The red line shows that, since August, banks have built their cash position in the form of Treasuries, agencies and deposits at the Fed by $865 billion, while their loans and leases have increased by only $325 billion.

In other words, rather than lending the billions of dollars received from the Treasury’s Troubled Asset Relief Program (TARP), as was originally intended, the recipient banks have squirreled away the bailout funds in order to shore up their balance sheets.

Concurrently, the Federal Reserve is exchanging its excess reserves for toxic waste from the financial institutions.

The combined affect is a “circular bailout” with the Treasury borrowing… in order to lend money to banks… that then lend it back by purchasing more Treasuries. Of course, the expense of this entire bailout scheme ultimately falls onto the back of the tax-paying public.

Interpreting what really is going on between Washington and Wall Street is a daunting task, yet it’s vital knowledge for investors looking to stay ahead of the trend and make a profit in the crisis now unfolding.