Bending the Third Rail
Because We Should, We Can, We Do
Friday, March 09, 2007
It finally struck me yesterday.

I keep reading all these econ sites discussing inflation and how the "big money boys" offer up corporate welfare on a plate. What was puzzling was exactly how is this done?

The Fed raises and cuts interest rates which affect everyone. Right? Then I read this and it clicked:
The Fed has been conducting 1 day repurchase agreements [“repos” or short-term loans] for much of the past week in amounts ranging from $4-7 billion. These funds are bid for by the primary dealer network and recently have been done beneath the Fed Funds rate.

A pretty good deal for the borrowers, right?

Sometimes repos aren’t even repaid and when that happens money is created out of thin air. [Think money supply growth.]

The primary dealers will use the money as they see fit but may rout[e] much of it to their trading desks [stock market] to play trade with.

Today’s 14-day $15 billion repo gives the dealers two weeks [“your tax dollars at work”] to “use” that money. If the money should wind-up at trading desks you can rest assured program trading, “this machine starts automatically”, will be the result. Or, the funds could help cover some subprime lending problems which we featured in a Bloomberg article yesterday.
Allow me to translate into English.

The Fed (the government), prints money (voila', we have money!) and then gives it to private businesses at below market rates, sometimes not even requiring repayment of the loan, to be used as that business sees fit. If the business pays it back, it's cheap money. If the Fed doesn't "require repayment" then it's free money! Your tax dollars at work indeed.

This is but one example of how the government, and it's big money interests manipulate the "free market" in their favor. The Fed doesn't issue that money to you or even to the local small businessman to invest.


It's given to Wall Street. Sheeesh, and these same people get all twigged if a Katrina victim wants their mortgage payment delayed due to disaster citing "personal responsibility" and "returning to good ole' solid Amurikan values"!!!!

As Rumsfeld would say (I kinda miss ole' rummy ...... well .... no I don't), one might say that this is a good way to keep the economy humming. And that's true. Pumping $20 billion dollars into the economy in a couple of weeks will do wonders in stimulating things. Stocks go higher .... shareholder feel wealthy ..... more Mercedes get sold ....

So where's the beef?

The beef is that these benefits are distributed unequally, and the hypocrisy is thick when discussing social programs. But that aside for a moment, it's also an inflationary move that tends to create artificial bubbles (housing anyone?) When you have abundant cheap money flowing around, you have crap like the loan offer I received yesterday for a 1% mortgage offer that will ..
"Cut your monthly payment in half while giving you $50,000 dollars in equity out of your home!!!!! (this loan is an adjustable rate mortgage which will adjust according to market conditions blah blah blah).
And gee. Who get's screwed when inflation is high? But don't worry you're little heads, the government boys will "adjust" those inflation numbers to convince you that your daily costs are not rising at any significant rate.

What the Fed has been doing is likely a part of the reason the stock market has bounced off the floor from last weeks crash (a stock market bubble re-inflating). And it will fuel inflation. And where it stops, noboby knows ........ But I guarantee you that the big money boys will have a chair when the music stops.