Tuesday, September 16, 2008

The Federal Reserve Snarfs Down Crow; US Dollar Suffers

In late 2007, the credit markets seized up; banks no longer trusted each other to repay their inter-bank loans. To deal with this problem, the Fed began dramatically lowering interest rates. It also announced new programs such as the "temporary" Term Auction Facility by which banks and eventually other Wall Street firms could borrow from the Fed. (Don't bother trying to borrow from the Fed yourself; you have to be "too big to fail.")

Until this point, the Fed had resisted such measures because it was more concerned about rising inflation. But everything changed almost overnight, and the Fed began chewing on an expensive entree of roast crow.

Despite continuing inflation risks, the Fed has increased their loans and lowered rates. They began to accept riskier mortgage debt as collateral for the loans; you can follow the outstanding loans at The Slosh Report website.

On Wall Street, "risk" is something you buy and sell. If you want someone to take your risky debt as collateral, you have to pay them well to carry your risk. But the Fed prints its own money. The bottom line: every American dollar is now worth less because we are paying for the risks that Wall Street firms took on and couldn't handle. The Wall Street firms made big bucks buying and selling that risk. Now when it comes time to pay their bills, they pass them onto the Fed and it weakens every US dollar.

Meanwhile, the value of the dollar plummeted. (It has risen only in the last few weeks as other world currencies are having similar troubles.) Your house, your savings, and your retirement plan were devalued because the Fed chose to bail out the crooks on Wall Street who profited handsomely from their risky activities. You and I are the suckers left holding the bag.