"Wealth Effect, Special Purpose Vehicle [SPV] – Financial Neutron Bomb"

Biz, Basel Switzerland

Low Wages Made Tolerable With Consumer Debt
 
US wage earners consumers were misled to think they had found new financial paradise on earth in a new wonderful age of credit miracle that made them financially more sophisticated and better off than their conservative thrifty to care for their families and especially the US aging parents.

Easy credit released by central bank loose monetary policy provided low-wage earners with ample debt money to live in bigger and better-equipped homes, to drive larger and faster cars, take exotic jet-set vacations, and to put their children through college with student loans that only needed to be paid back with the student's post-graduation salaries, all achieved by tapping into the regularly increasing size of the mortgages on their homes, the biggest leveraged asset in the average family's financial portfolio, the expected rising market price of which would allow already highly leveraged borrower/owners to take out additional cash by taking .on additional debt through cash-out equity refinancing that put additional spendable cash in their bank accounts without altering the conservative debt to equity ratio of the outstanding mortgage. This joy ride of the  mortgage debt bubble was expected to go on forever with ample liquidity expected to be released by an accommodating central bank to keep the housing bubbles expanding forever without causing inflation.
 
Home equity refinance became a huge Ponzi scheme to pay the cash-outs with the proceeds of new additional debt based on anticipated further rise in the market price of the mortgaged home in a gigantic real estate price bubble created by central bank loose-money monetary policy that treated real estate market price increase as desirable economic growth and treated wage increases as undesirable cause of inflation. Mortgage-backed securities because the largest component in the structured finance market and the main driving factor in economic expansion while wages remained stagnant.
 
Chairman Greenspan of the Federal Reserve Board labeled the phenomenon as the wealth effect of a growing real estate market made possible by the Federal Reserve lax monetary policy under his chairmanship.

Special Purpose Vehicle – [SPV] Financial Neutron Bomb

TALF money was designed not to go directly to targeted small businesses and consumers, but to the institutional issuers of asset-backed securities (ABS). The NY Fed would take the securities as collateral for more loans to the issuers of ABS. To manage the TALF loans, the NY Fed created a Special Purpose Vehicle (SPV) that would buy the assets securing the TALF loans. The function of a SPV is to isolate risk from the creator, in this case the NY Fed, as a device to hide debt from the balance sheet of the creator. In the case of TALF, the SPV creator is ultimately the NY Fed's parent, the Federal Reserve, the nation’s lender of last resort to banks.

SPVs are financial neutron bombs, used in war to kill enemy population without causing damage to physical assets, thus saving reconstruction time and cost in captured enemy territories. A neutron bomb is a fission-fusion thermonuclear weapon (hydrogen bomb) in which the burst of neutrons generated by a fusion reaction is intentionally allowed to escape from the weapon, rather than being absorbed by its containing components. The weapon’s X-ray mirrors and radiation case, normally made of uranium or lead in a standard bomb, are instead made of chromium or nickel so that the neutrons can escape to kill enemy troops and civilians, leaving empty undamaged cities for occupation by the winner in a battle.

The Fed's plan for eventual wind-down of its financial bailout and economic stimulus measures by selling in the open market some of its vast holdings of mortgage backed securities and Treasuries when the economy recovers faces the possibility of massive losses which could force the central bank to suspend annual payments of its profit to the Treasury for the first time since the 1930s.
 
The Fed is holding some $3 trillion in Treasuries as of February 2013, and is adding about $85 billion a month to keep interested rates low and to provide liquidity to the market in an effort to keep unemployment from rising. In 2012, the Fed contributed $89 billion to the Treasury to reduce a significant portion of the government's borrowing and interests costs. But as the Fed sells its holdings on economic recovery, the Fed must also raise interest rates to combat inflation, which will push down the market value of the low-rate securities in its holding to cause significant financial loss.
 
A Fed analysis published in January 2013 which projects interest rate at 3.8% later in the decade, show the Fed incurring a record loss of $40 billion which would force it to suspend payment ot the Treasury for four years beginning 2017. If interest rate rises another percentage point, the resultant loss would triple. This would put political pressure on the independence of the Fed to set interest rates. Worse yet, if the Fed fails to pull its own weight and becomes an added burden to the public debt, political momentum to abolish the Fed will gain strength.

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