Where did the money go?
If you are like most of us, you are wondering where the bailout money went. And explanations such as “market correction,” “the bubble bursting,” “reckless consumers” lack the substance to explain the economic collapse.
I have known some of the key elements of what caused this for some time, but I recently found a book that fills in the missing questions, such as with $1.2 Trillion printed and put into “circulation” why can’t a business get a loan? Why does there still seem to be less money than before this new money was created? Where did it go.
That answer is found in a book called Crisis by Design: A Look Behind the Wizzard’s Curtain.
A very shortened version of the series of steps that crashed the economy follows:
1. Former Chairman of the Federal Reserve, Alan Greenspan, held interest rates ” artificially low resulting in an orgy of borrowing and toxic side effects for the entire economy.”
2. The Community Reinvestment Act was rewritten in 1994. This combined with Greenspan’s easy money policies to create a wealth of toxic assets by creating a wave of mortgage’s written to those who did not have the income or credit ratings to pay them.
3. After the great depression, Congress enacted the Glass-Steagall Act to prevent such a catastrophe from happening again. Greenspan pressured Congress to repeal this act and succeeded in 1999, opening the door to more of the same activities that destroyed the economy in the late Twenties.
4. “In April of 2004, a group of five investment banks met with the regulators at the Securities and Exchange Commission (SEC) and convinced them to waive a rule that required the banks to maintain a certain level of reserves.” Banks were now not only allowed to lend far more money for every dollars of assets than was wise, they were actively pressured to do so.
5. “The final nail in the coffin—and this was really the wooden spike through the heart of the financial markets—was delivered in Basel, Switzerland, at the Bank for International Settlements (BIS).” The BIS is the bank that presides over other Central Banks, one of which is our Federal Reserve. They answer to no one but largely dictate the financial policies of the world. The BIS created an accounting rule called Basel II which required banks to use Mark to Market accounting to value their assets. This rule went into effect at the same time as the damage done by the sub-prime mortgage lending was first becoming evident. Though the majority were still making their mortgage payments each month on time, banks were force to mark the value of their assets to the market and trillions of dollars of assets vanished from the balance sheets. They were no longer able to lend.
6. In comes the Federal Reserve in the white hats with $1.2 Trillion in bailout money, much of which went to the banks to bail them out. When then with all that money are they still unable to lend? Because the Basal II accounting rule still forces their balance sheets below a level where they have sufficient assets to do so. Why with that much money put in circulation is the economy still contracting? Because much of it did not go into circulation. A provision of the bailout called TARP created the means for the Federal Reserve to pay interest on money deposited with it. Many banks who are unable to lend due to artificial restrictions imposed by Basal II simply deposited the bailout money back with the Federal Reserve to earn the interest until it “all blows over” .
This is a very shortened version. Please take time to read the full version of these step by the original author at: Crisis by Design. Then take a moment to write your elected officials and ask them to stop blaming the “reckless consumers” and go after the real culprits. Just as it is illogical to blame the mail room clerk for the financial crimes of Enron, so it is to blame consumers for the destruction of the American economy. It can be fixed, but it takes directing the attention of our lawmakers to the correct target… those that worked to collapse it in the first place.
