medium of exchange. It results from everyone giving to everyone else without holding out for being paid back. If everyone does that, everyone will have everything everyone needs and will owe no one for it but God who is the whole, the one. That's the teaching of Jesus Christ. That's his political economics. He's right! The sooner we do it, the better. Bring forth!