Dedicated to Deposits: Deals, Data, and Discussion

How the Proposed Fed CDs Will Affect Savers?

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Yesterday the Federal Reserve proposed selling CDs to banks as a new tool to help it remove excess cash from the financial system when they finally implement their exit strategy. Here's how the Fed describes it:
Under the proposal, the Federal Reserve Banks would offer interest-bearing term deposits to eligible institutions through an auction mechanism. Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the effective implementation of monetary policy.

This proposal is one component of a process of prudent planning on the part of the Federal Reserve and has no implications for monetary policy decisions in the near term.

A reader asked me how this may affect us savers. As this Motley Fools blog post describes, the Fed already has many tools to fight liquidity and inflation. "[P]roblem is that all of these will raise the interest rates on mortgages, hurting the residential real estate recovery." Perhaps the Fed is thinking these term deposits would have less effect on mortgage rates? That could also mean lower deposit rates. One of the comments in that Motley Fools post had a good question of why banks would choose these term deposits over T-bills.

Other discussions of this Fed proposal are at the Financial Times and in this AP article. It should be noted that at its last meeting, the Fed continued its pledge to hold rates at record lows for an "extended period".


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Comments
47 Comments.
Comment #1 by Anonymous posted on
Anonymous
Yet again, the Federal Reserve is punishing the savers in this country. We keep taking it on the chin. One day the Treasury will come begging to us wanting us to buy Treasuries when China and Japan stop buying them. We all need to tell them where to "stuff it" when that day comes!

1
Comment #2 by Anonymous posted on
Anonymous
The Fed will use everything in it's power to keep deposit rates at rock bottom. Aiding banking institutions to pay the lowest rates as possible is just another means of increasing banking profits. Additionally, forcing more savers into equities to keep the stock markets rising is the desired strategy to aid the Wall Street, too big to fail, institutions such as Goldman Sachs and JP Morgan. The Fed, under Bernanke, is out to destroy savers. They are an antithesis to the Wall Street regimen of risk-taking and promoting bubble economies.

1
Comment #3 by Anonymous posted on
Anonymous
With the low-rate climate for the foreseeable future, it is bad news for people (small investors) who hold cash (i.e., savers).

One approach may be to rate hop on RCAs since more banks are entering this market (for quick cash and for more profit margin via debit card/ACH). It will no longer be so abnormal to rate hop. Investors can seek the highest return by periodically changing RCAs. It will be just like re-financing the mortgage.

Rules: Hop when the rate is 0.5% or higher, with very slight interest rate loss during trnsfers. Gradually, investors can treat rate hopping as an art, with little risk/energy/effort.

It is a new era, thus innovative techniques are called for. Laddered CD is another, but much more conventional, with much less benefit.

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Comment #4 by Anonymous posted on
Anonymous
This is all smoke and mirrors from the FEDs.
They are not pulling money from circulation but actually recycling it through another channel to finance the deficit and they are putting the same money back into circulation in addition of the printed money.
Accounting gimmicks nothing else.
The FEDs are reinventing the wheel of the money circulation and are trying to fool the public into a false sense of security.
In mean time the savers are ****ed.

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Comment #5 by john (anonymous) posted on
john
"bernie achy" needs to go !

1
Comment #6 by Anonymous posted on
Anonymous
Since when the FED is in banking business.
That is not their addenda. FED is to fight inflation, but they are creating hidden inflation. The Dollar will fall further south of this idea and the savers will pay the piper.
It is obvious biased on the side of wall street. Bernanke does not deserve the man of the year cover page.

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Comment #7 by Anonymous posted on
Anonymous
What a scheme, pretend that you are doing something about the money supply and then put them back in circulation when the CDs mature.
Bernanke pulled another trick on the savers, thanks for nothing.

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Comment #8 by Anonymous posted on
Anonymous
In the last 7 years the U.S. dollar has fallen 33 percent. In global terms we are steadily getting poorer and poorer and the Fed and U.S. Treasury are happy to oblige. It would be very easy for the Fed to strengthen the dollar. All they need to do is increase the fed funds rate to encourage saving. Yet the only people that are saving right now are foreigners and many are happy to invest at 0 percent rates of return. The major losers here are those who are prudent and savers. If you look at savings rates at banking institutions it is truly pathetic because of the Fed's zero rate policy. If we were to go back to historical rates of 5 to 6 percent many savers would start storing money especially given the current economic conditions. Yet we are doing the opposite. The Fed now is trying to make rates so low that banks will be forced to lend. Yet here is the kicker. A bank would rather have a 0 percent rate of return than a certain loss to a bad borrower. It is a very tough time to be a saver with our current Fed and U.S. Treasury destined to annihilate the dollar.

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Comment #9 by Anonymous posted on
Anonymous
Nothing good ever comes from the FEDs.
0% interest rates CDs anyone, oh wait, we may get 0.1%, hurray!!!!

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Comment #10 by Anonymous posted on
Anonymous
.


Oh my ... Lots of FED bashing!

Well ... they say you get the government you deserve ... By the same token ... You get the FED you deserve.


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1
Comment #11 by Anonymous posted on
Anonymous
To poster at 1:48 PM, December 29, 2009.
You are not far from the truth. Actually, we are already losing money at the current rates plus taxes on the interest earned.
According to my calculations, I lose 2.2% on my money including the artificial inflation rate.
Ten tears ago, I used to buy 1G. gas for $1, today around $3, weekly groceries 10 Y. ago around $100, today around $300, all insurances from 10Y. ago have tripled today. I used to go on 10days vacations 10years for $3000, today same vacation is close to $10K.
My savings have gone negative and I don't even gamble, I suppose the falling Dollar made me much poorer than I thought. My salary is about the same as 10Y. ago, but I work twice as many hours.
If the FEDs continue to invent creative accounting as one poster mentioned above, we are all going down the tube. You may not feel it immediately, but I already do.

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Comment #12 by Anonymous posted on
Anonymous
.


>> Problem is that all of these
>> will raise the interest rates on
>> mortgages, hurting the
>> residential real estate
>> recovery."

Hmm ... There is no way to know for sure, but my guess is that creation of these CDs (which appear to be very very similar to T-Bills) will not necessarily affect the interest rates (any more than than the regular auction of T-Bills does).


>> Perhaps the Fed is thinking
>> these term deposits would have
>> less effect on mortgage rates?
>> That could also mean lower
>> deposit rates.

Nope ... don't think the effect will be direct and/or immediate.

Majority of the mortgage interest rates are tied to LIBOR, which is completely out of hands of the FEDs. Every action/in-action by each player in the financial market has some (butterfly) effect, (and FED is a colossal Dragon, not a mere Butterfly).

That said, since mortgage rates are directly tied to LIBOR the effect of this action by FED I guess will not be much, and neither should this have any adverse effect on deposit rates.

What FED is doing is quite admirable. Inflation is nowhere to be seen, but our FED is already worrying in advance (as it should) about the inflation and taking preemptive steps to stay a step ahead. ... Well done FED.

.

1
Comment #13 by Anonymous posted on
Anonymous
We are duped by the FEDs no question about it and it proves the main street is meaningless and irrelevant.

1
Comment #14 by Anonymous posted on
Anonymous
"That said, since mortgage rates are directly tied to LIBOR the effect of this action by FED I guess will not be much, and neither should this have any adverse effect on deposit rates."
You are wrong, this set up is to create liquidity to the banks and they can not pay more interest rate than the FEDs rate in those CDs.
The banks will have no incentive to lend money for mortgages or line of credits and take unnecessary risks.

1
Comment #15 by Anonymous posted on
Anonymous
.


>> Ten tears ago, I used to buy 1G.
>> gas for $1, today around $3,
>> weekly groceries 10 Y. ago around
>> $100, today around $300, all
>> insurances from 10Y. ago have
>> tripled today. I used to go on
>> 10days vacations 10years for
>> $3000, today same vacation is
>> close to $10K.

Err ... It that so?

Well ... then do you how much were the LIBOR values 10 years ago? :-)

They were 5.832 (1-month) 6.005 (3-month) 6.136 (6-month) 6.508 (12-month)

... and how much are they today?

They are 0.2378 (1-month) 0.2681 (3-month) 0.5168 (6-month) 1.0844 (21-month).

Well ... so ... the people whose mortgages are tied to LIBOR are paying way too less on their mortgages now than what they were paying 10 years ago ... (BTW for an average homeowner, mortgage is one of the the biggest expense and gas/grocery are chump change in comparison!)


.

1
Comment #16 by Anonymous posted on
Anonymous
.


>> The banks will have no incentive
>> to lend money for mortgages or
>> line of credits and take
>> unnecessary risks.

Excellent ... If what you've written is correct, that the banks will have no incentive to take unnecessary risks, and that's just great! :-)

Banks definitely should not take any unnecessary risks whatsoever. They should only take reasonable risks and maximize their own profits.


.

1
Comment #17 by Anonymous posted on
Anonymous
.


>> We are duped by the FEDs no
>> question about it and it proves
>> the main street is meaningless
>> and irrelevant.

So? ... If that's the case then what are you going to do about it? I mean, other than being irrelevant and getting duped? :-)


Personally I believe FED is doing a great job, and I for one and very glad to have such a capable FED managing monetary policy of my country.


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1
Comment #18 by Anonymous posted on
Anonymous
"What FED is doing is quite admirable. Inflation is nowhere to be seen, but our FED is already worrying in advance (as it should) about the inflation and taking preemptive steps to stay a step ahead. ... Well done FED."

Do you have your head in the sand or somewhere else it shouldn't be?

Inflation on all the necessities is all around us peasants. Food, Energy, Gasoline, Insurance Rates, Medical Expenses, Taxes, Value of the dollar against verses other currencies, Etc. Etc.

1
Comment #19 by Anonymous posted on
Anonymous
Fed is like a slow dummy; slow on rate decrease; now slow on rate increase.

Come on, they are a bunch of idiots, who get paid to be idiots.

You have not woke up since 2007 to this sad fact??

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Comment #20 by Anonymous posted on
Anonymous
To the guy who answers his own selfish thoughts, ya..you with the less then sighs in front of the quotes (<<<), please don't be so gullible because you are not a guru about the FEDs, we are the one the savers(who feel the pinch).
Defending the FEDs makes you look ridiculous and are discrediting yourself.
We are in this mess because of the FEDs and their action or lack of reactions when needed to step in and prevent this financial catastrophe they created on the first place.
I see the FEDs as an arsonist who starts the fire and then gets credit for dowsing it down and then they pad themselves on the back for job well done.
In meantime we suffer the consequences of their incompetent behavior. Get real and stop being childish and posting nonsense with smirk on your face.

1
Comment #21 by Anonymous posted on
Anonymous
.


>> Inflation on all the necessities
>> is all around us peasants. Food,
>> Energy, Gasoline, Insurance
>> Rates, Medical Expenses, Taxes,
>> Value of the dollar against
>> verses other currencies, Etc. Etc.

Nope ...

According to social security administration the COLA (Cost-Of-Living-Adjustment) is going to be ZERO. And Social Security Administration is not controlled in any manner by the FED.

Inflation is just in your head ... you are merely imagining it ... it is not really there.

Our (beloved) IRS is charged with adjusting the amount of contribution we can make in our IRAs and 401(k)s according to the inflation. ... Guess what is the increase in contribution for 2010 as compared to 2009? Yes ... the increase is ZERO. ... See ... No inflation! ( It is just in your head. )

Finally BLS publishes the very detailed numbers for cost of Food, Apparel etc. These numbers do not reveal any inflation either ...

Err ... Again ... the inflation is your head. ... Now that's what makes me wonder where your head is? :-)


.

1
Comment #22 by Anonymous posted on
Anonymous
.


>> We are in this mess because of
>> the FEDs and their action or lack
>> of reactions when needed to step
>> in and prevent this financial
>> catastrophe they created on the
>> first place.

Err ... What mess?

The real-estate market has stabilized (thanks to FED's action). The financial system has stabilized (thanks to FED's action).

And a reputable publication has put the FED chief on its cover as 'man-of-year'. (Contrast that to baseless FED bashing that goes on here by anonymous people).

Financial catastrophe was not created by the FEDs. It was (mostly) created by ordinary Americans who thought that property prices are going to go up and up and up. ( I know ... that's not a very popular view ... it is way too convenient to blame FEDs and/or Politicians and/or Banker. )

Blame (if any) squarely lies with the thousands of ordinary Americans who took on the obligations they could not repay. Don't blame FEDs for that.

FEDs and our Government is trying hard to help-out the ordinary Americans to pay for the mortgages. They gave us tax-breaks, and they gave us cash-for-clunkers, and for those of us who are buying first home, they are giving money!

Got to repeat with a smile (not smirk): Good Job FEDs! I'm glad that you are managing monetary policy prudently.


.

1
Comment #23 by Anonymous posted on
Anonymous
.


>> Fed is like a slow dummy; slow on
>> rate decrease; now slow on rate
>> increase.
>>
>> Come on, they are a bunch of
>> idiots, who get paid to be idiots.
>>
>> You have not woke up since 2007
>> to this sad fact??

Oops ... and guess who pays them? Idiot tax-payers like you!


.

1
Comment #24 by Anonymous posted on
Anonymous
No, idiot sleeper like you paid for it in the past, are paying it in the present, especially will be paying for it in the future.

You are really ****y in your mind yourself!!

Your style is also sickening, defending the Government and blame on the small investors.

It sounded like you belong to the Fed and got hurt by the remarks??

1
Comment #25 by Anonymous posted on
Anonymous
To the Fed Lover/Defender:

You are the real fool; the Fed stuck a knife in your back and you just replied thank you; what an idiot/pity yourself.

Your logic is all messed up, mind you.

If you were right, there would not be numerous senate hearings and criticisms.

You just want to be controversial for the sake of proving your foolishness.

Take a walk in the park and jump in the lake; please.

1
Comment #26 by Anonymous posted on
Anonymous
6:21 PM:

So either you are the tax-evading criminal (that do not pay any tax as you implied) or you are drunk/on drugs, or you just do not make any sense??

Please clarify...

1
Comment #27 by Anonymous posted on
Anonymous
.


>> No, idiot sleeper like you paid
>> for it in the past, are paying it
>> in the present, especially will
>> be paying for it in the future.

Muhaa ...

No no no ... I am a satisfied tax-payer who is happy to his (public) servants. My (public) servants are doing a good job, I like it, and pay for it gladly.

You on the other hand are very dis-satisfied with FEDs job, you think FED is duping you, you think FEDs are punishing you ... and then you got to pay them anyways! :-)

Now that's the classic definition of an idiot that sticks to you! ... The one that has paid, and will continue to pay for the job that is not to your satisfaction! :-)


Gee ... I guess I pity you.


.

1
Comment #28 by Anonymous posted on
Anonymous
Explain to me how one can pay tax smartly and one pays tax foolishly?? We are all paying for the Fed's mistakes, I agree with you on that part.

But paying tax is paying tax, get that straight in your mind.

You are so happy paying tax, so please continue to pay more and more; since that makes you sooo happy.

1
Comment #29 by Anonymous posted on
Anonymous
It is poeple like you that enable the Government to fool the people and get away with it.

How can you say that Fed is doing a good job on economy? Even if it's some people's doing in Real Estate that impacted the economy; it was still the Fed's tolerant policy that allowed it. Look for the source, not the surface.

1
Comment #30 by Anonymous posted on
Anonymous
.


>> You are so happy paying tax, so
>> please continue to pay more and
>> more; since that makes you sooo
>> happy.

Indeed ... I enjoy paying income taxes ...

When you wish that I should pay more and more taxes, in effect you are wishing that I should earn more and more (thereby pay more and more taxes) ... Gee ... Thanks!


.

1
Comment #31 by Anonymous posted on
Anonymous
Mark my word today:

The Fed will definitely be slow in increasing interest rate (to fight inflation) that the ecomony will suffer again (from runnign away inflation).

You declare that you know something about economy; but you really did not do not follow common sense.

Let's debate the issues, instead of calling names or personal attack.

Explain to me again why Fed was doing such a good job in the past 3-4 years that deserved your trust and praise??

From the numerous posts you got, you are certainly in the minority; if not the only one. That led me to believe that you may work for Fed or have some common interest in Fed.

I do not think that it was all Fed's fault, but they bore the most responsibility for the economic disaster in 2007-2008.

1
Comment #32 by Anonymous posted on
Anonymous
.


>> How can you say that Fed is doing
>> a good job on economy? Even if
>> it's some people's doing in Real
>> Estate that impacted the economy;
>> it was still the Fed's tolerant
>> policy that allowed it. Look for
>> the source, not the surface.

Definitely ... Let's look. Shall we?

Who is the source? Fed's tolerant policy? Right. ... And let us not stop there. Let us look at the source - of FED's policy. The Government. Right. ... And source of the Government. Oh ... my ... that source is us - we the people!


.

1
Comment #33 by Anonymous posted on
Anonymous
We should be on chat-line, hehe...

Anyhow, I do not understand you at all.

How can anyone be a happy satified tax payer for all the huge bail-out?? Are you making any sense??

Please enlighten me!

Thanks.

1
Comment #34 by Anonymous posted on
Anonymous
No, no, no, the last argument does not hold water... How can the Government (that we elected) be us??

Wow, that was magic logic, I did not get that?

What drugs are you taking to arrive at that logic??

1
Comment #35 by Anonymous posted on
Anonymous
There is a huge gap between the Government Policies and the people's wishes/opinions in U.S..

You are onto some idealistic system that the Government represents fully the people's view/opinions. Is that how you arrive at the Government is us??

1
Comment #36 by Anonymous posted on
Anonymous
.


>> From the numerous posts you got,
>> you are certainly in the
>> minority; if not the only one.

Maybe here on this blog ... But all in all in the USA people like you are insignificant minority.

A very reputable publication with tens of thousands of readers puts FEDs Chairman on its cover and praises him for a job well done. Does not appear like a minority to me at all!


>> That led me to believe that you
>> may work for Fed or have some
>> common interest in Fed.

Well ... you got it exactly the other way around. FED works for me - the tax-payer. ( I don't work for them. ) FED is charged with only my (tax-payers) interests.


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1
Comment #37 by Anonymous posted on
Anonymous
Well, it is an endless debate. Fed has done a terrible job since GreenSpan (now called RedSpan)... That is a historical fact.

The majority is not happy with the huge bail-out with taxpayers' money. So ow can you say that the majority is happy with the Fed??

It is a mneaingless debate. You are using some blues-sky modifier that all people are supporting the Fed and stuff.

I agree to disagree totally with you on every viewpoint you have expressed.

Let's stop at that.

Since you are an intersting dude, to say the least, let me ask you for your financial strategy... do not forget that youa re so happy with the Fed, your investment should be consistent with that view.

Thanks.

1
Comment #38 by Anonymous posted on
Anonymous
.


>> There is a huge gap between the
>> Government Policies and the
>> people's wishes/opinions in U.S..

Don't think so ... I like the policies of the government I helped elect.

Only some fringe minority elements think there is a huge gap. BTW what those huge gaps are?


.

1
Comment #39 by Anonymous posted on
Anonymous
I recall that you were the same fellow that are fully in bonds/cash investment, right?

Come on again, you do not drink your own medicine...

On one hand, you claimed that you fully trust and support the Fed, on the other hand, you put everything in cash/bond to show your trust.

And come on, you believe all those shallow magazines that worth zero in value!!! I think that you are smarter than that.

As for me, I invest strategically with my own approach. It is totally independent of how the market is doing. I do not trust in anybody but myself since it is MY money.

You seem rational in some aspects, I am trying to see if I can learn something from this endless debate.

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Comment #40 by Anonymous posted on
Anonymous
Gaps:

We hope that the economy is stable for all of us working class to live handsomely. All these dark news on economy, huge bailout, worsening economy conditions, 10% jobless rate; ... I can go on all night; and you do not see any gaps? Which world/era are you living in??

How can you be so happy with all these dark realities??

1
Comment #41 by Anonymous posted on
Anonymous
And 2010 is bound to be worse...

I can see that we may be living in two different world... Anyhow, it is good, to some degree, to see some positive people around, haha.

1
Comment #42 by Anonymous posted on
Anonymous
.


>> I recall that you were the same
>> fellow that are fully in
>> bonds/cash investment, right?

Your memory is bit faulty. I did mention last week that I will buy some TLT and IEF if they fall this week ... And they did and I have.


>> On one hand, you claimed that
>> you fully trust and support the
>> Fed, on the other hand, you put
>> everything in cash/bond to show
>> your trust.

What? ... Come again? Do you have any clue what are the underlying securities of TLT and IEF? No? Research that first.


>> As for me, I invest
>> strategically with my own
>> approach. It is totally
>> independent of how the market
>> is doing.

Well ... So what? ... Who cares?


>> I do not trust in anybody but
>> myself since it is MY money.

Well ... I do trust completely when I buy T-Bills, T-Notes and T-Bonds and TIPs and I-Bonds from my government. (And back when my treasury sold me some series EE bonds, I had complete trust in that as well. )


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1
Comment #43 by Anonymous posted on
Anonymous
.


>>Gaps:
>>
>> We hope that the economy is
>> stable for all of us working
>> class to live handsomely. All
>> these dark news on economy,
>> huge bailout, worsening economy
>> conditions, 10% jobless rate;

Alas ... I did not ask what are your dreams. I asked the gaps between government policy and people's wishes.



>> ... I can go on all night;

Go on ... don't think anybody is stopping you. Give me list of government policies via-a-via the wishes of majority of the people that are in contradiction.


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Comment #44 by Anonymous posted on
Anonymous
I can see we have no commonality. You are just in your own small world that would not accept anyone else or any other viewpoints.

Your tone is always condescending and critical. I am sure that you have "many friends" around you.

You just can not help putting people down and take enjoyment from it.

I am so gald that I can simply ignore your kind and get on with my own happy life.

I spent so much time and was hoping that we can share something positive for both of us.

I confess that I have no clue what your investments are; but I would not put a cold remark like "who cares." I feel like that I am really talking with a kid or some very abnormal person; that simply loves to get into arguments with others.

Why would I waste more time with a person like you; we just do not connect at all?

But no harm done, I still wish you and your family happy holidays and best wishes for the New Year.

Thanks for your time.

Best Regards.

Last guess: you must be a kid of some sort or military person that has fully loyalty to the Government (if you were, my hats off to you; but very unliekly with your disrespect toward everybody).

1
Comment #45 by Anonymous posted on
Anonymous
.


>> You just can not help putting
>> people down and take enjoyment
>> from it.

I do find it silly when people post idiotic statements like the very first in this blog (Yet again, the Federal Reserve is punishing the savers in this country) when in fact, the FEDs are mere public servants employed by the tax-payers doing the jobs within the limits that we have imposed upon them, and making the best they can to look after our interests. If pointing out the facts is same as putting people down, then be it.


>> military person that has fully
>> loyalty to the Government

Hmm ... Before you somebody else guessed that I work for the FED, now you are guessing that I work for the military. (Though I must admit that your guess perhaps is bit more reasonable considering that I have accounts both at USAA and PenFed.)



>> But no harm done, I still wish
>> you and your family happy
>> holidays and best wishes for the
>> New Year.

Ditto. I wish you and your dear ones happy new year.


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1
Comment #46 by Anonymous posted on
Anonymous
There is one thing that seems to be universal throughout history. When things go bad, you always need to find a scapegoat.

1
Comment #47 by Anonymous posted on
Anonymous
The poster using the ">>" marks instead of proper usage of " marks is just stirring the pot, if some of the others posting thoughts here, have not discovered yet. Just ignore the bloke.

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