Makes Sense

I have written on a couple of occasions about so-called repo loans by the Fed and Treasury. These are short terms loans given to "primary dealers" (i.e. Citibank, Goldman Sachs) at very favorable rates by the government. Put another way, creating money out of thin air for da' boyz to play with. This week those loans have been to the tune of $37 Billion from the Treasury alone.

I ran across this analysis today and it makes perfect sense:

Just what’s the Treasury’s game [pumping money into the economy]? What they’re doing is quite shrewd. They’re taking excess tax receipts and lending them to the primary dealer network for short periods of time and earning interest on the money until it’s needed. Treasury Secretary Paulson [and is an ex-CEO of Goldman Sachs, a primary dealer] is no dummy and knows there’s an intended side benefit. The primary dealers will support the markets since it’s in their financial interest to do so to support fee income from the public and their own trading profits. In a previous interview a few months ago Paulson stated essentially that he hoped that rising stock prices had offset lower home prices boosting consumer confidence. It all makes sense.

These primary dealers take the cash and, using programmed trading that makes up over 60% of all stock trades on the NY Stock Exchange, put that cash to work. The two benefits mentioned are 1) attracting retail investors (schmucks like you and me) who see a market goin "to the moon Alice" and want to get in on the action and 2) creating a new bubble to offset the old bubble (housing).

Quite a scam. Keep blowing bubbles to avoid the deflating of the old bubble. The only problem with it is that nasty "I" word.