Since we have been discussing the Dollar all week, let’s go to Alan Abelson’s Barron’s column this week, Debasing Bernanke.

With a wordsmith’s gift for clever wordplay, he opened the column "BEN BLINKED. Or was it a wink? Was he only funning the folks with all that malarkey about acting judiciously lest he encourage reckless financial behavior among the great unwashed — moral hazard, as the cognoscenti like to put it?"

We had titled our post-FOMC post on Tuesday "Bernanke Blinks."   Whether its surname or proper name, past tense or present, the similarities make us smile just a little on the inside. Anytime a scribe whose prose we admire or whose perspective is noteworthy or influential or just plain fun uses similar language to our own, we know that we are at least heading down the right path towards scribbling enlightment.

Anyway, back to the subject at hand, which is the ever shrinking purchasing power of the US greenback.  Here is the relevant Ubiq-cerpt:

"NO GOOD DEED, OF COURSE, goes unpunished. And wouldn’t you know, Mr. Bernanke’s muscular move that touched off a blistering rally in stocks also, it grieves us to report, had less salutary, if equally predictable, consequences in other trading arenas. Turmoil in the credit markets, which presumably was among the Fed’s primary concerns prompting the rate slash, though hardly erased, nonetheless was suddenly overshadowed by turmoil in the foreign-exchange market and ominous disturbances in key commodities.

Our own beloved currency turned garishly green around the gills, nicely matching the traditional color of its back. A euro fetched a record price in U.S. dollars and the Canadian dollar — the loonie — achieved parity with our battered buck for the first time in over three decades (who’s crazy now?). Virtually every currency known to man appreciated against our beleaguered greenback, which did hold its own, we’re happy to say, against the Zimbabwean dollar (inflation in that ruined nation is running an estimated 15,000% a year and seems determinedly headed for six figures).

Moreover, the latest dizzying descent in the buck can only make our foreign creditors, those generous folk whose forbearance, encouraged by our insatiable appetite for their goods, has enabled us to live the good life on borrowed money, all the more antsy. They had already shown growing disquiet over the steady erosion of their huge hoards of our IOUs, by edging their reserves into more stable currencies.

The incidental devaluation of the U.S. dollar sent the price of crude, which is denominated in dollars, barreling to an all-time high above $84 a barrel before it paused to take a breath. And the fresh debasement of our coin, coupled with prospects of a surge in inflation, powered a spurt in gold to nearly $745 an ounce, the highest price since January 1980, when it hit $850 as bungling Bunker Hunt tried to corner the market for the yellow metal.

The moral imperative that inspired Mr. Bernanke to take down interest rates half a point instead of a quarter was to ease the pressure off the reeling housing market. In the event, though, he managed to steepen the Treasury yield curve, which means that the longer-term obligations, which effectively determine the level of mortgage rates, went up. Not, we suspect, the ideal medicine for what ails homebuilding.

Indeed, it’s doubtful that any of the palliatives being proposed to dull the pain of mortgage holders who can’t meet their payments or improvident lenders in the soup are likely to prove very effective. The latest data certainly provide little comfort. The news from the builders is uniformly bleak. And, as the aforementioned Minter and Weiner note, foreclosures on subprime loans alone could result in cumulative losses of — gulp! — $164 billion. It’s also reckoned, they say, that a 15% decline in house prices — not exactly outside the realm of possibility — could wipe out $3 trillion of household net worth.

It’s ease to see what got us into this bloody bind: a breathtaking binge of mindless borrowing accommodated by legions of lenders uninhibited by scruple of any sort, mightily aided and abetted by Wall Street’s ingenuity in discovering new ways to create and peddle leverage. And, of course, by snoozing watchdogs, like the Fed.

How to get out of the very sticky mess is a bit more difficult to envision. Except cutting rates and going the way of Zimbabwe probably isn’t it."

A shrinking dollar means reduced purchasing power, which is in and of itself the equivalent of a particularly pernicious form of inflation.

But not to worry, the solons and spinmeisters have assured us that the dollar will raly upon the news!

Shock & awe? Or shockingly flawed?

>


Source:
Debasing Bernanke
ALAN ABELSON
Barron’s September 24, 2007   
UP AND DOWN WALL STREET 

http://online.barrons.com/article/SB119041472248335791.html

Category: Currency, Federal Reserve, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

77 Responses to “Shock & awe? Or shockingly flawed?”

  1. SPECTRE of Deflation says:

    Welcome to the new and brave world of elitism. Yes the cuts will cause high inflation for the huddled masses in everything, but thank God we saved the elites from themselves.

    The dollar, small d from now on, is toast. How exactly will we sell Treasuries, Agency and MBS Paper to our patsy, I mean partners in trade? They ain’t buying like they used to. I wonder why?

  2. km4km4 says:

    Goodbye U.S. dollar, hello global currency
    says Benn Steil, Director of international economics at the Council on Foreign Relations

    “The dollar’s privileged status as today’s global money is not heaven-bestowed. The dollar is ultimately just another money supported only by faith that others will willingly accept it in the future in return for the same sort of valuable things it bought in the past.

    In other words, if the institutions of the U.S. government fail to validate that faith, the dollar, too, merits being abandoned”.

    No wonder why the rest of the world is sick and tired of U.S. dollar standard because America is careless in its monetary and fiscal policies e.g. the bullshit US housing market, the Iraq war racket to line the pockets of Bushco corporate cronies, the almost $1B/yr trade deficit, and so on.

  3. Pool Shark says:

    Is it just me, or does anyone else have this deja vu feeling that it’s the 70′s all over again.

    I was particularly struck by the statistic that the last time the Canadian Dollar had parity with the US$ was 1976.

    I also recall the housing boom here in California in the early 70′s that preceded the raging inflation, energy crisis, and general ‘malaise’ that ensued at the end of the decade.

    But there is one difference between then and now; then we at least had Paul Volker…

  4. cinefoz says:

    Now that an elementary understanding of the difference between higher prices and inflation is starting to catch on in circles where it should have been common knowledge before this, let’s discuss the basic theory of exchange rates … sometimes called the balance of payments in text books. (long sentence, huh?)

    When one or more countries hold an excess of the currency on another nation, the value of the currency falls. Three things may increase the value of the currency …

    1) Higher interest rates in the country with the falling currency and/or

    2) Rising exports from the country with the falling currency due to the now cheaper currency and/or

    3) Capital investment from foreigners in the country with the falling currency.

    Each of these reactions causes the currency to be repatriated. Less currency in other parts of the world raises the value … and thus flows the great currency cycle.

    Of course, aberrations can sometimes occur but these are rare and are usually preceded by huge inflationary bubbles like Japan in the 1980s and Asia in the late 1990s.

    The natural currency cycle will take care of itself and re-balance providing no meddlers try to prevent currency repatriation. Exports are good. Investment from foreigners is good. High interest rates are bad at this time since they have a crushing effect on liquidity when confidence is low and inflation does not exist.

    Low taxes are good (deficit financing is not good) if they encourage investment that will ultimately create jobs, improve the infrastructure, or raise productivity.

    Everyone benefits.

    Got it?

    With respect to China …..

    China has pegged it’s currency to the US dollar at a, basically, fixed rate. When the dollar falls, the value of Chinese currency falls. China must set a new peg rate or let their currency float to offset this decline in value.

    If China lets their currency rise, import prices mitigate but their export products become more expensive to the rest of the world. Chinese exports will decline as a result, causing business problems and unrest in China.

    This will be good for any other country with a labor advantage over China and for exporters such as the US, Japan and Europe who will all appear to be more competitive with China at the low end.

    China is not going belly-up. It is just joining the world business community on a more even footing. And there should be a decent stock market shock and buying opportunity when it does. Maybe next year?

    In fact, China is in a sort of squeeze play right now … It can do nothing and see Chinese inflation root and sprout -or- raise the exchange rate and lower Chinese import prices, causing Chinese export prices to rise. This is a hot box situation and China is in the middle of it.

  5. Jason says:

    I stopped reading at this point:

    “the highest price since January 1980, when it hit $850 as bungling Bunker Hunt tried to corner the market for the yellow metal.”

    Bunker Hunt tried to corner the market in SILVER not gold. If the facts are bad how can I believe the analysis?

  6. My recollection is that prior to the run on Silver the Hunt Brothers made a run on Gold.

    I’ll find a link.

    ~~~

    Nope. Can’t find anything. Maybe it was a gold mine, not gold . . . they were originally Oil men. . .

  7. stormrunner says:

    Goodbye U.S. dollar, hello global currency
    says Benn Steil, Director of international economics at the Council on Foreign Relations
    _____________________

    Global Currency – thats likely the destination, but first the relentlessly patient CB’s, will travel the direction of the continental currency. The first leg in the trip having been already completed with the EU and its Euro, stage 2 and well on its way to implementation is the NAU with the Amero. Most “top tier ” candidates have specific affiliation to, CFR, SPP, etc. Is this conspiracy, possably, but only untill enough sound bites reach the ears of the public to garner recognition then the sales pitch, with finally acceptance.

    “If you’ve retired you don’t have anything to worry about, thats the third time I’ve said that. I’ll probably say it three more times, see, in my line of work you’ve got to keep repeating things over and over and over again, for the truth to sink in. You’ve gotta catapult the propaganda.”

    George Bush

    The following quotation of David Rockefeller, then Chairman of Chase Manhattan bank, speaking at the June, 1991 Bilderberger meeting in Baden Baden, Germany (a meeting attended by then-Governor Bill Clinton) is illustrative of the media control mentioned above:

    We are grateful to the Washington Post, the New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. He went on to explain: It would have been impossible for us to develop our plan for the world if we had been subjected to the lights of publicity during those years. But, the world is more sophisticated and prepared to march towards a world government. The supernational sovereignty of an intellectual elite and world bankers is surely preferable to the national autodetermination practiced in past centuries.

    Still wondering why the banks are being salvaged at the risk of the Dollar? The Dollar has been a tool, that tool has out lived its usefullness, I don’t know when but it will be replaced. After all these are the individuals that brought us the dollar (FRN’s), as Bernanke demonstrated it is Their Dollar not ours, every dollar issued is issued at a cost. In today’s globalized market place subject to an advanced world wide communications network, the public scrutiny of a single Soveriegn nation appointing controllers of the world’s reserve currency will become too restrictive. As this unfolds it will become neccessary to have a unit of exchange completely independent of the Will of the Public.

  8. cinefoz says:

    No, the Hunts went after silver. They manipulated the market until the price rose to about $50 per ounce. Then they went bust. What a pair of dumb asses.

  9. Lord says:

    Cinefoz is right. All those other nations that have so greedily bought up anything in dollars, will have some thinking to do. No one forced them to. They did so for their own reasons. Their alternatives going forward are not great from their point of view and they will find themselves in a worse position than us.

  10. cinefoz says:

    Lord, thank you. (I bet people have fun with your name).

  11. SPECTRE of Deflation says:

    The Hunt Brothers attempted to corner the silver market. I have no recollection of them being in Gold.

  12. stuart says:

    Rates were cut drastically because the Fed fears the consequences of debt default more than inflation.

    The underlying pressures fueling debt default are only going to increase from here.

    Pretty clear where this is going.

  13. stuart says:

    Hunt Brothers only went after the silver market. The comex then changed the rules and snookered them.

  14. SPECTRE of Deflation says:

    Now that an elementary understanding of the difference between higher prices and inflation is starting to catch on in circles where it should have been common knowledge before this, let’s discuss the basic theory of exchange rates … sometimes called the balance of payments in text books. (long sentence, huh?)

    When one or more countries hold an excess of the currency on another nation, the value of the currency falls. Three things may increase the value of the currency …

    1) Higher interest rates in the country with the falling currency and/or

    2) Rising exports from the country with the falling currency due to the now cheaper currency and/or

    3) Capital investment from foreigners in the country with the falling currency.

    Each of these reactions causes the currency to be repatriated. Less currency in other parts of the world raises the value … and thus flows the great currency cycle.

    Of course, aberrations can sometimes occur but these are rare and are usually preceded by huge inflationary bubbles like Japan in the 1980s and Asia in the late 1990s.

    The natural currency cycle will take care of itself and re-balance providing no meddlers try to prevent currency repatriation. Exports are good. Investment from foreigners is good. High interest rates are bad at this time since they have a crushing effect on liquidity when confidence is low and inflation does not exist.

    Low taxes are good (deficit financing is not good) if they encourage investment that will ultimately create jobs, improve the infrastructure, or raise productivity.

    Everyone benefits.

    Got it?

    No I don’t. You can’t extrapolate prior history into this scenario. The variables ha
    ve changed to a degree that makes easy answers impossible. Ever hear of exponential growth? Our debt has doubled in 7 years. It took 220 years to get to the level of the year 2000 debt. In 7 short years we doubles it. With M3 growing at better than 14% we will again double the national debt in 5.25 years.

    We have systemic problems that make prior problems a walk in the park. Our trade partners, what a joke that is, are not buying our paper causing net outflows which aren’t going to get better with a dollar that is a form of fancy ass wipes.

    Got it?

  15. inquiringmind says:

    Under Executive order 6102, it was illegal for US citizens to “hoard” gold from April 5, 1933 until Jan 1, 1975. (Exceptions for nuministic & industrial purposes)

    I’d bet that the Hunt Brothers were too far into silver by that point to have diverted attention to gold.

    Abelson probably meant silver. That is what the Hunts were famous for…

  16. cinefoz says:

    SPECTRE of Deflation,

    Most people suffer from not understanding the problem solving technique of ‘problem decomposition’. To put it simply, within each big problem are a lot of little problems trying to get out. This is also your problem. Most people look at problem like one big lump. None are, except the smallest ones.

  17. lurker says:

    Abelson is as senile as he is a poor writer.
    Hunts were in silver. And if you take the adjectives and alliteration out of his windy prose his padded column would be half as long, which would be twice as good. Still not perfect because he should give up that space to someone with a brain. Sorry to speak ill of the braindead, but back when I read Barron’s he wrote about 2 or 3 good columns a year, and, unfortunately, it is a weekly gig. IMHO. Barry, don’t model your style on that windbag, please.

  18. Eclectic says:

    http://www.wallstraits.com/main/viewarticle.php?id=1298

    It was a concerted effort of the futures exchange and the Federal Reserve to break the Hunt’s silver hoarding episode.

  19. jimo says:

    Abelson and blogger talk about how ‘the sky is falling’ just makes me laugh.

    Its in the US interest to break the Asian dollar peg.

    oh … and what was that? I thought I just heard Airbus squeal …

    Let’s play on …

  20. Diva says:

    lurker – I pretty much agree with you.
    All of the nonsense about ‘woe is me’ re the $ has many complicated reasons.
    AND
    I think all the whiners are about to be surprised over the next 6 months.
    geeze louise

  21. Diva says:

    PS
    My sister worked directly for/with one of the Hunt Bros. It was a silver deal that went ‘bad’.
    Anyone who doesn’t know that has ‘limited’ understanding of the ‘real world’.
    PPS
    She was in KY, not TX.

  22. stormrunner says:

    I’m having a bit of trouble comprehending the us vs them mentality. Maybe someone can clue me in.

    As an outsider, no real ties to the financial community, I see two ideologies. In one, The US, EU, BoE, Private for Profit banks control the issuance of the currency and retain all interest charges levied upon issuance. On the opposing front China, ??, the currency is state issued and interest is levied by the state for the benefit of the state, largely, public self appointed citizens. This in effect means the government is run using taxation and inflation. Have the Chinese ever had to borrow to build their military and infrastructure?? Honestly I don’t know.
    In the former, Private Model, the government is run on credit, taxation merely pays interest on the national debt to private Global Interests. To some extent this is merit based. In other words industrialists built their companies and employed the people that generated the wealth leading to the acquisition of this power, it is the retention of this power though the industrialist creation of a banking cartel which issues and manipulates the currency I object to. I also have trouble envisioning a peaceful coexistence of these two opposing models. In the end I see this as the catalyst leading to Global confrontation more so than any religious ideology. It may be sold to the public as a “Holy War” but in the end it will boil down to the Industrialists and Banking Elite, wanting their cut.

    JMHO, a merging of the two systems would be of the most benefit to the public at large. One is which the state controls the issuance of the currency and the state is appointed by the public where business is allowed to be conducted as it always has profiting by way of service and production enhancement as opposed to currency manipulation.

    What does this have to do with the dollar? I think everything as we shall soon see especially if animosity builds against the FED. The Ron Paul Revolution is just one example though still muted, of possable back lashes. Even Greenspan projected recently public condemnation of the FED in the not to distant future.

  23. Estragon says:

    Stormrunner,

    Currency is state issued in the west. Credit is bank issued in the west. Although obviously related, currency and credit aren’t the same thing.

    In China, credit is essentially state issued, though this appears to be changing (slowly).

  24. Eclectic says:

    Strangely enough, the Hunt’s silver hoarding came to a crashing end when, after speculating and building a large inventory of a commodity thought to always be ultra-liquid, it was suddenly not negotiable with anyone because the Fed encouraged member banks to refrain from lending to other speculators who wanted to buy the metal.

    Industrial users (capable of cash buying) didn’t need enough of the metal to help the Hunts cover margin requirements, and with no more speculators to fuel the climb, and with the exchanges not permitting the Hunts to buy up more positions and effectively complete the “corner,” the Hunts were in a special kind of no-man’s land specially designed for them.

    Sound refreshingly similar to anything rounding the bases right now?… Let’s see… an asset thought fully negotiable at all times becomes no longer salable?…Hmmm?… Could that be, uh, dare I say… MBS and ABCP?… the special type carrying Will-o’-the-wispish consequences were it to be whipped down to mark-to-markie value?

    http://en.wikipedia.org/wiki/Will_o'_the_wisp

    Funny, but, THE PEOPLE are who finally halted this latest fiasco (unfortunately with their frantic, if unknowing, financial system-threatening balking in markets, and their sidewalkian line-dancing actions at a Californicating bank as well as an across-the-pond variety, that they wouldn’t take it any more!), not the FOMC that has the responsibility to recognize hyperbole and do something about it before it harms the financial system.

    I’ve always thought that the very moment, the exact instant in time, in which WorldCom began to unravel was when its merger/acquisition of Sprint fell apart… Why?… Because until that very moment, WorldCom was able to con its internal and external auditors into sucking up to the illusion of an endless stream of hocus-pocus pro-forma EBITDA accountancy. Busting the merger finally broke the endless chain of meet-or-beatsmanship and forced the uncovering of their off-the-book slime.

  25. stormrunner says:

    Estragon said
    “Currency is state issued in the west.”

    http://en.wikipedia.org/wiki/Federal_Reserve

    The Federal Reserve System is a quasi-governmental/quasi-private banking system composed of (1) the presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils.
    ********************

    Item 4, Private US member banks which hold stock, this is where the profit in issuing currency exists. The FFR on released FRN’s goes to these member banks to private stock holders and is a credit to the public’s books, thus the deficit. This taken into consideration with the fractional reserve lending methodology where these high powered funds are loaned out 10X again at interest, the credit you refer to, it is easy to see the wealth being accumulated by the banking system. Somehow this does not infer state issuance.

    If there is something abjectly false in this deduction, someone please enlighten me.

  26. Estragon says:

    Stormrunner,

    The FFR is the rate targeted by the fed for overnight lending between private banks. The fed adds/removes currency by buying/selling treasury securities from/to private banks to/from fed holdings.

    AFAIK, the net earnings (interest received on treasury securities holdings, fees, etc.) of the federal reserve system are returned to the US treasury, not the private banks.

  27. stormrunner says:

    Estrogen

    http://en.wikipedia.org/wiki/Money_creation

    An example of the creation of new money in the USA
    The following steps describe one way that new money can be created in the USA.

    The government issues a Treasury security. This is simply an IOU, a promise to pay the holder a specified sum of money on a particular date. In this example, let’s say the government issues $1,000,000 worth of bonds.
    The Federal Reserve prints a check, in the amount of $1,000,000 and makes it payable to the government. This check is the proceeds from the sale of the bonds.
    The $1,000,000 of bonds is recorded as an asset by the Fed. (money owed to the central bank is called an “asset” by the bank) It is assumed the government, with its power to tax, will make good on its debt (this is why the people buying the bonds from the fed consider it a risk-free investment). The Fed can sell these bonds which are a liability of the government. Individual investors, pension funds, mutual funds, insurance agencies, banks, foreign government central banks, can all buy the bonds, effectively loaning money to the treasury. They do this to invest their money and receive interest in return.
    *********************

    This is a confusing issue for me, it was my understanding that the FFR interest went to the Federal Reserve Bank from which the funds were borrowed, which as stated in item 4, has non-transferable private stock holders, as opposed to the Treasury. I was of the impression that the Treasury was required to pay this interest on the backing notes created. In other words the Treasury issues notes the FED holds the notes till the Treasury repays at interest. Maybe I’m confusing two distinctly separate issues. If you can provide a link to this it might totally change the perceptions I have recently aquired having been schooled on the Federal Reserve System, buy the likes of media publications such as the Money Masters, Fiat Empire, etc, endorsed by Milton Friedman and other economists of note.

    At any rate if the quasi private banking system is in need of injections to remain solvent, and the FED has private stockholders these would be the same people operating the member banks, screaming for new issuances even at the cost of the currecncy debasement it would still be those individuals who would have the greatest influence on the degree of debasement not the government appointed governors.

    Please follow-up on your assertion as this is very important to my contention which on the face of it would have been in correct all this time.

    Thanks for the discourse. I would like to have this concept put to rest.

  28. wunsacon says:

    Pool Shark,

    >> Is it just me, or does anyone else have this deja vu feeling that it’s the 70′s all over again.

    Completely. In early 2003 in emails to friends, I referred to Bush as “Nixon II”. Gee, we have a quagmire. War-induced deficit spending debasing the dollar. Oil and gold rising accordingly. A secretive, lying administration. And, as it turns out, Henry F. Kissinger is a White House regular. When I learned that, I instinctively intoned “~~~The circle is complete.~~~”

  29. zen investor says:

    The fed funds rate — short for federal funds rate — is the interest rate at which banks lend to each other overnight. As such, it is a market interest rate. But the Fed sets a target for the fed funds rate, and keeps the rate on target via open market operations. Unless otherwise specified, references to the fed funds rate are actually to the fed funds rate target (on any given day, the actual rate may differ from the target rate slightly).

    The fed funds rate target is set by the Federal Open Market Committee, the Fed’s monetary policy committee. As the U.S. short-term benchmark, it influences market interest rates throughout the world.

    http://www.thestreet.com/tsc/basics/tscglossary/fedfundsrate.html

    From Hussman this week:

    Wall Street continues to hold its breath about the upcoming decision by the Federal Reserve. There’s no question that the Fed’s decision will have a market impact. This is not because Federal Reserve operations matter, but because investors believe they matter. The total amount of U.S. bank reserves affected by FOMC operations is less than $45 billion, and only the “excess” portion of that – typically about $2 billion dollars – is what determines the overnight Federal Funds Rate. Meanwhile, the total amount of borrowings through the “discount window” – though higher than in recent years – still amounts to only about $3 billion.

    http://www.hussman.net/wmc/wmc070917.htm

  30. Winston Munn says:

    Stormrunner:

    The FFR is not some type of statutory rate mandated by the Fed – it is a “target” rate that the Fed uses to guage its interventions.

    Federal Funds Rates change all the time, usually within a fairly narrow range. The object of FFR is to move surpluses of bank reserves to banks with reserve shortfalls. The issuing bank takes collateral against the loan at a price – somewhere around the FFR.

    The Fed can protect its target rate by selling treasuries, which tightens the money supply, or by purchasing treasuries, which adds to the money supply – or, they can change the reserve requirements to tightern or ease. That is all they can do.

    The actual FFR is set by the banks making the transactions.

  31. Eclectic says:

    Estragon,

    …You asked for it. We all sat here innocently and watched it unfold:

    http://www.youtube.com/watch?v=F_jwEd6I7Aw

  32. Stuart says:

    How did they “suddenly” implode instead of slowly bleeding off with everyone aware of the problem? SIVs, Conduits, and other “off balance sheet” games.

    1. These need to be made illegal – it is absolutely imperative that investors and the world be able to look at your 10K and 10Q and see EXACTLY what your exposure is to everything you are involved in!

    2. That is the definition of accounting and a public company. No more mark to model, no more mark-to-myth, no more Level 3 “assets” and while you’re free to run all the SIVs and Conduits you want, they all have to be on your balance sheet!

    3. Further, all derivatives must be traded through an exchange with proper margin supervision. This practice of allowing Hedge Funds to write OTC derivatives with ZERO margin supervision, effectively allowing unlimited leverage backed by nothing but hot air, MUST STOP.

  33. Clarke says:

    “A shrinking dollar means reduced purchasing power, which is in and of itself the equivalent of a particularly pernicious form of inflation.”

    Why would there need to be any other form at all, doesn’t, “my dollar buys less than I thought it would when I received it” pretty much cover all the bases??

  34. stormrunner says:

    Is this not the essence of Debt-Based Fiat Monetary system, that ALL money is created in Debt. I was just trying project the future of the dollar with the geopolitical implications. I think the West thinks it needs a more encompasing monetary unit to solicate the engagement of our allies. The EURO AMERO thing would seem the logical course. What better why to stimulate this transition than to debase the currency into a politically acceptable replacement.

    It would seem in the East the benfits of state issued currency is countered by the
    lack of Democracy

    In the West the Democracy is encumbered – manipulated by privitization of the currency.

    These two geopolitical systems would seem to be in direct opposition, once the labor imbalances are worked out between systems and the west can no longer advantage the labor arbitrage, I wouldn’t be surprised to see a conflict in China similiar to our civil war or worse.

    Is this such an insane position.

  35. stormrunner says:

    Winston

    I believe I get your post about it (FFR) being a target rate but it doesn’t directly answer the question.

    When currency is issued who gets the interest attributed to the release of the FRN’s the FED Banking System or the US Treasury. This is critical to the perspective.

  36. stormrunner says:

    Or better yet in order to increase the supply of money which may be necessary to bail out the banking system, does the FED borrow from the Treasury at interest to the benefit of the people. Or more likely does the Treasury issue notes to the FED then print currency in the equivilent which are released into the banking system for which the tax payer is responsable for the interest.

  37. Winston Munn says:

    Stormrunner:

    This from Bert Ely of Ely and Company may be of some use:

    “Contrary to widely held belief, the Fed does not control the money supply, for two reasons. First, the Fed, acting on behalf of the U.S. Treasury, passively supplies whatever quantities of currency that people voluntarily want to hold. This passivity exists because the federal government can no longer force currency into circulation since it does not pay its bills and other obligations in currency.

    Second, the Fed passively supplies the banking system with whatever reserves banks need to meet their reserve requirement so that the Fed can send interest rate signals to the financial markets through its manipulation of the quantity of “excess” reserves. Excess reserves, which average about $1 billion, are those reserves that exceed what the banking system as a whole needs to meet its reserve requirement; in effect, excess reserves float on top of a demand-determined quantity of required reserves.

    Because the Fed supplies whatever quantity of required reserves the banking system needs so that the Fed can manage the quantity of excess reserves, required reserves do not limit the quantity of reservable deposits, which in turn account for less than 25 percent of all deposits. Therefore, if banks increase the quantity of reservable deposits in the course of their lending activities, the Fed automatically supplies the additional reserves demanded by that deposit growth. Hence, the reservable deposit portion of the money supply, like the currency portion, is entirely demand-driven.”

    Money supply is a byproduct of debt creation, and the Fed is only a passive player in its creation.

  38. whipsaw says:

    stormrunner-

    I do not claim to have any real knowledge of the mechanics of the system, but the fact that you have yet to get a straight answer to your basic question suggests a lack of transparency which in turn suggests the answer. :)

    My take on this is that the FOMC has a blank check with the Treasury and can buy as many bonds as it likes on 100% margin, then trades as needs dictate. My assumption (and that’s all it is) is that things are reconciled from time to time and the Treasury ultimately gets back the principle and interest due on the bonds. My further assumption is that the FOMC is most likely a highly profitable entity since it can manipulate all kinds of stuff and that the net impact on John Q. Sucker is probably positive overall. But this is still set up primarily to benefit bankers and other big hitters, so any populist positives are probably just an anomaly.

    Changing gears, I find it interesting that so many people here are so preachy about the dollar. Intuitively, a falling dollar sounds like a bad thing, but there are two sides to every trade and to every policy decision. The fall of USD certainly makes trips to countries without pegged currencies more expensive, if not altogether impractical, but it really has nothing to do with what Wal-Martians will face so long as the yuan is more or less pegged to the dollar. On the other hand, it will mean that the only things that we actually export any more (heavy equipment, high end defense systems, and some agri products) will be more competitive globally. It might ultimately mean that we resume producing other things that have been pushed out of the market by coolie labor overseas.

    USD appears pretty awful now until you look at a monthly chart, then it isn’t quite so grim. The short (as in brief) version is that it is a little below the 1992 bottom at the moment which is not too surprising, but hardly an indicator of anything. My guess is that it will most likely droop a bit more into the end of the year, then a setup will appear could be quite profitable over the following quarter.

    Which reminds me, why don’t you people ever talk about investing/trading ideas instead of just focusing on The Apocalypse? I am not talking about touting stuff, I just mean practical thoughts about what to go into/get out of? It has been a long time since it appeared that most people here actually have any money on the line- is everybody here now some 20 yr old who spent the summer reading Ayn Rand? It certainly sounds that way.

    =whipsaw=

  39. stormrunner says:

    Winston
    This would seem to confirm my suspicions that money is printed as a condition of demand, demand that is created in the Banking System through credit creation. This would infer that all Money, Physical or Digital, is in fact created in Debt, Debt for which both principle and interest must be returned to the banking system regardless of the nature of the borrower be him a Private or Government entity at no time is this interest a credit to the Treasury, (earnings for the people). I believe we are confusing the actual physical printing which is in fact performed by the Treasury as being an interest free unrelated act when in fact it is just a response to the physical replenishment requirements of circulation especially in light of todays digital demand accounts (debit cards). In this analysis the banking system gets a piece of every dollar issued related to the target rate for Federal Reserve Banks and the prevailing lending rate for other institutions.
    ****The Fed passively supplies the banking system with whatever reserves banks need to meet their reserve requirement.
    This would appear to be critical to my argument. The way I suspect in which reserves are depleted is through the lending of money, if there is a guarantee that depleted reserves are replenished, then this would appear to me to be a license to the banking system to “print money” at interest, digital or physical matters not with respect to inflationary effects. This equates to the Private Banking System, in reality by deciding to whom and how much to lend, issues the currency and earns the return, No? In light of this our currency can not be considered to be issued by the government, only the physical representation of it is, the FRN’s, for all accounting purposes the Dollar is owned by the Banking System lock, stock and barrel.

    Do you disagree with this?

  40. stormrunner says:

    Whipsaw,

    If one can determine who really controls the value of the dollar, and hint its not Big Ben, then last week, before the rate decision one might have been able to predict the rate cut and moved their money accordingly. I was still in the moral hazard save the dollar camp that was telegraphed in the speach releases. Why do you suspect such a large portion of GS earnings were related to Trading and in both directions I might add in a quarter when big rate decisions were implemented first at the discount window then at both.

  41. whipsaw says:

    stormrunner said:
    “Why do you suspect such a large portion of GS earnings were related to Trading and in both directions I might add in a quarter when big rate decisions were implemented first at the discount window then at both.”

    That’s pretty simple, one of their guys is running the Treasury and they have no scruples about front running their own customers.

    In another thread, some guy posted a Sept 13 bloomberg article that said something like ‘GS strategists recommend investors buy puts in industrials, materials and tech.’ Guess what would have happened if you followed that “advice?” All it told me was which sectors GS was writing puts and buying calls in.

    We are not working in a fair or level market, indeed neither has ever existed. But you can pretty much tell that anybody who is going on the short side better be well scaled back and damn quick. Everything I see says new highs by the end of the year, after that I am not certain. But I may re-open a forex account in January to set up long USD positions.

    ==whipsaw==

  42. stormrunner says:

    Sorry I need to be more careful about causation, GS earnings were for last quarter during which time only the discount window cut on 8/17 prior to the markets open applies, we’ll have to wait in judgement of this quarter for effects of the double cut. I just find the great earnings amazing in light of the amount of repos necessary to keep the system solvent.

  43. SPECTRE of Deflation says:

    Kevin Depew has it exactly right. This from Sept. 20, 2007:

    2. (I Just Wanna) Testify

    Meanwhile, the Co-Mythmakers-in-Chief themselves are appearing on Capitol Hill today to propagate still more misinformation and partial truths while answering impossible to either make up or answer questions from politicians posturing in front of television cameras.

    How else can one explain comments like this from Treasury Secretary Henry Paulson: “The Fed’s action “helped to stabilize financial markets,” Paulson told the House Financial Services Committee.”
    Really? Did the US Treasury Secretary and former head of Goldman Sachs (GS) not have access to a Bloomberg terminal prior to his speech?
    DOLLAR FALLS TO RECORD LOW AGAINST EURO – (BN)
    CANADIAN DOLLAR RISES TO $1 FOR FIRST TIME SINCE 1976 – (BN)
    GOLD RISES TO 1980 HIGH AS DOLLAR FALLS – (BN)
    CORN RISES 3% IN CHICAGO – (BN)
    WHEAT RISES 1.8% ON CBOT – (BN)
    SOYBEANS RISE 1.6% – (BN)
    TREASURY YIELD GAP WIDEST SINCE MAY 2005 – (BN)
    Perhaps by “helped to stabilize financial markets” he meant “helped to stabilize the price of Goldman Sachs stock,” which is currently up 1.7% today. We’re just “speculating.”
    Meanwhile, Federal Reserve Chairman Ben Bernanke in his House testimony noted, helpfully, that “Markets do tend to self-correct.”
    Self correct? That’s odd.
    Why, “self correct” almost implies that markets operate independently, without the hand of intervention from the Federal Reserve, which the Treasury Secretary praised in his testimony for acting to “help stabilize financial markets”… to stop them from self correcting!
    Anyway, it doesn’t matter. Really it doesn’t.
    And that’s the point markets are making today.
    DOLLAR FALLS TO RECORD LOW AGAINST EURO – (BN)
    CANADIAN DOLLAR RISES TO $1 FOR FIRST TIME SINCE 1976 – (BN)
    GOLD RISES TO 1980 HIGH AS DOLLAR FALLS – (BN)
    CORN RISES 3% IN CHICAGO – (BN)
    WHEAT RISES 1.8% ON CBOT – (BN)
    SOYBEANS RISE 1.6% – (BN)
    TREASURY YIELD GAP WIDEST SINCE MAY 2005 – (BN)

  44. rickrude says:

    “……..How to get out of the very sticky mess is a bit more difficult to envision. Except cutting rates and going the way of Zimbabwe probably isn’t it.”

    That is precisely what the USD
    is going to do.

    How else can you stiff the investors in
    USD debt ??

  45. rickrude says:

    Posted by: km4km4 | Sep 22, 2007 10:52:26 AM

    Is it just me, or does anyone else have this deja vu feeling that it’s the 70′s all over again.

    I was particularly struck by the statistic that the last time the Canadian Dollar had parity with the US$ was 1976.

    I also recall the housing boom here in California in the early 70′s that preceded the raging inflation, energy crisis, and general ‘malaise’ that ensued at the end of the decade.

    But there is one difference between then and now; then we at least had Paul Volker…
    //////////////////////////////////////////
    your also foregetting that US is now
    heavily dependant on oil imports.
    Also the asian manufacturing

  46. SPECTRE of Deflation says:

    Anyone who has watched imports/exports for the last 25 years knows we were hosed, and a cheaper dollar won’t be the saving grace for this economy. Manufacturing used to represent 47% of GDP and now we sit at 14%. Even when exports are up, imports are always up more and have been for 25 years.

    3 card monty comes to mind, and just as the jackasses on the corner never learn, so to the American sheeple never learn either.

  47. stormrunner says:

    Does no one hear have an opinion regarding where the profits of Credit-Creation, Currency-Issuance, Digital or Physical in the Macro perspective all is interchangeable, where these profits are directed and therefore for all intents and purposes, who “owns” the dollar. Once this is put to rest there will no longer be “shock or awe” at any policy aimed at salvaging the banking system.

    I believe wunsacon stated it correctly when he alluded to the fact that debasement of the currency was the only way to balance the wage disparity, while keeping the Proletariat solvent, possibly even helping them by allowing current debt to be serviced with depreciated dollars. Of course if we suffer a Bernanke conundrum the reverse of the Greenspan issue, where the long bond rises in the intermediate term, its likely to be one wild ride.

    Look I’m wide open to criticism here for espousing this view, criticism I’m hoping may point me in the direction of a more “correct interpretation” I don’t necessarily enjoy being the contrarian, but you know as our fearless leader has stated,

    “There’s an old saying in Tennessee—I know it’s in Texas, probably in Tennessee—that says: fool me once, shame on … (long pause) shame on you? (long pause) Fool me -you can’t get fooled again.”

    George W Bush

  48. Winston Munn says:

    Stormrunner:

    I agree that the right to create money rests with the Federal Reserve, and that money is backed by the full faith and credit of the United States.

    Keep in mind that temporary action is not the same as adding to the money supply – it is simply moving monies around to satisfy daily reserve requirements.

  49. Estragon says:

    Stormrunner,

    WRT the disposition of net income from the federal reserves (private banks vs US treasury…

    From page 11 of this purpose and functions paper from the fed:

    “The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other major sources of income are the interest on foreign currency investments held by the System; interest on loans to depository institutions; and fees received for services provided to depository
    institutions, such as check clearing, funds transfers, and automated clearinghouse operations.

    After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. (Income and expenses of the Federal Reserve Banks from 1914 to the present are included in the Annual Report of the Board of Governors.) In 2003, the Federal Reserve paid approximately
    $22 billion to the Treasury.”

    (emphasis mine).

    Hope that helps. I may try to elaborate on my thought on the money supply credit thing later. Let me know if you’re still following this thread.

  50. stormrunner says:

    Yes I will be following this thread, good information thank you.

    Extrapolating, 95% net earnings returned on all operations foreign and domestic equals 5% of net earnings of the governments entire monetary system, going to the stock holders of the member banks. Granted this is a far cry from 5% of every digital or physical dollar issued, but still is significant when taken into consideration that through the miracle of Fractional Reserve Lending, this high powered money that they appearently only make 25 basis points off (5% of 5%), is again lent out 10 or more times at the prevailing interest rate which historically averages ~7%, which on performing loans could theoretically yeild as much as 70% on every dollar held in a member banks reserve account. As reserves dwindle open market operations dictate replenishment.

    Though not as bad I still see the same control issue. Is my logic flawed? In other words the expectations for profit are a function of the member banks abilities to increase their reserves, whatever the nominal increase for reserves in any given year must equate to credit expansion and thus long term inflation expectations.

  51. stormrunner says:

    Winston said:

    Keep in mind that temporary action is not the same as adding to the money supply – it is simply moving monies around to satisfy daily reserve requirements.

    If member banks are allowed to lend 10X reserve and they reach that limit, how does a member bank increase its reserves, by borrowing at the discount window, correct, have we now potentially increased the money supply M3 by 10X that amount borrowed. Would it not be correct to assume that 10X the prevailing rate minus the discount window fee would be the expected profit on whatever loans ended up performing. From the perspective of the banks obligations to the FED does this not infer a complete recouping of funds borrowed 65% the first year, if accounting for defaults maybe 24 months to everything from that point forward being complete profit. Available to be lent out 10X again. I realize this almost sounds rediculous, but it is the way it is explained by the contrarian opposition to this Debt-Based/Fractional Reserve banking system.

    Again thanks for the input.

  52. Estragon says:

    Stormrunner,

    The 5% not returned to the treasury is better thought of as sort of retained earnings. The analogy isn’t technically correct, but the point being it isn’t “profit” paid out to private commercial banks.

    From a fed faq :

    “Are the Federal Reserve Banks private companies?
    The Federal Reserve Banks, created by an act of Congress in 1913, are operated in the public interest rather than for profit or to benefit any private group.

    Commercial banks that are members of the Federal Reserve System hold stock in the Reserve Bank in their region, but they do not exercise control over the Reserve Bank or the Federal Reserve System. Holding stock in a regional Reserve Bank does not carry with it the kind of control and financial interest that holding publicly traded stock affords, and the stock may not be sold or traded. Member banks do, however, receive a fixed 6 percent dividend annually on their stock and elect six of the nine members of the Reserve Bank’s board of directors.

    Although they are set up like private corporations and member banks hold their stock, the Federal Reserve Banks owe their existence to an act of Congress and have a mandate to serve the public. Therefore, they are not really “private” companies, but rather are “owned” by the citizens of the United States.”

  53. stormrunner says:

    ****Member banks do, however, receive a fixed 6 percent dividend annually on their stock

    I had read this seems roughy equivilent to my loose analogy. I do not possess the knowledge necessary to debate the merits or lack thereof much further except to say that the nature of the system lends one to believe money is created in the banking system at the behest of the bankers and their need in this ponzi finance scheme to continuously expand credit so the system does not collapse.

    I realize this is a stretch but there is a 43 min video that capsulizes, the threat. as I perceive it you might find it to be contrived but I’d reccommend it. If you would be willing then comment on the merits of the position presented.

    Money as Debt
    http://video.google.com/videoplay?docid=-9050474362583451279&q=Money+as+debt&total=972&start=0&num=10&so=0&type

    From a previous post
    http://bigpicture.typepad.com/comments/2007/07/hulberts-4-big-.html
    *********************

    Eclectic’s review so far….
    47 f’ing minutes already. It’s entertaining and 90% is a description of the reality that very few people understand.

    You might find it entertaining also.

    There seems to be some 10% he doesn’t like,
    Trusts the government less than the banks. I understand this, but being that the banks issue the currency they run the country and we can’t vote them out.

    Again many thanks for the discourse recent events playing out as they are seem to support the validity of the Video assertions.

  54. Estragon says:

    Stormrunner,

    Keep in mind that the 6% dividend is paid on the paid in capital of the member banks. For example, the NY fed paid $221 million on paid in capital of $3.7 billion in 2006. You might argue that this is better than they could get on their money if they lent it out, but the difference isn’t material one way or another.

    Anyway, I may try to look at the video and/or discuss more a bit later.

  55. corky+mr clean=jeff macke says:

    “DOLLAR FALLS TO RECORD LOW AGAINST EURO – (BN)
    CANADIAN DOLLAR RISES TO $1 FOR FIRST TIME SINCE 1976 – (BN)
    GOLD RISES TO 1980 HIGH AS DOLLAR FALLS – (BN)
    CORN RISES 3% IN CHICAGO – (BN)
    WHEAT RISES 1.8% ON CBOT – (BN)
    SOYBEANS RISE 1.6% – (BN)
    TREASURY YIELD GAP WIDEST SINCE MAY 2005 – (BN)”

    oh the horror! the horror!!!! if youre taking advice from minyanville i can see why you’re so angry, probably down 20% YTD.

    regarding your brilliant and plagiarized points, i’ve never seen a setup so easy to play before in my life, if you don’t know how to play the inflation game i really pity you.

  56. Winston Munn says:

    Stormrunner,

    A bank is always limited by its reserves as to its lending capacity. The reason for the exponetial growth in housing was due to the abilities of the banks to bypass this limit by selling the loans and in essence becoming fee-based loan originators.

  57. Winston Munn says:

    Contrary to financial news reporting, there has been no permanent infusion by the Fed. The last permanent system open market account activity was in May.

    Repos and discount window activity is temporary.

  58. Greg0658 says:

    I’ve been following this discussion as best I can.

    Does a foreign trade deficit have a dual interest payment? One for the foreign bank and a 2nd payment to the US FED Reserve?

  59. Tom a taxpayer says:

    The reason Ben blinked is the same reason that Mervyn King of the Bank of England blinked: the run on Northern Rock bank.

    The Northern Rock bank run erupted in the week before the Fed’s Sept 18 meeting. Thousands of Brits lining up on the streets tried to withdraw their savings. Mervyn King, head of the BOE, made a complete about-face, and bailed out Northern Rock. The bail out annoucement came on Sept 17.

    Mervyn King, the BOE, and the British banking establishment were scared witless of bank run contagion. I believe the Northern Bank run, front page news in England, pushed Ben and the FOMC into full panic and the .5% drop in the Fed funds rate.

  60. Eclectic says:

    Stormrunner (and others):

    Stormrunner’s references to my opinions of fractional reserve banking and a 47 minute video produced by supporters of ex-deb Fed currency are a little misleading.

    I liked the video and it is very useful in understanding fractional reserve banking, however I am not opposed to fractional reserve banking, but only observe that Fed oversight of the process is sometimes not as effective as it should be.

    Good system… sometimes poor administration.

  61. stormrunner says:

    Sorry Eclectic, my aim was not to take your words out of context, but simply to restate that you felt the time spent viewing the material is not wasted. Hence the link to the origional thread. I obviously favor a chartalist approach to currency issuance, the arguments here seemed to be becomming circular. The video does a far better job of explaining why in aggregate “money” should be considered to be a product of the banking system rather than as;

    Estragon said
    “Currency is state issued in the west.”

    which on the face of it is true, but is in some way directly proportional to the demand created by private banks a demand which is an extension of credit. In other words he who controls the credit has the greatest impact on aggregate money supply which is positive in inflationary and negative in deflationary times. This concedes an inordinate amount of control to the Banks, allowing them to accumulate a disproportionate allotment of society’s hard assets.

    For those with no time to back track to the previous thread, Eclectic’s trust issue I alluded to, was not with regards to the current system architecture, but with what I was recommending. That being a “true state” issue approach to currency issuance.

    For the uninitiated “Chartalism”

    Note the most important aspects,

    This has been done many times in the US it is not precedent setting. The banking sysetm frowns on it however because the monies created in this way as stated,
    …all money created without debt.

    http://bigpicture.typepad.com/comments/2007/08/helicopter-drop.html

    I pulled this off a thread a ITulip is this the kind of helicopter drop that is likely to occur?
    http://www.itulip.com/forums/showthread.php?p=13322

    …..I’m a chartalist which has nothing to do with charts and everything to do with the creation of money without debt. One needs to be very careful in the interpetation of Bernieboy’s helicopter drop comment. The US has used a helicopter drop about 56 to 60 times in our history as a nation. In fact this was the original currency of the colonies and many believe the real reason for the Revolutionary War. Colonial Script is a form of Helicopter drop, Lincoln’s Greenbacks are a form of a helicopter drop, Nixon’s $2 bill in 1971 is a helicopter drop. Many other instances in our nations history of money being created through the Treasury directly and not by the banks. Nixon paid the Navy with $2 Treasury Notes directly and the Navy used the $2 bill as payroll to get them into circulation. Kennedy ordered the Treasury to issue Treasury Notes backed by silver, this was a helicopter drop as well. All money created without debt.

    Eclectic again sorry if I misrepresented your stance on this issue.

  62. stormrunner says:

    Whipsaw check out this scathing expose of GS shananigans

    http://www.investorvillage.com/smbd.asp?mb=4245&mn=156628&pt=msg&mid=3054995

    *************************************

    Well, you see, Goldman doesn’t manage OTHER peoples money quite like it manages it’s own.

    From the report – Asset Management (money they manage for others), Goldman: “Asset Management net revenues were $1.20 billion, 31% higher than the third quarter of 2006, reflecting a 40% increase in management and other fees, partially offset by lower incentive fees.”

    Lower incentive fees? Fees were down 52% from last year. Incentive fees reflect doing a good job. Looks like their performance was lacking from last year.

    Goldman: “During the quarter, assets under management increased $38 billion to $796 billion, reflecting money market net inflows of $31 billion, non-money market net inflows of $19 billion spread across all asset classes, and net market depreciation of $12 billion, reflecting depreciation in equity and alternative investment assets, partially offset by appreciation in fixed income assets.”

    Increase of $38 billion. That’s a lot of money but still just 5% increase. But with $38 billion in net inflows after depreciation it appears that they had negative organic return on the assets that manage.

    All on all, the money they manage for OTHERS had a bad quarter.

    Now look at their proprietary trading unit – THEIR money. Trading and Principal Investments were $8.23 billion, 70% higher than the third quarter of 2006. Equity trading revenues were up a mind boggling 154%. This is in quarter were we saw a rough drop of about 3% in the S&P500.

    Goldman: “Significant losses on non-prime loans and securities were more than offset by gains on short mortgage positions.”

    They shorted mortgage positions with THEIR money! Shorting mortgages – a bet that citizens will default on their loans and possibly lose their homes. Goldman made money when things were good by pushing these sub-prime loans, now they win again when they go sour.

  63. Estragon says:

    Stormrunner,

    I have a few quibbles with the video, more in what is not said than in what is, but it does cover ground few people seem to understand.

    Bear with me here, hopefully this won’t get too long, but I think it may help redirect your thinking a bit.

    For the sake of argument, consider the term “money” as a reference exclusively applied to a liability of the US treasury. Thus defined, money comes in two broad types. “Now money” is currency. “Later money” is US notes and bonds which are convertable to currency at some future date. They’re identical except in the time dimension.

    At the risk of oversimplification, but to avoid getting bogged down too much in technical details, consider that the fed operates primarily by influencing the balance of “now money” versus “later money” in circulation. Supply and demand for now and later money will determine the price of each relative to the other.

    This definition of money is distinguished from credit in that credit, although nominally denominated in money, is a transaction between private parties. This definition of credit is important because it introduces a second dimension to “later money”; credit risk. Because the government, and only the government, can create money as defined above, there can be no credit risk in money. “Now money” can be created at will in the event that maturing “later money” can’t be rolled over to new “later money”. Credit, in contrast, carries a risk of default. Credit creation is therefore dependent on the confidence of private concerns in other private concerns.

    Consider the following scenario; Stormrunner (S), Estragon (E), and our gracious host (B) get along famously and start a little country, call it Merka. We all live in modest identical homes with slightly different views, for which we all paid $100,000 on the same day some years back. Each day, we meet for tea to discuss our day, taking turns to make the tea.

    One day E shows up for tea to learn that S and B have grown bored with their views, and have exchanged homes. In making the exchange, they decided to value the transaction at $200,000 for each house, each giving reciprocal $200,000 mortgages in payment. Unfortunately, in all the excitement, S (whose turn it was) forgot to make tea.

    The next day, also bored with his view, E trades homes with S, but this time they value the transaction at $300,000. E takes the $200,000 mortgage owed on B’s home from S plus a new mortgage of $100,000 in payment. E has magically gained $200,000 in equity. B of course, is delighted that his home (on which he owes $200,000) in now apparently worth $300,000. S, not to be outdone, arranges to trade homes again with B, this time at $400,000. And so on.

    It now transpires that having discovered this magic “wealth” creator, B & S intend to trade homes regularly, and expect to be too busy as realtors and mortgage brokers to make tea for the foreseeable future.

    E is a little put out, but since homes identical to his are now worth $1,000,000, he’s much wealthier. Surely, such a wealthy person should be able to get a cup of tea on credit, so he goes down the road to a tea house (not in Merka). The tea house, as it happens, is anxious to sell more tea and agrees to run a tab for such a wealthy Merkan.

    So long as S,E,B and the tea house all have confidence in the other’s desire and ability to collect and pay debts, credit can continue to expand without limit, with profound effects on incomes, employment, trade etc., both in Merka and globally.

    Hopefully you can see where this is going. Nowwhere in that series of transactions are the fed or banks directly or necessarily involved. Credit (but no money) has been created entirely outside the fed/bank fractional reserve system. In the real world, there would be interaction between the totally private credit system and the government money system, but the essence of the transaction is entirely outside the scope of the money system.

    As was noted by an earlier poster, the banking system is increasingly less directly involved in the credit creation process. Credit is being created increasingly by and among non-bank private interests.

    This raises two troubling questions related directly to this thread:

    1. Is the fed’s ability to understand credit becoming weaker given the diminished interaction between money and credit?

    2. Is the fed’s ability to influence credit through control of money becoming weaker?

    Contrary to the thrust of the video, it seems to me that although we can impune all sorts of nasty motives to the government, the fed, and/or the banks, what’s likely to really bite us is the opacity of the global credit system lying entirely outside the scope of money and fractional reserve system. The fractional reserve system doesn’t create credit, it limits the creation of credit among private parties by tying it to money, and allows the transmission of quantitative risk information through the price interaction of money and credit. The system also allowed for qualitative risk assessments through bank supervision. It seems to me that this is the crux of the present problem.

  64. stormrunner says:

    This may appear short sighted and I realize your trying to keep the analogy simple but the only flaw in the analogy I see (which could be wrong), is as you’ve stated the banking system was left out the loop – credit was not extended – In the house price appreciation process these were bartered transactions and no one in the real world do this due to the tax implications unless they were planning to dump to someone via the “greater fool theory”. (I realize these types of fraud did occur however in the recent bubble but merely ripples in the much larger pond) In the real world an appraiser of the banks selection would have to agree on the comp’d price appreciation and real money would need to change hands either cash or demand deposit (checks) if credit was to be extended and some proportional increase in the money supply would need to occur, no? I don’t believe we can leave credit out of the analogy because it is this credit extension that would lead to inflation there simply is not enough cash buyers to initiate this. The recent debacle occurred not due to cash transactions but because of the catalyst of cheap money. The illusion the banking system creates that they just supply the medium of the transaction for a fair service charge, I don’t buy it. If the system operated in this fashion no amount of monetary stimulus in the form of cheap credit though lagging by as much as 6 -12 months would ever boost the economy. Which usually this does work, this time however the debt load of the average worker is already been maximized and wage adjusted inflation is flat .

  65. stormrunner says:

    it “limits” the creation of credit among private parties by tying it to money, and allows the transmission of quantitative risk information through the price interaction of money and credit.

    Does this process not work in reverse substitute “limits” for “expands”. Simply buy invoking the FFR and Reserve Requirement policy changes. Is this not the control mechanism that is the basis for the warning, the toggling between inflation and deflation that becomes the thief in the night so to speak.

  66. Eclectic says:

    http://www.youtube.com/watch?v=j6jlNMybgCs

    …Storm, you need to get Estragon a friendship ring… something to commemorate your first anniversary.

    I tell you… last time I saw this much dialog was when my friend and I took our kids camping. We couldn’t get the kids to sleep that night because the geeky guy (elec engineering student) in the tent beside us sat up all night long tellin’ this girl about resistance, ohms and alternating current.

    And, the **idiot** couldn’t have read body language or tone if it’d been carved on the girl’s forehead. I think he finally talked her to sleep… about dawn.

  67. stormrunner says:

    Hey I’m trying to get a free education what could be wrong with that, my circle of experience doesn’t include people with such knowlege, you truely are an enlightened bunch.

    Maybe it was the girl putting up the resistance. Just think what kind of education your kids might have gotten if he rectified the alternatin to direct.

  68. Winston Munn says:

    I hope to add a little clarity to this discussion.

    First, money stock (or supply) is increased when the Federal Reserve makes permanent purchases – the treasury creates a $3B bond which the Fed purchases and voila’, $3B in cash is created. The bond goes into the system open market account.

    Now, in theory, the Federal Reserve can drain money supply by the opposite tact, i.e., selling treasury bonds. The bonds are sold and the money goes back into the dark, mysterious hole from whence it came.

    The problem is, this may change the money stock but does n-o-t-h-i-n-g to change debt availability. The treasury bond purchased is just as liquid as cash for the purposes of collateral.

    The only way to reduce credit availability is by raising the reserve requirements, and the Fed has done just the opposite by allowing some banks to hold less reserves for their off-balance sheet special vehicles. Imagine Enron with the Fed’s cooperation and you get the idea.

    The magnitude of the potential collapse is staggering – this is what caused the Fed to panic.

  69. Eclectic says:

    BTW, Estragon… that was super work you did above! You asked two questons:

    “This raises two troubling questions related directly to this thread:

    1. Is the fed’s ability to understand credit becoming weaker given the diminished interaction between money and credit?

    2. Is the fed’s ability to influence credit through control of money becoming weaker?”
    end quote.

    The answer to both questions is yes, and they are related questions. Greenspan answered your first question: Conundrum!

    Bernanke answered your second question at Jackson Hole and explained the conundrum: It’s because of a lack of the effectiveness of monetary policy to control credit extension that is determined by interest rates that are set in c-a-p-i-t-a-l markets.

    In fact, he could’ve titled has Jackson Hole speech: “A PHILOSOPHICAL DISSERTATION ON THE FUNCTIONAL CAUSES OF THE CONUNDRUM: Securitization’s Detrimental Effects On Monetary Policy Transmission”

  70. Winston Munn says:

    greg0658:

    See if this helps. Suppose as China you sold $20 Billion in goods to the U.S., and were paid in dollars. Being a good citizen, you go to buy pork at the market but lo and behold the Chinese seller does not accept dollars as payment. What to do?

    You could exchange your dollars for yuan, but this would mean the Chinese central bank would have to print more yuan, increasing the yuan supply, which would cause inflation in China, making your money worth less.

    Another option would be to buy U.S. bonds – the U.S. will accept dollars as payment for bonds, so you can put your $20 billion into U.S. bonds without causing inflation at home; likewise, the extra $20 Billion in bond demand will raise bond prices, keeping yields low in U.S., so the interest rates are kept low. to make continued buying easier.

    Looks like a win-win.

    But how is the interest on the bonds paid? By tax receipts.

    And what would happen to this entire scheme if the U.S. economy slowed dramatically or even went into a prolonged recession?

  71. stormrunner says:

    Eclectic

    Posted by: stormrunner | Sep 23, 2007 12:56:27 PM

    Of course if we suffer a Bernanke conundrum the reverse of the Greenspan issue, where the long bond rises in the intermediate term, its likely to be one wild ride.

    I agree, stated that, higher in the thread for the short term, intermediate term it may not necessarily be so much of a conundrum as a delayed response, given that the debt load is rising exponentially, the period and degree of an effect from policy will end up being some factor proportional to the total new credit extended during the previous cycle. The ship is much larger now and more difficult to turn, I imagine theres also some theoretical limit where the tools do not overcome sentiment.

    I’m still obviously skeptical that the FED System is independent of the Credit Markets, actions speak louder than words, they had an excellent chance to convince us, check the link for the GS article its really hard not to be a skeptic in the same way that you would doubt that the government could responsably issue debt-free bills, traps of misallocations and all.

  72. Greg0658 says:

    Winston -
    1st I’d have to pay the bills back in China, ie wages, utilities, local commodities and I would need to exchange dollars for yuan knowing that the 4 something percent interest wouldn’t pay those bills for a long while

    so I guess its deflate/inflate my yuan (deflate / inflate is a point of view isn’t it)

    the action of creating a product in my local economy and bringing in a payment exchange is what matters to the heads of households in my China community and makes me a local hero

    but to the banking ministry of China the dollars better be worth more than fire starters

    whats a dollar got behind it – land, a military, commodities, intellectual ideas, products, businesses – lets trade

    for now I prefer my homeland (so keep your land)(hum, we have a birth quota because of land/pop ratio) – I feel safer with my own military – I could use your commodities (fairly priced – otherwise its a big world now thanks to oil and the engine) – intel (ok but we understand reverse engineering too) – products (ok if fair priced and or difficult to reproduce) – businesses (na, there over there and I’m here)(maybe I’ll buy into them and yank your chain using your system if need be)

    If your economy slowed down? I guess I would start selling my products with my factory on my homeland to my people at prices they can afford. Provided they can at least afford the commodities required in the build process.

  73. Winston Munn says:

    Stormrunner:

    Here is a conundrum. What would be the pressing need for 6 major banks to petition the Federal Reserve to lower the capital requirements for SIVs?

    What reasoning would the Federal Rerserve have to grant these requests in continuum?

  74. Tom a taxpayer says:

    Uh oh! Uncle Ben will blink again when he learns that the U.K. Financial Services Compensation Scheme holds only 4.4 million pounds.

    “Sept. 25 (Bloomberg) — The yen gained versus the British pound and the euro as the Independent newspaper reported the U.K.’s deposit protection plan needs more cash to cope with the bailout of mortgage lender Northern Rock Plc.

    The yen climbed against the 16 most-active currencies as investors reduced holdings of higher-yielding assets funded by loans from Japan, known as carry trades. The U.K. Financial Services Compensation Scheme holds 4.4 million pounds ($8.9 million), while a similar U.S. fund has $49 billion, according to the article on the newspaper’s Web site.”

    http://www.bloomberg.com/apps/news?pid=20601087&sid=asntCOyV3lBU&refer=home#

    As I mentioned in my Sept 24 3:26am post, the reason Ben blinked on September 18 is the same reason that Mervyn King of the Bank of England blinked: the run on Northern Rock bank.

    Mervyn King, the BOE, and the British banking establishment were scared witless of bank run contagion. I believe the Northern Bank run, front page news in England, pushed Ben and the FOMC into full panic and the .5% drop in the Fed funds rate.

    Yes, there were many other factors involved, but the straw that broke the camel’s back was the Northern Rock bank run. The run on the Countrywide bank was fresh on the Fed’s mind. News of the Northern Rock bank run sent the BOE and the Fed into panic operations.

  75. Eclectic says:

    Storm (and by reference also Winston):

    Let’s put the conundrum into practical language:

    The conundrum was the recognition that the Fed’s tightening of short-term rates, that in the past had eventually (albeit with delays) resulted in a competition for limited capital markets funding, was no longer having the same effect on capital markets, and thus long-term rates did not rise to modulate c-a-p-i-t-a-l e-x-p-e-n-d-i-t-u-r-e.

    Securitization was so powerful that it obviated FOMC monetary policy… and flummoxed Greenspan, whether in or out of the tub.

    So, according to your thesis question (prphrz): “What would happen if we experienced a conundrum in reverse?”

    A Connie In Reverse: Hmmmm?…. Pondering that for a moment…. hmmmm?… Well, I suppose…

    …that would be (a-la Winston) were the easing intentions of the FOMC to be swallowed up by an even faster collapse of securitized credit extension, thus resulting in profound competition for limited capital markets funding, and thus higher long-term rates that choke off GDP but not the e-x-p-e-c-t-a-t-i-o-n-s of market participants for even higher rate increases.

    Yep… I think that’s it… that’s what a Connie In Reverse would look like. And, yes… your characterization “wild ride” doesn’t quite do the concept justice if it ever gets its fuse lit.

    But more!:

    Notice that by defining A Connie In Reverse as being essentially: An easing FOMC, accompanied by antithetically higher capital markets rate expectations and profound competition for capital expenditure funding… I’ve just defined something we long ago recognized as being a-g-f-l-a-t-i-o-n-s-t-a-y. Consequently, the conundrum must be its mirror opposite!

    Well, I’ll just be damned if it isn’t!… That’s it!… The conundrum is stagflation’s antithesis.

    And, that would make Mr. Greenspan absolutely correct in his assessment that (prphrz): “As we begin to reach equilibrium, in relationship to the West, for wages and benefits among workers in China and in the old Soviet Bloc and much of The Third World, inflation in world markets will resume being a serious problem.”

    He’s right but the timing is what is just as critical.

    My personal opinion is that the equilibrium he speaks about is still so far into the future that the world-wide deflation of wages and benefits (mostly in the industrialized West) will continue to moderate inflation for some time… possibly another half-generation or longer.

    We’ll see. But, Barringo… I’m kinda back to not sweatin’ five-two-five on the T-Y-T.

    You reckon I’m right?

  76. Winston Munn says:

    Seems ironic that by ignoring its oversight role the central bank has made itself somewhat irrelevant.

    One must wonder if Citibank or another large bank wouldn’t be Rocking like Northern without the capital reserve change waive of 23A authorized by the Fed.

    Allowing greater leverage is about all the Fed can realistically accomplish, though, but is it acting on faith based that this is simply a crisis of liquidity or is it acting in panic due to a crisis of solvency?

    Either way, increasing leverage ability is a dangerous game.

  77. Eclectic says:

    My last word here, Winston… because soon we’ll starve to death on this soon-to-be Donner Pass to Big PicSierra:

    http://en.wikipedia.org/wiki/Donner_Pass

    Let’s blame the Fed for what we can blame it for, but refrain to just pile on.

    I hold them responsible for allowing the housing debacle. They had ample opportunity to realize it was a bubble, and they had real monetary instruments and regulatory pursuits available to address it. “I just didn’t get it” is not a good enough excuse for me.

    However, here’s some things they really couldn’t control:

    1) – Pro-forma EBITDA accountancy development by big league stockholder corporations. Once you buy into this and supply-side economics, it’s then much easier to buy number…

    2) – Expectations that privately made derivatives contracts can always be settled. We all know now (many of us knew intuitively before) that a wide-scale attempt to settle these contracts in any significant level of crisis would be patently impossible. The subprime component of the total is yet a tiny portion of the overall size of this market.

    The reason derivatives markets became so highly developed was for the specific purpose of bypassing Fed margin requirements. Futures and options exchanges are regulated markets where there is a requirement for settlement party competence (clearing house with absolute authority to oversee equity) and for contract definitions according to: size, manner of trading, real marked-to-market price quotation and carefully observed margin requirements.

    None of these elements are found in private derivatives market trading.

    3) – Corruption, optimistic willfulness for its own sake, greed.

    4) – General legislative and executive branch failures in the area of fiscal policy.

    5) – Market participants having vacated their responsibility to themselves.

    6) – Demographic shifts the Fed was not structured to deal with.

    The real irony, Winston, is that so many rely on the Fed to fix the problem. It’s a little like asking a surgeon for psychoanalysis.