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The Silent Bailout

November 19th, 2010 - 8:06 am

And this time, it wasn’t even done through legal channels. Read:

I have a different explanation for the Fed’s latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks.

The 2009 quantitative easing lowered mortgage rates and helped home prices rise for a while. But last month housing starts plunged almost 12%. And in September, according to Core-Logic, home prices dropped 2.8% from 2009. Commercial real estate values are driven by job-creation and vacancy rates, both of which are heading the wrong way.

Because of unexpectedly bad construction loans, the staid Wilmington Trust was sold to M&T Bank earlier this month in a rare “takeunder”—what Wall Street calls a deal done below a company’s stock value, in this case by 40%.

In other words, real estate is at risk again. But Mr. Bernanke would create a panic if he stated publicly that, if not for his magic dollar dust, real estate would fall off a cliff.

Does anyone remember what TARP was supposed to do? It was the Troubled Asset Relief Program. It’s aim was to “unbundle” the bad home loans from the good ones. Not to get too technical here, but good loans and bad ones had been bundled together, to make the bad ones palatable to investors. You know, “There’s so much horse shit, there must be a pony here somewhere!”

Or, as Wikipedia has it, TARP was to allow “the Treasury to purchase illiquid, difficult-to-value assets from banks and other financial institutions.” So why are the banks still exposed, if the Treasury is holding the bag of horse shit while the bankers all sit on the ponies?

Well, because TARP — if it had ever been anything else — quickly turned into a slush fund, and the banks figured they didn’t have to sell their bad assets at fair prices, so long as their bottoms were covered with easy money. And besides, the Treasury wasn’t all that interested in buying them up.

So — now that we’ve exhausted our legal means for saving our financial system, the Fed is resorting to extra-legal means.

But if Bernanke has done anything other than ever-so-slightly put off Doomsday while increasing our risk of a massive inflation… Well, I can’t figure out what it is.

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