How Did It Happen and What are the Ugly Consequences?
Published on Global Research.ca, by Matthias Chang, March 10, 2009.
… The Fed is no different from banks in that confidence in the quality of its assets is critical and that if and when the market recovers, there is in fact a market for the junk assets that it took on to unravel the gridlock in the financial markets.
By way of analogy, if your high street bank’s balance sheet is made up of junk, what would you do? There are just not enough assets to meet its liabilities.
But of course, one can argue that the Fed is not your high street bank. It is the central bank of the mighty USA. It will always be able to “print money” or “digitalise” money and keep the markets going.
But beware that the Federal Reserve Note is mere paper, fiat money which cannot be redeemed for anything tangible such as gold. And although it is stated boldly in the notes issued – “In God we trust” – you and I are not actually placing our trust in God when accepting the Federal Reserve Notes as “money”.
When Joe Six-Packs realises that the Federal Reserve Note is not even secured by US treasuries and or the FED has real tangible assets, but its balance sheet is littered with junks and toxic waste, there will be a run on the Fed i.e. when Americans and foreigners no longer have faith in the Federal Reserve Notes as “money”.
If confidence could vaporise in a second and cause a stampede in what was once considered solid security, the triple A rated bonds in the repo and money markets, the same confidence that is now reposed in the Federal Reserve Notes can likewise disappear into the memory hole.
All these years, the con was maintained by the Fed that it was solid because it has on its balance sheet over $800 billion of US treasuries i.e. its notes “were so-called backed by these treasuries”. It could sell its treasuries in the repo market for cash and thereby control the money flows in the economy and vice versa.
In their subconscious mind, Americans and stupid foreign central banks and their executives (brain-washed by the Chicago School of Economics) somehow believe in the infallibility of the Fed.
Now it has been exposed that the Fed’s “assets” comprise of junk bonds and toxic wastes.
The Emperor has no clothes!
Paul Volcker, former Chairman of the Federal Reserve may have given the ultimate epitaph: “The bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.”
And it is any wonder that Professor Nouriel Roubini declared:
“The process of socialising the private losses from this crisis has already moved many liabilities of the private sector onto the books of the sovereign. At some point a sovereign bank may crack, in which case the ability of the government to credibly commit to act as a backstop for the financial system – including deposit guarantees – could come unglued.”
In my opinion, the Fed has already become “unglued”. Whatever guarantees given to secure the indebtedness of CitiGroup and others to prevent a run on these banks are useless.
It is bankrupt! (full long text).
(Matthias Chang is a prominent barrister, author and analyst of the New World Order based in Malaysia.
His website: Future Fastforward. He is a frequent contributor to Global Research. Global Research Articles by Matthias Chang).