“Olde Reb”  (c)copyright 2011 All Rights Reserved


Pundits are reacting with aghast at Bernanke’s QE2. The purpose of QE2 is not for the benefit of society; it is a desperate attempt at self-preservation by the Federal Reserve. It will not salvage the Ponzi scheme.

If the market is left alone, the value of mortgages held by the banks will continue to fall. When the toxic mortgages eventually have to be written to value, the assets of the banks will rapidly de-leverage—and the banks are obviously bankrupt. When the banks fail, the riots start and Congress–to make a show for the public–will have to point fingers at someone (other than themselves) and that will be at the Fed. If the man behind the curtain is exposed to scrutiny or an audit, all hell will break loose. The Fed will be like BCCI on steroids.

The scheme of how the Fed receives phenomenal gain from T-securities—and the transfer of wealth from the citizenry to the financiers—must be appreciated.

Fiat money originates with the Fed and Congress creating a ledger account via deficit spending. Congress gives a T-security to the Fed (asset) and the Fed credits the Treasury’s account (Federal Reserve Notes) as a liability. The checks written by the Treasury on that credit will then be honored by the check clearing procedure of the Fed. Voila !! Congress can spend the new money. (Congress recently gave $700 billion in T-securities as TARP funds. Congress spent the money. The Fed swapped the T-securities for toxic MBS.)
[Granted, this is a vast simplification of the process. The basic accounting by the Fed can be reviewed at 2009 Annual Report to Congress by the Board of Governors, from page 448

Treasury accounting breakdown is accessible here.

Congress gets to spend the fiat money so created and the Fed holds the security and receives interest. When the security matures, the Treasury must redeem the security. The value of fiat money initially created must then be paid to the Fed and becomes gain. The “loan” has been repaid. The Fed has the entire value of the security as profit.

The Fed has an acceleration option used for virtually all securities–it will sell the security. Arrangements are made whereby the Treasury acts as auctioneer. Primary Dealers are required to submit bids and usually about 90 percent of each new issue is sold. The operation is touted as the public buying securities from the Treasury. Upon maturity the Treasury redeems the security from the holder. The Fed, as owner, receives the (bid) value of the security upon the sale. This profit is not shown on any accounting records.

[The Fed’s receiving the bid value is disputed by Treasury statements. Treasury financial statements also claim “borrowing from the public” finances government operations. Direct borrowing from the public cannot, in any way, expand the monetary system or result in the creation of fiat money; i.e., inflation. The label is deliberatively misleading.]

By either of the two methods, the Fed has received the value of the security. The total value of all issued T-securities becomes a gain for the Fed. Good luck on trying to follow this sequence in the accounting records. Even Enron, World Com, and Bernie were able to cook the books—and they were audited. But the Fed explains: the accounting records do not reflect “securities purchased under agreements to resell.”                                                Ref. Table 9A, note 4, Annual Report.

The method used by Congress to fund the redeeming of the security, and the interest incurred, is beyond the scope of this writing. THINK—more T-securities and perpetual debt.  The economic scheme imposed by the Federal Reserve is a self-destructive Ponzi scheme predestined to inherent national bankruptcy. Any Ponzi scheme, including the Fed, cannot survive downsizing (i.e., deflation). Ref: Rip-off by the Federal Reserve,Ref: Rip-off by the Federal Reserve,

PS: Numerous writers have written that the Fed is printing money. (The actual “printing” of what are labeled Federal Reserve Notes is by the U.S. Treasury and sold to the Fed for the cost of printing—about 4 or 5 cents per Note—whether it reads $1 or $100.) QE2 involves purchases by the Permanent Open Market Operation which put money into circulation. The purchase power the Fed is using has been created by the humongous deficit spending (giving T-securities to the Fed) by Congress. The Fed cannot create money by itself. Ref. Rip-off by the Federal Reserve,