XIAM007

Making Unique Observations in a Very Cluttered World

Friday 10 July 2009

Is the Fed Juicing the Stock Market?

Reading - Is the Fed Juicing the Stock Market? http://bit.ly/meevt

Why has the stock market been on a 3-month tear when the economy is undergoing the worst economic contraction since the Great Depression? The S&P 500 has shot up 40% from its low on March 9 and the Dow Jones Industrials have followed close behind. Is this a typical bear market rally or is the invisible hand of the Fed goosing the markets?

Everyone seems to agree that the Fed's multi-trillion dollar quantitative easing (QE) is the jet-fuel that's put stocks into orbit. But how is the money filtering into the market?

The first place to look is the Fed's lending facilities which have provided trillions of dollars in loans and US Treasuries for dodgy mortgage-backed collateral. These loans are not collecting dust in company vaults, but are being used for speculation in the stock market. Unfortunately, Bernanke refuses to say which financial institutions have gotten the loans, or how much they have borrowed, or even what type of toxic garbage that's been taken in exchange. It's all very hush-hush. Bernanke's even shrugged off the threats of legal action from Bloomberg News, which is demanding greater transparency in the Fed's programs. What a joke. The Fed doesn't have to comply with the law; it IS the law. Meanwhile Bernanke's stealth monetizing operations have continued without pause, boosting market activity, driving up the price of commodities and inflating another equities bubble. It's all just business as usual at the Fed.

If Bernanke is dabbling in the stock market; it's certainly understandable. After all, his back is against the wall. He needs to keep the banking system from crashing, but he can't go back to congress for more money because his political support has eroded and the country's mood has soured on bail outs. That's why Treasury Secretary Timothy Geithner concocted the Public-Private Investment Partnership (PPIP) which was supposed to remove the banks bad assets by providing financial institutions with 94% government funding in the form of non-recourse loans to purchase (mostly) mortgage-backed securities (MBS). But less than two hours after Geithner announced the details of the program, bloggers figured out that the plan was nothing more than a swindle which would allow the banks to set up off-balance sheet operations (special purpose entities) that would buy back their own garbage debt with generous subsidies from taxpayers. As soon as FDIC chief Sheila Bair got wind of what the banks were up to, she put the kibosh on Geithner's scam--saying that the banks would NOT be allowed to bid on their own assets. That was the last that anyone ever heard of the PPIP.

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