What's The Big Bad Secret?

One theory that I have held for several months is that the US banking system has been insolvent since the Dec07/Jan08 time period. Since then, the US Federal Reserve has been keeping these rancid banks on life support by loaning good money (US Treasury instruments) for bad money (various flavors of Mortgage Backed Securities). Back in the spring of this year, I noticed that the "burn rate" of the FED's reserves would put them in the red by September 2008.

Note that the crisis was brought to the Congress on September 18, 2008.

Here is a chart to illustrate what I am talking about.



If the mortgages are bad (and we know they are), then the FED is out of money. This would certainly get the Congress' attention, and explain all the panic and hush-hush over the specific problems.

Again, Paulson and Bernanke had to have known about this months ago.

If this theory is true, then giving $700B isn't going to solve the problem. It just rolls back the Day of Reckoning to March, if that. It would likely come sooner because the problem with the US banking system is one of confidence.

Panic, hush-hush, fictional accounting, infinite leverage (yes, that is part of the new bill), and Banana Republic dark-of-night rule changes do not inspire confidence.