'Helicopter Ben' Bernanke and the 'Bankers' Bailout'

Since there is so much opposition here to the idea of using taxpayer money to bail out borrowers and lenders who made bad choices, it's worth facing the facts: a stealth government bailout of the mortgage industry is well underway, and a bigger, more ambitious rescue plan appears more likely every day.

Today the Fed is gladly accepting as collateral mortgage-backed securities that are so toxic the private sector can't even put a price tag on them.  As John Cassidy wrote recently in Portfolio, "This is the same toxic paper that institutions like Citigroup and Merrill Lynch have been unable to sell or even value because the market for it has dried up."

Or, as The New York Times columnist Paul Krugman wrote, "In a worst-case scenario, the Federal Reserve would find itself owning around $200 billion worth of mortgage-backed securities."  The problem is, Krugman made that estimate before today's new lifeline from the Fed.

Fed Chairman Ben Bernanke's latest dollar-dumping mission (they don't call him "Helicopter Ben" for nothing) is the latest chapter in what Cassidy calls "The Bankers' Bailout." It's too late to write your congressman to protest -- the bailout began last summer: "'It is no exaggeration to say that the mortgage market was effectively nationalized" in the third quarter, BNP Paribas economist Richard Iley wrote.

Quickly and quietly, risk has been shifted from the private sector to the Fed, Fannie Mae, Freddie Mac and the FHA.  The only question now is how much more risk will be offloaded onto the government, and how Congress will structure the various lifelines, rescues and giveaways. And lastly, what maddening acronyms they will dream up as a patriotic cover for the whole thing. (HOPE NOW! The SAFE Act! The HOME Act!)

Feel free to send in your favorite acronyms for future bailouts and rescue plans.
Photo Credit: Fed Chairman Ben Bernanke, by Bloomberg News.

Comments

[Digitalian]

The disgraceful bottom line is that the Fed is "loaning" money to the wizards on wall street and the banking industry with nothing but worthless derivatives being offered as collateral. Eventually someone has to take a loss for that worthless stuff. And of course the smart money would bet on the US taxpayer being the fall guy and meanwhile the executives of these bailed out firms grow ever richer.

[adoptivefather]

Below is classic of realtor desperation. Gotta love "interior needs some drywall" And "added approx 200 SF off mastr suite with bathroom and walk in closet, in process of final approvals" sounds like they got caught doing remodel without permit.

"Beautifully restored classic 1920's spanish home. Original details. Arched door ways and coved ceilings, courtyard entry & classic formal dining rm. Bright livg rm w/arched spanish windows. W/D and fireplace. Breakfast nook. Hdwd floors, clay tile roof. Garage converted to an office. Owner has added approx 200 SF off mastr suite with bathroom and walk in closet, in process of final approvals, exterior of addition done, interior needs some drywall. Distressed owner and possible short sale. "

[LJR]

The Fed is chartered to be a lender of last resort. For better or worse that is exactly what it is doing now by exchanging low risk treasuries for high risk collateral. The collateral remains on the borrower's books and reserve requirements still must be met. This isn't a way to hide bad debt.

The Fed's hope is that by this exchange of liquid for non-liquid instruments, the market will unfreeze and fear will subside, the result of which will be a rational pricing of the collateral held by the Fed.

The Fed is the creature of the banks. Creating profitable conditions for banking is second only to keeping the system from freezing up. Lowering rates will allow the banks to profitably lend long from short borrowings. This worked in 2002 and it may work again. By pumping up the profitability of the banks the Fed can attempt to create conditions necessary to unfreeze the lending market.

I don't believe it will work but it's not a bad plan. It is not, contrary to the whiners, a taxpayer bailout. If it turns out that the collateral held by the Fed has a lower book value when the markets unfreeze the borrower still must pay back the treasuries at face value.

The Fed is simply doing what it must to stabilize the market. There really aren't any good options. This is the best of a bad lot.

[LJR]

"Random musing, completely unrelated of course...if you have the file on client #10, you can make him do anything now."

Whew! I was Client #8. They missed me.

[Hugh Jorgan]

Figures. I got a form letter from Congressman Miller, completely ignoring the topic of the letter I wrote.

I think I'm gonna be sick.

[mbob]

BTW, to quote the NY Times:

"... The total volume of mortgage-backed securities is about $6.1 trillion, with almost $2 trillion in riskier nonagency securities that are not insured by the federal government or by Fannie Mae or Freddie Mac....

“The Fed is saying if you don’t want those mortgages, then give them to us,” said Peter D. Schiff, president of Euro Pacific Capital, an investment firm in Darien, Conn. “The Fed thinks that inflation is the way to solve our problems, but all this does is create bigger problems.”

[sirimiri]

This is the American way:

"Privatize the profits, socialize the losses."

[tom]

Hey this is easy. Three trillion dollar war? Just print money. Worthless mortgage securities? Print money. Babyboomer retirement social security crises? Print money. Hope they don't run out of ink before the election.

[Uncle Billy]

In the words of Elijah Cummings of Maryland at the recent congressional hearing on executive pay: "Something doesn't smell right."

[pretending like I really understand this stuff]
Now that we're full tilt boogie into the open market operations party, it's time to ask that question again: were repos (repurchase agreements) and reverse repos already climbing at an "embarassing" pace back in 2006 when the Fed stopped reporting the size of M3 (widest measure of money supply, and the one that reported the repo component).

Easy money was the driver for the housing zeppelin. Were free flowing repos the ultimate driver for the wider inflation? How much bad debt were we already buying in 2006? Any untainted economists out there care to weigh in? No think tankers or large university academics, please. Brilliant grad students are welcome to apply. Bloggers who have learned enough mumbo jumbo to sound authoritative are not.

[Dan Moran]

Maybe I'm just old -- I've seen this cycle too many times to be surprised by it. In the United States major multinational corporations don't play "capitalism." They play "capitalism-for-profits," and "communism-for-risk." Somehow, I've never quite been clear how, conservatives in general don't find this form of income redistribution to be as offensive as that which ends up feeding children, or paying for medical insurance.

Go figure, eh? TAANSTAFL is real ... but sometimes you can get some other poor schmuck to pay for your lunch. That's what we're all about to do for the big multinationals. If you've got anything left over after paying three trillion for Iraq, and $4 for a gallon of gas.

[David Raether]

A better solution: the Fed should raise interest rates.

Oil prices are skyrocketing because the one thing you can get a loan for is to buy oil.

And the rates are great for that.

Oil prices go up, the economy slows, our currency continues to devalue, inflation gets roaring... does this sound like 1978 or what?

Raise interest rates. Oil prices will plummet.

The vast majority of Americans are not impacted by the housing crisis. What they are impacted by is inflation. Food, gas, everything is much more expensive now that it was last year.

We are losing confidence about spending money on anything other than the basics because that's increasingly all we can afford

[russell]

They get $200 billion, and you get a little spending money from Daddy Bush. See the way it works, kids?

[GawainsGhost]

Subprime Housing Investment Trust Corporation, or S.H.I.T. Co for short.

[newageblues]

The poor need discipline and the rich deserve every bit of corporate welfare they get and then some. That's the American way. You should be used to it by now.

[PD Quig]

Facilitating
*nderwriting &
*ollaterallizing
Known
Useless
Paper

[ATM]

While an increase in the value of the dollar will lead to a decrease in oil prices, it will lead to an increase to consumer imports surging again. The simple fact of the matter there is no way for Americans to have cheap energy and cheap consumer goods long term if we continue to fund their imports with a strong dollar that makes exports uncompetitive. I hope large oil reserve discoveries up in the Dakotas pan out, because that is the only thing that will stabilize the situation. The oil requires more expensive horizontal drillling tech but will be profitable as long as oil prices remain above $40-$50/barrel. The only way to deal with consumer goods prices is increased productivity through automation and robotics. A strong dollar supresses both domestic oil recovery and investment in automation and robotics.

[lsjogren]

The Fed IS the agency that prints the money.

They purchase debt with money they have printed out of thin air.

They can print however much they want. All they need to do is find some debt to purchase in order to disseminate the newly-minted dollars into the economy.

And there is always plenty of debt out there to purchase, whether it be bonds from the Treasury dept that fund our federal deficit or foreign government bonds or debt issued by private companies.

At least that is my understanding of how it works.

[alvin]

could anyone here, including peter, that is screaming "tax payer funded bail out!!!" please explain how this is a "tax payer funded bailout"? i've read the links. i don't see it. thanks.

[lsjogren]

LJR said:

"The Fed is chartered to be a lender of last resort. For better or worse that is exactly what it is doing now by exchanging low risk treasuries for high risk collateral."

Yes, and as to "for better or worse", it is for worse.

That's why the Fed needs to be abolished. Ron Paul is the only Presidential candidate who understands the economy well enough to understand that. He may be a kook on some things but he's the only one with a clue on monetary policy.

[lsjogren]

Dan Moran:

As to why conservatives support this, only phony conservatives do.

But note that it was the Democratic Party that was the impetus for the corrupt Federal Reserve System.

In the 19th century the Democratic Party was the party with a sound money policy.

In 1896 the Democratic and Republican Parties flipped and the Republican Party became the party of sound money, while the Democratic Party became the party of fiat money and "prosperity through inflation".

But today's Republican Party supports the same garbage.

[Fourth Generation]

Well leave it to the RepubliCONS to come to the rescue of their wealthy friends in the banking and lending industries. Welcome to the new capitalism were the profits are private but the risks/loses are socialized. Mortgage amnesty or Bailout is both and the same except that is aimed at saving the rich. But horror, Bush opposes, on ideological grounds, "socialize health insurance" for children but not "socialize bailout" of banks.

In a capitalistic system those who underperform are left behind in the dust bin. It is supposed to work that way. If you offer the better product or service and beat the competition your company will prosper. Failing banks did it on themselves by throwing sound economic principles overboard for short term profits risking the long term sustainability of their institutions. If they fail then the system worked the way is supposed to work. Except in the world of the present republican socialists capitalists in which failing banks are to be rescued.

[MyLessThanPrimeBeef]

Lsjogren, you are right about how the Fed prints money. That's more or less my understanding as well - creatio ex nihilo, just like God.

As for the Fed coming to the rescue, it's very medieval...fuedal you might say. Like how the lords of the manor get to eat first and the servants can have the leftovers, so too the bankers have the first cut, Mafia like, when the general economy, that's you and me, needs a lift. Just look at how it works: the Fed lowering rates to pump up bank profitability, as banks borrow short and low and lend out long and high, is the first and necessary step for the rest of the economy to recover.

Why can't money be injected into the system in some other fashion? Why must the shareholders of the Federal Reserve be given the seigneurial rights, which incidentally in the 'real' medieval world, include sleeping with the wives and daughters of the servants?

[JonB]

could anyone here, including peter, that is screaming "tax payer funded bail out!!!" please explain how this is a "tax payer funded bailout"? i've read the links. i don't see it. thanks.

I think it works like this: The Banks have mortgages (on paper) that they can't sell (obviously, because no one wants them because they are probably worthless). Since they can't sell them, they don't have cash to lend to people to buy houses.

Bernanke will give the Banks $200B worth of real money in the form of Treasury Bonds in exchange for $200B worth of mortgages as collateral. This way, the banks have real money to lend to people again.

I'm guessing two problems might come up:

1. What if the banks default on the $200B loan? In that case, the Fed would be left with the collateral ($200B in mortgages), which we all know isn't really worth $200B! If the collateral only ended up being worth $50B, then Bernanke would have given the banks $150B for free. And where did Bernanke get that money from? It comes from you and I: the taxpayers of America. Ergo, taxpayer gift to the banks.

2. What if people don't want the banks to lend them money for houses? I have money in the bank for a down payment, a good job (over $120k/yr) and am renting. In my area (Santa Clarita valley), housing is still priced way to high. Prices will have to drop at least another 20-30% before I'll even think about buying. If banks will only lend to people with down payments and enough income to actually pay a mortgage, and these people are the ones smart enough to wait for housing prices to continue to drop, then the problem isn't that the banks don't have money to loan. The problem is that houses are too expensive.

The solution to the "crisis" is for housing prices to drop. Fast and far. That's it. Whether it takes one year, or ten years, that's the only thing that will stop the bleeding. Bush and Bernanke seem to think there is another solution that will allow home prices to stay unrealistically high, but there really isn't.

[David]

I've read all the comments here and see that you haven't pinpointed a few facts. First, the Federal Reserve is a privately owned bank - - a banking cartel of about 12 or 13 families. Second, I've seen some data on it, but since I can't remember where, let me speculate that the 12 Federal Reserve Banks and many other large institutions are owned by family and buddies of those 12 or 13 families. I'm still new to financing, so I'm hoping someone will answer this. If the Fed bails out all their buddies/family and sticks it to the US Treasury and the taxpayers, doesn't that just make them so rich that they can truly rule the world soon? Don't they rule the world already? Do some research on the Rothchilds, the Central Banks, fractional reserve banking before you answer.

[Michael Snyder]

Laker,
If the Fed is treating these mortgages in short term paper what we have here is the largest money laundering operation in history. Given the continued implosion in the bond markets, nobody's going to be bidding on that $200 billion in bonds in 28 days. even with the 'Fed's seal of approval", those bonds are going to sit there and accumulate service fees for the Federal Reserve on the taxpayer's backs. It doesn't really matter how you slice & dice it, "We the people" always get stuck with the bill.

ATM,
Nice to have you back! That was one heck of a nap! Is Rip Van Winkle your uncle? Oil at $40 to $50 a barrel? American exports? In the twenty years or so you've been asleep NAFTA has led to the outsourcing of most of the manufacturing jobs in America and oil just crossed $110 a barrel today and is at $110.28 as of this posting. Do you really think a cartel that's willing to sacrifice hundreds of thousands of lives for oil is going to sell it at a discount? Oh before you hock that ring, gold is up to $984 per ounce showing an $8 plus gain the day after the DJIA "rallied" by over 400 points. I'm at a loss as to connecting the dots between robotics, the dollar and productivity in the workplace but I can guarantee you one thing; those robots aren't purchasing anything. Until the consumer is healthy again, every "solution" is at best a band-aid and doomed to failure.