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Came across this article on Salon.com that does a good explaining in plain English why the financial crisis is not over. Read the full story at Salon.com

Some excerpts:

Commercial banks, by law, have to hold a certain percentage of their deposits as cash at the Federal Reserve. (S)ince August 2008, these bank reserves held at the Fed have exploded to more than $1.2 trillion (as of March 2010), even though only $65.6 billion was required to be deposited by law.

During the past 20 months, the Fed has tripled the size of its balance sheet by acquiring more than $1.5 trillion of new assets, more than $1 trillion of which are mortgage-backed securities.

What is going on here? Why would commercial banks hold $1 trillion more than they legally had to in reserves at the Fed, earning only 0.25 percent interest per year, and why would the Fed buy more than $1 trillion of mortgage securities of undisclosed quality in the marketplace?

What I believe the Fed did next was fraudulent and deceitful, its full impact still hidden from the American public.

The Fed, I am convinced, went to these commercial banks and offered to take many of their toxic mortgage assets off their books, often accepting them as collateral for loans to the banks. In exchange, the Fed credited the commercial banks with an increase in the reserves held at the Fed, so long as the banks agreed not to withdraw the excess reserves immediately. Magically, the Fed was able to take a bad asset like a CDO and transform it into a sparkling good asset: bank reserves at the Fed.

What concerns many knowledgeable investors is that the Fed doesn't have the money needed to purchase these assets and instead prints new money.

One rumor is that the Fed is looking at selling more than $1 trillion of mortgage securities back to Fannie Mae and Freddie Mac. This would complete the circle of deceit, because Fannie and Freddie could fund their purchase with increased borrowings guaranteed by the government... Total government debt would increase by $1 trillion, but it would be hidden from the taxpayer

A second idea being discussed is for the Treasury, over time, to slowly transfer real money to the Fed to reduce these excess reserve balances and thus cover any resulting undisclosed losses in the portfolio.

The House of Representatives passed legislation requiring a regular audit of the Fed's assets, but this provision was removed by Chris Dodd, D-Conn..."Obama administration officials have declined to weigh in on any specific amendments, with one exception: a move by Sen. Bernie Sanders (I., Vt.) to give the government more power to audit certain operations at the Federal Reserve. Fed and administration officials have signaled they would fight to stop it at all costs."
 
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