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The Fed Cries Foul?

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Over the weekend, the Fed began pointing fingers.

Faced with a still languishing economy, despite extraordinary monetary policy measures that include near zero long-term interest rates, a number of quantitative easing campaigns (i.e., printing money), and the purchase of piles of bad assets, the Fed has decided to now focus on the blame game.

The culprit?

The government’s housing policies are the problem according to the Fed, which they say have not done enough to kick-start the housing market in the U.S.

"The ongoing weakness in housing has made it more difficult to achieve a vigorous economic recovery," says Fed New York President William Dudley. "With additional housing policy interventions, we could achieve a better set of economic outcomes."

The solution the Fed is cooking up is to buy back more of the bad debt on housing, to pressure the government to step up efforts to loosen lending restrictions for borrowers and to do loan write downs for owners who owe more than their house is worth through Freddie and Fannie.

As The Wall Street Journal reports, “Fed governor Betsy Duke, speaking in Richmond, Va., said policymakers should consider policies that use Fannie and Freddie more aggressively to spur a housing recovery ‘rather than focusing entirely on minimizing losses’ to the firms.”

Translation, use taxpayer dollars to clean up the Fed’s mess... and make them money.

It’s interesting that the Fed is diving into housing policy for two reasons. One, the Fed traditionally has no say in these types of things as their official mandate is simply to keep the inflation rate in check and to keep unemployment low through fiscal policy.

Two, the root problem of the housing market was the very banks that the Fed represents and which the Fed helped bail out during the height of the financial crisis —again, with taxpayer money.

When the Fed makes a move like this, you have to look below the surface for answers. The Fed states that the goal of meddling in housing is to help their efforts to kick-start the economy. But who stands to win and who stands to lose from their proposed actions?

As always, the U.S. taxpayer stands to lose and the big banks stand to win.

A possible real reason behind the Fed’s sudden earnestness regarding housing is the fact that in 2012, the number of properties the banks are expected to have to take back is estimated at 1.8 million — up from 1.1 million in 2011 and 600,000 in 2010.

Such a scenario is bad for the middle-class, as it will continue to push down housing prices and extend the housing crisis. For the banks, it’s bad because it means that they will be stuck with even more bad assets caused from toxic loans that they gave out in the first place. Rather than take responsibility for their poor lending practices, they’re pressuring the government to use your tax dollars to fix the problem.

Beyond that, the Fed and the banks would benefit greatly from such an action, especially if they buy bad debt for pennies on the dollar and succeed in influencing U.S. housing policy to help raise housing prices through taxpayer-funded debt forgiveness.

This is a big opportunity for you, if you have a financial education

For some of you, this will enrage you, as it should. But you should also be able to see the opportunity. If the number of properties expected to go back to banks as foreclosures happens, that means there will be even more great deals for investors ready to buy assets and build their portfolio. This means a big opportunity to build your cash flow by purchasing properties cheap and to possibly be the recipient of inflationary policies that help push the price of housing up.

Additionally, the Fed’s call for a loosening in lending policy should open the door more for investors to secure loans easier at already, historically low interest-rates.

As I’ve written before, wealth never disappears. It’s simply transferred, and the biggest wealth transfer in U.S. history is still happening. If you have a good financial education, the good news is there’s still time to get on board if you have a good, financial education.

Want to learn more and increase your financial education? Check out our Rich Dad Community here.

Original publish date: January 10, 2012

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