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Why Federal Reserve’s fiat currency dream is unrealistic

10/9/2012 3:09:08 PM | Richard (Rick) Mills

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Quantifornication refers to the insane fiat dream that the monetary policy employed by the Fed can fix the predicament we are in.

Overheated US housing prices started dropping in 2006. Homeowners were going underwater (they owed more than the house was worth) and many had questionable credit – “fog the mirror loans” were common, if you breathed you got a loan.

*Banks sold these mortgages to agencies like Fannie Mae and Freddie Mac.

They bundled the mortgages with other loans bearing similar interest rates and then sold them as Mortgage-backed securities (MBS), so called because their value was backed or secured by the value of the underlying mortgages.

An MBS is therefore a derivative because its value is derived from the underlying asset - the mortgage that was often underwater and held by someone with bad credit.

*The Residential Mortgage Backed Securities (RMBS) Working Group, a state-federal task force created by President Obama, just announced their first legal action.

“Co-chair, New York Attorney General Eric T. Schneiderman has filed a Martin Act lawsuit against J.P. Morgan Securities LLC, JP Morgan Chase Bank N.A., and EMC Mortgage LLC for making fraudulent misrepresentations and omissions to promote the sale of residential mortgage-backed securities (RMBS) to investors.

According to Attorney General Schneiderman's lawsuit, these defendants deceived investors as to the care with which they evaluated the quality of mortgage loans packaged into residential mortgage-backed securities prior to Bear Stearns & Co's collapse in early 2008, incurring losses that have totaled approximately 22.5 billion to date.” MENAFN.com

The Federal Reserve started easing monetary policy aggressively throughout 2008. By December of 2008, the federal funds rate was between 0 and 1/4 percent.Additional stimulus was injected by expanding the holdings of longer term securities.

The System Open Market Account (SOMA) purchased mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae (agency MBS).

"On numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to individual institutions to stabilize financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008." Government Accountability Office (GAO)

To view the rest of this article, please click on the link:

http://aheadoftheherd.com/Newsletter/2012/Quantifornication.htm

ABOUT THE AUTHOR

Richard (Rick) Mills

Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald and Financial Sense.

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peterpalms

They were being paid back in dollars that were worth only a fraction of the ones they had lent out. The banking crisis had caused the disappearance of savings and investment capital, so they were unable to issue new loans to replace the old. Besides, people were afraid to sell their homes under such chaotic times and, if they did, very few were willing to buy with interest rates that high. Old loans were being paid off, and new loans were not replacing them. The S&Ls, which in the 1980s had been in trouble because home prices were falling, now were going broke because prices were rising. Congress applied the expected political fix by bailing them out and taking them over. But that did not stop the losses. It merely transferred them to the taxpayers. To put an end to the losses, Congress passed the Housing Fairness and Reform Act (HFRA). It converted all Bancor-denominated contracts to a new unit of value—called the "Fairness Value"— which is determined by the National Average Price Ind

peterpalms

The U.S. housing bust has saddled the country with an "extraordinary" level of abandoned properties, inflicting heavy costs on the wider community which may warrant to ease the problem, a top US central banker said on Friday. "In order to see the robust economic recovery we all want, we need to deal effectively with the large volume of vacant and distressed properties throughout the country," said Federal Reserve Board Governor Elizabeth Duke. QE3 Now the banks OWN your house. When the dollar collapses the government will no longer have the collateral of these houses and the banks will have paid nothing for them. Here is what will come next. If you do not pay your real estate taxes on time you home will become the banks property. One of the first industries to feel the raw power of "emergency measures" was the home industry. During the early stages of inflation, people were applying their increasingly worthless dollars to pay down their mortgages. That was devastating to the lenders

CONSTRUCTIVE_SUBVERSION

Something thats been in the making for quite some time. Canada will get some kind of reversal soon enough in the housing market. I just dont think that it is the temporary slowdown in China that will cause the dramatic decline. Perhaps, a debt rating agency will look at one of the provinces and come up with a large downgrade. That might be enough to trigger some headaches.. Agreed, not sure how some of those loans could be catagorized as similar in risk. Thats the USA, land of opportunity ????

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