Arson Suspected

[don]

as another old-growth forest goes up in flames....

Even though QE is mainly a backdoor way to recapitalize the banks; some lending has continued, although not to consumers and businesses. So where has the money gone? Here's part of the answer from the Wall Street Journal:

Former Salvadoran finance minister Manuel Hinds points out in the latest issue of International Finance that banks have indeed been shirking on their day job of transforming increased deposits into increased private-sector credit. But they haven't quit entirely. In fact, they've funneled significant new funds into nonbank financial institutions—which have not lent them on. What's happening is that U.S. banks have been behaving exactly like developing country banks during earlier crises, such as Indonesian banks in the late 1990s—raising lending to their worst borrowers to keep them alive, lest the banks themselves collapse from their borrowers' defaults.

For U.S. banks, these zombie borrowers are their affiliated financial entities set up to manage so-called off-balance-sheet activities—such as the famous SIVs (structured investment vehicles) created by Citigroup and others during the boom. Thus, the massive fiscal and monetary bailouts of the banks have served to worsen the credit misallocation that led to the general economic collapse in 2008. ("Prepare for a Keynesian Hangover", Ben Steill, Wall Street Journal)

So the banks are not only taking depositors money and using it in high-risk derivatives transactions and currency "carry trades", they're also propping up the long daisy-chain of insolvent creditors whose default could domino Lehman-like through the entire financial system. Funny how the media skips little tidbits like this when they give their rosy evening roundup.

And then there's this; on Christmas Eve, the Treasury Dept announced that it would lift existing caps on the mortgage-finance giants Fannie Mae and Freddie Mac. The two GSE's will no longer be limited to a ceiling of $200 billion in losses each. Although, the Treasury's action looks like it was designed to support the housing market, the real beneficiaries are the banks whose balance sheets are coming under greater pressure from the relentless uptick in foreclosures. It is widely believed that Treasury is laying the groundwork for a major revision of the Obama's mortgage modification program which has, so far, been a dismal failure. If the critics are right, the administration is planning to slash the principle on millions of mortgages sometime in 2010, thus shifting the sizable losses onto the US taxpayer. Otherwise, the banks will face potential losses on another 4 million foreclosures in the next year alone. (according to Credit Suisse)

Economist Dean Baker says that the Treasury's surprise announcement is an indication that Fannie and Freddie may have paid too much for the mortgage-backed securities they bought back in 2008 when the GSE's were used as a dumping ground for distressed bank assets.

This would mean that they were paying too much for mortgages and mortgage-backed securities bought from banks after the financial meltdown was already in full swing. This was the original purpose of the TARP program. Of course, TARP came with at least some restrictions and disclosure requirements. If Fannie and Freddie are overpaying for mortgages, then there are no conditions whatsoever put on the banks that get the money.

(Fannie Mae and Freddie Mac: Just a four Letter Word, Dean Baker, Huffington Post)

The Treasury's action is tantamount to another stealth bailout by industry reps working within the Obama administration. All policymaking seems to revolve around two fundamental tenets: Increase the profit potential for the big Wall Street banks, and crimp the flow of credit to the real economy to increase privatization, crush the labor movement, and reduce the population to third world poverty. That's Neoliberalism in a nutshell and, apparently, Obama's economic dogma. In fact, as economist L. Randall Wray points out, Obama's new health care bill is just more of the same; another ginormous handout to Wall Street disguised as public policy.

There is a huge untapped market of some 50 million people who are not paying insurance premiums—and the number grows every year because employers drop coverage and people can’t afford premiums. Solution? Health insurance “reform” that requires everyone to turn over their pay to Wall Street. Can’t afford the premiums? That is OK—Uncle Sam will kick in a few hundred billion to help out the insurers. Of course, do not expect more health care or better health outcomes because that has nothing to do with “reform” … Wall Street’s insurers… see a missed opportunity. They’ll collect the extra premiums and deny the claims. This is just another bailout of the financial system, because the tens of trillions of dollars already committed are not nearly enough.

(Healthcare Diversions Part 3: The Financialization of Health and Everything Else in the Universe L. Randall Wray)

It's no wonder that the Obama administration's appeal to China to "expand its domestic market" focuses exclusively on health care and retirement programs. Wall Street is just lining up for the next gravy train.

Mike Whitney

http://www.counterpunch.org/whitney12312009.html