World Wide, Central Banks verses the Markets

From Gary North's Answers website. One of the many austrian economists that called this train wreck a long time ago. Best $10 a month you can spend.

Dead Rabbits Out of Political Hats
Gary north

…Franklin Sanders, who sells coins for a living, has summarized the Federal Reserve System's policy options: inflation and blarney. He was short-sighted, as we all were. The FED has one other: swapping Treasury debt for assets that are rated AAA by the ratings agencies, despite the inconvenient fact that these assets do not have liquid markets.

This policy option is the equivalent of trading a silver dinner set for crushed beer cans, which are priced officially at silver's price.
The problem here is that the FED has swapped out about 40% of its inventory of Treasury debt. What happens when it runs out?

Why does it do this? Because it does not have to create fiat money when it swaps.

What does a swap achieve? Temporary bank solvency. Because the institutions that borrow Treasury debt for 30 days -- hahahahaha -- are allowed by the regulatory agencies to list this Treasury debt on their balance sheets as if they owned the Treasury debt rather than the AAA-rated, non-marketable debt. This keeps the regulators satisfied. Otherwise, the banks would have to list the AAA-rated paper -- hahahahaha -- at market value. No one really knows what this value is, other than this: it is a lot lower than Treasury debt. The banks would then have to call in loans because of asset losses.

Why? Because of a new rule which went into effect this year: bank assets must be marked to market. Imagine that! Banks must state what the value of the collateral is for their loans. This is FASB 157, issued by the Financial Accounting Standards Board….

….So, what is the credit crisis really about? The conflict between Market pricing and governmental power to alter market pricing.
Commercial banks have played the carry trade game with borrowed money: borrow short, lend long. This is the essence of all fractional reserve banking. It always has been.

Fiat-money booms always become busts. There are no exceptions. On this point, read Chapter 20 of Ludwig von Mises' book, "Human Action." Read Murray Rothbard's short book, "What Has Government done to Our Money?" They can be downloaded for free from the Literature section of www.Mises.org......

Non-banking financial institutions got in on the carry trade game during the expansion of fiat money under Greenspan. The asset bubbles got very large, especially that most popular of carry trade markets, residential housing.

Now the free market is re-pricing the assets that were the focus of the carry trade. The Treasury and the FED are fighting this process….