Here's an interesting question: If a year and a half ago the major banks and financial institutions were on the brink of failure and needed a massive federal bailout, how is it possible that they are already making big profits?  This is an important question because it is these profits that have been a major catalyst - if not THE catalyst for the big stock market run up since the March low.  And it is also these profits that lead a lot of economists to believe that the recession is over as healthy banks are now able to lend to business and ultimately create jobs and demand.

To understand the answer to my question, imagine for a moment that you are a bank president and its one year ago and your bank is in danger of collapse.  The reason for the crisis is that you have a lot of bad mortgages and real estate loans on your balance sheet, which you have no idea if it will ever be able to perform and pay off.  So, under then federal accounting rules you
have to devalue these loans to their market value which in many cases may be near zero. You're in big trouble!

Uncle Sam's clever solution, since there are so many of these "toxic assets", as the press dubbed them, there is simply not enough money in the world to buy them off your books, so you just change the accounting rules.  Instead of "marking to market" value (as I said near zero), you can now mark them to what you think they may be worth some day.  In other words, you can mark them to make-believe-whatever-the-heck-you-want.

Meanwhile there is another problem; even if you can pretend that you are solvent by doctoring up phony values on your books, you still need to make a profit to operate.  And since the business of banks is to lend money, you face another huge problem.  You see, since real estate has been  the major source of collateral for the loans you made in the past and since it has plummeted in value and is still falling, you can't really make any safe new loans.  So what are you to do?

Well, you are very clever and all of a sudden you see a guaranteed way to make money!  All you
have to do is borrow money from the Federal Reserve at .25% and then buy Treasury Bonds from the  Treasury Department for 3.5% and voila!  You make a huge profit with absolutely no risk at all! What could be better?  Now you can post profits every quarter since you don't have to recognize losses under the new accounting rules and you don't have to make any risky loans because you can just play the spread between what the Fed is charging and what the Treasury is paying!  Wow!

You can just do that as long as the interest rates remain as they are.  And wonder of wonders, interest rates that the Treasury pays are sure to go up as they need to raise more and more foreign money to fund the huge deficit to counter the now constant drop in the value of the dollar.  Plus, the  Fed won't dare charge higher rates to you as that would cut off your profits, expose the fraud, and lead to another huge drop in the economy in an election year! 

So no worries for you, Mr. Bank President. You can just keep on making gigantic profits, take no risk, make no loans, and hum right along.  Your "profits" are only going to get bigger and bigger. And the government can pretend that things are going better as they print paper money and filter through you into, well, their own budget!  What a neat trick!

Except for one big problem; this does nothing to sustain an economic recovery as none of the money reaches business which actually employs people and sooner or later the deception will come to light and  the whole scheme will collapse on all of our heads.  Get it?

These are make believe profits made with phony paper money and supported by lies on bank balance sheets. This, my loyal reader, is why the current stock market is a fantasy, the recovery is a mirage, and why you need to NOT fall for it.  Stay in gold if you have money to invest and hoard cash into TIPS.  If you are lucky enough to have made some money since March, GET OUT NOW!!!  Remember, pigs get fat and hogs get slaughtered.