Nationalization steamroller rumbles on, flattening everything in its path.
Just consider these headlines:
U.S. Considers Taking Ownership Stakes in Banks
http://www.foxnews.com/story/0,2933,434844,00.html
Fed loans AIG another $37.8 Billion
http://www.foxnews.com/story/0,2933,434749,00.html
I switched on my BS detector while reading the second one, and it burst into flame. The story is a complete fraud in almost every sense: "Under the new program, the Federal Reserve Bank of New York will borrow up to $37.8 billion in investment-grade, fixed income securities from AIG in return for cash collateral. These securities were previously lent by AIG's insurance company subsidiaries to third parties."
Trust me, there is no borrowing going on here. Not by the Fed, and not by AIG, who is dead but still hooked up to the breathing machine.
What is going on here? Very simple. AIG is at the heart of the Mega Problem known as credit default swaps. The Fed is sliding $38 billion in counterparty risk off AIG's books, taking both AIG and third parties (read GS, JPM, MER, etc.) off the hook at the same time.
Now the United States taxpayer owns yet another stack of worthless defaulting paper. We knew the first $85 billion "loan" was just a down payment.
Note to Canada: Do not enter into any contracts with the U.S. or its dependent entities. The U.S.A. is now a wholly-owned subsidiary of Goldman Sachs (NYSE: GS, Stock Forum). USA, Inc. is insolvent and its shares, Federal Reserve Notes, face repeated massive dilutions of this kind for as far as the eye can see.
I was looking into this mess, pondering the imponderable, when all at once I had an epiphany! A light came down from Heaven and my eyes were opened. Suddenly I knew the Truth; I had seen All The Way Through to the other side. There is no going back for me. I am forever transported to a higher plane of understanding, and I just hate it. Ignorance was bliss.
Since I know that you're on pins and needles to hear what I saw in my vision, I'll cut right to the chase: Gresham's Law strikes again!
The Bad Money is driving the Good Money out of circulation. Now listen carefully, because your understanding of this next concept determines your financial salvation. Get it wrong, and you go to Fiscal Hell until someone on the outside decides you're worth buying out of Purgatory. Here it comes: Just as artificially low prices in paper futures drove real gold and silver into scarcity, artificially low prices for paper credit are driving real credit into severe scarcity.
That's it. Did you get it? You didn't? Think, think, THINK! Don't risk financial damnation!
Every time the Fed artificially suppresses interest rates by loaning fake money at rigged rates, they make real money harder to borrow.
Credit is credit, you say. Nope, think again. Just as no silver mint can afford to sell struck silver today for $11 an ounce, no one with real money can afford to lend it out for a 1.5% return. "Real money" in this usage means money that was generated through work. Make no mistake: Real Wealth can only be produced by someone doing Real Work. No exceptions, no free lunches.
Central bankers don't work when they produce the bogus money they call credit. They speak it into being, or print it. In other words, they counterfeit it. The Fed is out of money, so they backed up the truck at Treasury and loaded up with crisp T-bonds that reek of hot ink. Now the Fed credit blaster is recharged for the time being, and they are zapping right and left.
Hence, the price of counterfeit money (a.k.a. Fed credit) is dropping, but real money is getting scarce and the price is rising - if you can get any. Yes, I hear the dunces at the back of the class: "You're stupid. Mortgage rates are down since last week. Money is getting cheaper."
Haha, you fell for it. You thought the posted rates were real. Those advertised rates are not what you pay. Very, very few people can qualify for the posted rates these days. Banks are adding on points for risk. For example, Toronto Dominion Bank (TSX: T.TD, Stock Forum) used to write mortgages at about a 75bp discount to the prime rate. Today, they charge 100bp over prime instead. See how it works?
So now, scarce credit is being allocated and rationed, just like scarce gold. Government is routing credit to the banks to stop their collapse, and so there's precious little left over for consumers. Only the consumers with the best credit can borrow money today, and they're paying more for it after all the fees and risk adjustments.
As things now stand, the U.S. government and the U.K. government are both moving to take ownership of the banks. Why do they want to own the banks? Heh - they don't. They want to give money to the banks, and the only politically palatable way of doing it is to pretend they are buying the banks' shares. What do I mean by "pretending?" Well, think about it. When the Fed took an 80% stake in AIG, did they stomp, elephant-like, into the NYSE and take most of the shares off the market? Hahahahaha! That would have driven the common stock To Da Moon!! (Hint: the moon is nowhere near two dollars and change.)
The Fed does not want the worthless A shares. They took over AIG and issued themselves new, non-voting convertible preferred shares. They diluted themselves a 79.9% share of the biggest insurance corporation in the world! How's that for rapine and plunder? True, they own 4/5 of a bankrupt company, but they get to skim 11% interest no matter what happens to the carcass. But the Fed isn't in this for the 11%; that's a smiley-face mask on the Devil. They're in this to take control of AIG's CDS business before it bankrupts the global financial network. Good luck with that, Ben! Ben? Hey, where is Mr. Helicopter these days? He seems to be keeping a low profile. I wonder why? Maybe he doesn't like his new boss, Henry Paulson.
So, here's the AIG deal in a nutshell: The Fed issues $85 billion in counterfeit money and uses it to buy counterfeit shares in AIG. See how nicely it works out? Fake money for a fake stake in a ruined company. And no one is fooled except maybe the taxpayers.
Are you fooled, Mr. Taxpayer? Hey! Put that pitchfork down, you crazed gun-toting rustic! This is all being done for your benefit, and you'd damned well better appreciate it! Ouch! Stop! Ouch!
There's no gratitude these days. What a pity. I can only hope that some of you share my epiphany and take steps to insulate yourself from the flood of bogus money the central bankers are issuing in their desperation to reflate the Miracle of 2005. And if you think the present troubles are ended when the governments buy out the banks and insurance companies with great wads of counterfeit money, I have only two words to say to you: Hyper. Inflation.
This article was written by a member of the Stockhouse community.
