There’s been a lot of talk in recent years about the need for transparency in the financial system.  Well, I think we’ve pretty much got it.

Let’s trace some of the steps here.

1. The fed rate gets really low.
2. A bunch of banks, crazed by the cheap money, make a lot of high risk loans, many of which turn out to be bad.  See: sub-prime mortgages.
3. It becomes clear that these loans are bad, so instead of being counted as assets, they’re counted as liabilities.  It now becomes clear that they’ve lent way beyond what they can back with actual money¹.
4. The banks can no longer lend because they’re close to their reserve rate, which is the minimum ratio of assets to liabilities that was put in place, *cough*, to prevent banks in a partial-reserve system from lending like madmen.
5. Because the banks can no longer lend, every business or person that operates on debt financing is screwed.  Shockingly, over years of cheap credit, almost everyone has been convinced to start doing it.
6. “To let us lend again,” the banks say, “the government has to help us deal with all this bad debt.”  A plan is drafted to drop 700+ billion dollars into buying bad debt, which will restore bank reserves.
7. The US Federal Government issues 700+ billion dollars of bonds, which are bought by the Federal Reserve in exchange for cash, which they’ve just printed (well, electronically transferred).  Now, bonds are debt, and the government owes interest on that debt.

So where are we?  The government is a nearly a trillion dollars further in debt, and has gained nearly a trillion dollars of known junk.  The banks are right back where they started before the lending frenzy, and the Federal Reserve banks are up nearly a trillion dollars in bonds, which they can now sell for profit.

But wait, it gets better.

The Federal Reserve banks are owned by their member banks, which just happen to be the same ones that were doing the stupid lending in the first place.

And now the chairman of the Federal Reserve is saying “the banks need more capital.”

Someone, please fill in the facts that I’m missing so this stops looking like a shockingly transparent swindle.

1. *cough* I know, shut up.

This entry was posted on Tuesday, January 13th, 2009 at 1:27 pm and is filed under Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.