Corporate Welfare .... Again

If you follow the news, you know that the Fed stepped in with some dough yesterday to help the market. In simple terms, the Fed agreed to take virtually any junk as collateral and give, in return, some very nice U.S. Treasuries.

Many have been asking an important question. These "swaps" are for 28 days. What happens then?

What happens after 28 day is pretty clear. The swap will be rolled over and over and over until the mortgage backed security market stabilizes. This could be a year from now, or perhaps 10. That may sound ridiculous but it's essentially what happened in Japan. It's also part of the Zombification process I described in The Great Pretender.

Inquiring minds might be asking what happens if the value of the MBS drops. Will the Fed issue a margin call or just look the other way? One might think we just have to wait and see, but since the Fed will probably never say, it's more likely we have to wait and not see.

The truth is that no one will know. At a minimum, the Fed can continue to carry the junk as long as necessary to insure that the private corporations financial institutions can stay in business and not pay a consequence for the crazy lending they've done. Or perhaps the Fed will simply absorb the losses with you and I paying the freight.

No matter what, this situation gives any good liberal the perfect, detailed, situation illustrating why a conservative arguments against welfare or government assistance (health care anyone?) to citizens is bogus. The same "moral hazards" exist for corporate "citizens", and any arguments against improving the common good for citizens is just bullshit.