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How to Recognize a Bailout

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Fed launders bad loans, taxpayers pick up tab.

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The regulator of the Federal Home Loan Banks (FHLB), which are regional banks effectively controlled by the government, announced the member banks can now purchase an additional $150 billion mortgage-backed securities. The government doubled the limit for the banks' investments to six times their capital from just three times. Apparently the regulator was persuaded by the Treasury Department to take the action.

I think we can be assured the action was not profit motivated; that would assume government officials are smarter than their Wall Street counterparts. First Fannie Mae (FNM) and Freddie Mac (FRE) are authorized to increase their portfolios and next FHLB is allowed to buy more from them. There is a pattern.

When the government can't find any more entities they control to take bad private securities away from the private sector, they will create one. But it's all the same. The securities will disappear at a good price for banks. They will digest for a few years inside a government entity and slowly be regurgitated back out to the private sector at a much lower price. In this way the private sector's (Wall Street) losses are effectively laundered away.

Of course someone picks up the difference and that someone is U.S. taxpayers. Maybe not today's taxpayers, but maybe so. The cost can't be avoided. The U.S. in reality has public debt approaching $13 trillion (if you add in the cost of the Iraq war which no one does), and that's without $45 trillion in unfunded liabilities from social security and medicare.

The U.S. is basically a third world country that depends on other countries' generosity (it's really other central banks that just don't get it or are too scared to fully abandon the dollar) to survive. At some point though we will reach the Pin Prick level where U.S. interest rates will shoot up as foreigners cry "No Mas!"

All these actions by the Fed and the Treasury Department, from arranging private sector takeovers of shaken down firms to stealth bailouts to outright bailouts just shift the cost of too much debt from banks to our children.

So when you praise Mr. Bernanke for decisive action you better look in the mirror and practice explaining to your children why their standard of living is lower than yours was.
No positions in stocks mentioned.
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