Rolling Stone magazine's Matt Taibbi discussed the Fed loan scam.

In a very interesting read from Rolling Stone online magazine, Matt Taibbi (of "Goldman Sachs is a giant vampire squid sucking the life out of America" fame) discusses questionable loans by the Federal Reserve citing documents that were recently released by congressional mandate.  Caution, Taibbi uses strong but situationally appropriate language in the article.

In case you have a short attention span, get easily confused by details or are just interested in the bottom line, Bernanke saw that the global credit system was locking up.  The cause: too much existing debt.  Banks didn't want to lend and people didn't want to borrow.  Bernanke knew that without ongoing credit increases the global credit/debt Ponzi would go bust.  He wanted to buy time but things were breaking down at an exponential rate.  Congressman Kanjorski discusses the first wave of this on Youtube but there have been several follow on waves that have also been handled quietly by Bernanke and company, most recently with trillion dollar deficits and the printing of $600 billion from thin air in what has been called QE2.

The goal of buying time was so that banks could recapitalize themselves so that they could avoid admitting that they were (and still are) completely insolvent.  They could do this several ways including floating bonds, selling stock, selling assets, borrowing cheaply from the Fed and loaning to the people with a 4-5 point spread, etc.  In order to buy time, Bernanke knew that he needed to pump credit to anyone who was willing to take it on.  As you can see from Taibbi's article, that included nearly a quarter billion dollars loaned to the wives of a couple of big Wall St. bankers.

The problem with all of this is that it gave a few special people gobs of risk free, low cost money to buy assets at fire sale prices when others did not have access to credit.  Well connected people, including apparently their immediate families, got massive loans so that they could buy stuff.  So they went out and bought stuff at the bottom and made massive profits off the inflation and debt induced bounce.  This had the effect of buoying asset prices as Bernanke was hoping it would but much of the economic benefit for the bounce was concentrated into the hands of a few special, connected people.  In other words, not you or me.

Now, all of this money-giving was supposed to be loans that had to be repaid.  Thus, some people are not going to see the problem with it but there are huge problems nonetheless.  The first problem is that these were basically gift loans.  The repayment terms have not been released but we know the money was lent at very close to zero percent interest.  Who knows what the loan term was.  It could be a million years for all we know with the minimum annual payment being $1.  We just don't know.  But we do know that the Fed was desperate to lend money and so the loans it offered would have to be at very, very favorable terms.  We also know that they were in many cases uncollateralized.  If the rich banker's wives (or any other recipient) had invested in stuff that crashed instead of bouncing, how would they have been able to repay?  They simply could not have repaid and that would be that because we don't have debtor's jail for the elite.  Bottom line is that it was essentially a risk free transaction for them.  They could win or break even but they could not lose.  This is how wealth is concentrated into the hands of the few, essentially nonworking elite under a fraudulent money system such as ours. 

The second problem is that while everyone else is losing jobs or getting pay cuts, the new funny money loans injected into the economy created inflation which drove up prices of food and energy.  This reduced the discretionary buying power of the people, pushed people out of their homes and is responsible for a significant reduction in the middle class.  The final problem was that of moral hazard.  Since they got away with it once they are likely to do it again the next time the debt Ponzi begins to show weakness.  In fact, even more pigs will be lined up at the feeding trough than before because now everyone knows what was happening the first time around.  When too many people become the beneficiary of a con then it has to collapse due to an insufficient number of patsies to fleece relative to the con men who are trying to get paid.  At some point the con is more likely to go against them.  Instead of making massive profits they will lose the money and then the scam will blow wide open.  Of course, they never had the ability to repay the loans and so their debt will again be laid at the feet of the sleepy taxpayer. 

Historically speaking regarding times like these, at some point the slumbering giant which is the general population wakes up and decides not to take it anymore.  The result is civil unrest.  The fast talking, fast moving, weasel-like con men eventually get body slammed by the slow-to-anger but unstoppable-once-they-are-pissed public (the proverbial "hanging in the streets").  If you want to know what that looks like check out this short video.  If all of this is finally beginning to catch your attention then I would be remiss not to remind you about the only 2008 presidential candidate who was actively warning us about the Federal Reserve.  That would be none other than Dr. Ron Paul.  Back in 2008 people told me that voting for him was a "wasted" vote because that's what the media was saying.  In hindsight, the data clearly shows that any vote which was not cast for Ron Paul was wasted.