The Federal Reserve is essentially offering cash for trash, in its expanding campaign to inject liquidity into stalled credit markets.

The Fed last week joined with other central banks in an effort to boost market liquidity by making U.S. dollars available to a wide variety of sources for increasingly suspect collateral. So, if a foreign bank is struggling to obtain short-term financing from its peers -- remember those pesky high Libor rates? -- they can go to their local Bank of England, Swiss National Bank or even the European Central Bank to get dollars. These central banks can knock on the Fed window and borrow dollars on the cheap and put up whatever they think is "appropriate" as collateral. If you read between the lines, that could mean just about anything.

These foreign banks do not, in all cases, have U.S. branches and therefore not subject to our regulations, but they are getting the same sweetheart deal as your neighborhood bank.

The move is the latest in a string of measures aimed at strengthening the banking system. The most recent move being the Emergency Economic Stabilization Act, which created the troubled assets relief program, the much-ballyhooed $700 billion government rescue plan that intends to buy up troubled -- read: unwanted -- assets from the banks. The man in charge of the program is 35-year-old Treasury Undersecretary Neel Kashkari, who parlayed a Wharton MBA into a Goldman Sachs ( GS) job and now yields the power to stabilize the economy.

What kinds of things can be used as collateral, you ask? How about home equity loans, regardless of whether consumers have quit paying them. Then there are car loans, consumer loans and student loans. There's also collateralized debt obligations -- who knows what exactly is contained in these pools of toxic debt -- and construction loans.

Technically, Congress is supposed to oversee the Fed, but the Fed seems to be doing its own thing these days with minimal resistance. Meanwhile, the dollar is now backed by piles and piles of financial institutions' unwanted junk.

Back in the early days of this crisis, way back in say March of this year, the Fed opened up the discount window to investment banks and allowed them to put up just about any financial instrument they pleased. This was extraordinary. It was an effort to save firms like Goldman Sachs and Morgan Stanley ( MS). JPMorgan Chase ( JPM) picked up the carcass of Bear Stearns , since the window didn't open until after the firm was on the verge of collapse. The ability to borrow at the discount window was not enough to save Lehman Brothers, which filed for bankruptcy last month.

Originally the Fed required that any collateral it accepted in exchange for liquid Treasuries had to be highly rated. The discount window was for losers. It was the lender of last resort.

Those days are long gone.

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