June 2011
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Federal Reserve Diverts $600 Billion to European Banks?

Zero Hedge Fund blogger Tyler Durden speculated that the Federal Reserve spent the $600 billion, QE II, it created last fall to shore up Europe Bank assets. In other words QE II went to help Europe, Germany, Spain, Portugal, and Greece no the US banks. He bases his claim on the build up of the Federal Reserves monetary base shown and the simultaneous increase in European bank reserves.

Monetary Base, note QE II begins fall of 2010

Durden notes the growth of the monetary base here and the growth of bank reserves over in Europe there is a almost one to one correlation.

Foreign bank reserves increased $600 billion since the fall of 2010

Foreign bank reserves compared to Federal Reserve monetary base from fall of 2010 to June 2011

If this is true, and there are several economist like Gary North that are convinced it is, it is the end of Bernanke. There is no one in Washington that will be able to save Bernanke when this scandal becomes public.

Second this explains why the Euro has remained relativity stable over the last few month compared to the dollar and other currencies. If true European exporters will be just as furious as Americans over this action that will have cost them billions in sales.

Third now we know why Germany has had a change of heart as far as its position to bail out the Greeks. A few billion here and there will do that.

Fourth since none of this money made it to US banks none was lent out to help the economy. Not that the US banks would have lent the money out with the specter of inflation looming in the distance and zero confidence in the economy, banks would simply take the cash and purchase more short term T-Bills, but it kind of defeats the whole Keynesian “liquidity” argument for QE II when you are shoveling the cash to Europe.

Fifth, and most important, since there is no excess “liquidity” for US banks to purchase more Washington spending and other nonsense we are almost assured of QE III. Economist and Euro Pacific President Peter Schiff thinks the Fed will hide the QE III program in purchases of longer, three to five year, treasury notes. There will officially be no QE III and the Fed will hide these purchases just as stealth like as they did QE II.

And I thought Bernanke was a dull guy.

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