Well, quite recently the European Central Bank (ECB) made this
very same offer to over a hundred underwater banks in Europe, awarding them
$640 billion (489 euros) in dirt-cheap 3-year loans in exchange for all manner
of dodgy collateral for which there is currently no market. Now you, dear reader, know that when you try
to sell something on Craig's List, and there's very little interest; you have
to drop the price in order to attract a buyer.
That's just how supply-demand dynamics work in a free market, right?
Au contraire. In fact, this
rule never applies to bankers. When the
junk assets on a bank's balance sheet begin to fall in value, the banks just
ring-up their big brother at the ECB or the Fed and demand a bailout, er, I
mean, "swap liquidity for collateral that is temporarily impaired." But the truth is, the garbage that the banks
have accumulated -- particularly the sovereign bonds from Italy, Spain, Greece,
etc. -- is not merely "impaired": These
bonds will never regain their original value because the loans were made at the
peak of a bubble. So, there's as
much chance that Greek bonds will bounce back in three years as there is that
that tacky $650,000 McMansion you bought in Encinito in 2005 will claw its way
back to par.
But that's not going to happen, as Mike Whitney points out.
So, the $640 billion that the ECB forked out on Tuesday, is
basically a whopping-big gift to the banksters that will probably never be
repaid to any large extent. And if you have any doubt about
this, just take look at the Fed's balance sheet which has exploded to
nearly $3 trillion. You'll notice that
the $1.45 trillion in mortgage-backed securities (MBSs) that Bernanke so "generously'
bought from the banks two years ago are still on the Fed's books. Why? Because no one in their right-mind would buy
these turkeys. And, if the Fed were
to put their stash of MBSs up for auction; the sale would further depress the
assets (the remaining MBSs, not yet unloaded to the Fed) on the banks' balance
sheets triggering another financial crisis.
(In fact, this actually happened about a year ago when the government
experimented with bonds from the AIG fund.
Not only did the auction fail, but it also sent the equities markets
into a nosedive.) So, just as the Fed will eventually have to
account for the losses on their pile of MBSs, so too will EU banks have to
write down the losses on their sovereign bonds. And that will push many of Europe's banks into
bankruptcy, which will undoubtedly trigger another round of loans. When financial institutions are insolvent,
their only choice is to extend and pretend.
Obviously, the ECB sees its job as helping with this fakery. The show must go on! You've heard of political theater? This is financial theater.
This is a familiar pattern with central banks. They create the easy money and loose
regulatory environments where bubbles emerge, and then they provide "limitless"
liquidity so that their bankster friends don't lose money on the inflated value
of their assets. That's what the recent $640
billion boondoggle was really all about:
propping up toxic bonds that are worth a
mere fraction of their original value.
Financial theater. And the show
must go on. (The raw truth would bring down
the entire house of cards, and we can't have
that!)
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