Now, the Fed Swoops in to Pick Up the Spoils!

CNN, 11 Feb 2009 "Administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money." (Money it creates out of thin air, but charges interest on. )

We have seen this play before, The First Great Depression in the 1930's among other debacles.

First, the Fed funds an enormous bubble in some asset class, real estate, stocks, Oil, etc.

That kicks off an irrational exuberance, eg. The Roaring Twenties.

The Fed and its minions stubbornly declare that all is well, there is no reason to worry, the economy has entered a new phase. Gone are bad old recessions once and for all.

Remember as late as 2004 Alan "Double Bubble" Greenspan, Fed chairman said, "Bubble? What Bubble, it is impossible to have a National Bubble in real estate since each market is local!" He also famously said, just a few years prior, A Bubble in the Stock Market? No Way!

Eventually, of course the Bubble implodes, (no tree ever reaches the sky!) resulting in astronomical losses, especially to the poor schnubs who came late to the party.

Public money, (loaned, gratiously by the Fed) is needed to clean up the mess and save Wall St, or the banks from collapsing.

What to do with all those failed assets that people bought for outrageous prices at the height of the boom, with money borrowed from the banks? (read FED)

Well, they must be liquidated, so they set up a Public/Private partnership to get rid of them.

Whether it is the Reconstruction Finance Corporation from the First Great Depression, the Resolution Trust Corporation of the 1980's or whatever Official sounding term they will tag on this one, the result will be the same.

Assets that exploded in price, rank speculation fueled by the Fed, gobbled up investor's funds as their prices soared into the stratosphere. Fun, riches, good times for all!

What the average man did not realize however was that the knowledgeable investor was Selling while he was buying! They made enormous profits.

However, once the inevitable crash took place and values plumeted, the banks that financed the investors had to be saved from all the loans on their books that were now in default!

This called for a tremendous influx of tax payer money. Tax payers took the losses, while the private sector took the profits.

Now, what to do with all of those worthless assets? Let's set up a Public/Private partnership and dispose of them. Back come the bank funded (read Fed) money men to pick up
the troubled assets at fire sale prices! The SCARFF plan. (You know, like the college kids scarff down beer and burgers?)

Here is a real life example:

In 1989, the nation faced a financial crisis caused by the collapse of hundreds of savings and loan associations, who had taken advantage of loosened regulations to invest aggressively in real estate and other ventures, many of which went sour.

Fearing both the size of the bill if the troubled institutions went under (too big to fail!) and the damage such a meltdown might cause to the economy at large, Congress and President George H.W. Bush in 1989 created the Resolution Trust Corporation to take over troubled thrifts, as the banks were known.The mission of the corporation was to dispose of the assets as quickly as possible for maximum value.

In swooped the Fed financed investors who made out like bandits when the economy returned to normal (waiting for the Next bubble!)

So you see the Fed loves economic Panics, as they were called in the last century, they make money when the economy goes up and when it crashes! Is it any wonder they are so keen on causing Panics, Recessions and Depressions?