Terrific chart via Bill King shows the extent of the borrowing by financial institutions at the Fed Discount Window.

Note the 4 spikes: Continental Illinois bailout (1960s), S&L Crisis  (1980s), 9/11 (2001), Credit Crisis (today)
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Dwb_32608

Chart courtesy of Bloomberg, Bill King

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I’d call that provocative!

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Category: Credit, Federal Reserve, Finance

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.

65 Responses to “Discount Window Borrowing”

  1. ECONOMISTA NON GRATA says:

    “I’d call that provocative!”

    I’d call that BLOODY MOTHER F—ING INSANE…!

    Best Regards,

    Econolicious

  2. JustinTheSkeptic says:

    Have I mentioned this quote from Ludwig von Mises: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or LATER AS A FINAL AND TOTAL CATASTROPHE OF THE CURRENCY SYSTEM INVOLVED.” (capitals mine)

  3. Neal says:

    I predict that this will be called “demonstrative of an accounting shift, nothing more”, as was the negative non-borrowed reserve for depository banks was a few weeks ago.

    A mere flesh wound.

  4. Karl K says:

    I take it those dollars are nominal, not real? In that case, I wonder how the Continental number compares in real terms to today.

    The other thing about these spikes is that they are, well, spikes. Infrequent. We eventually move past them.

    Also, I’d be curious to know what the discount window borrowing was, say, in the 1930s. My history is shaky on this, but I don’t think there was very much at all.

    I know that the economic fundamentalists on here, like the religious fundamentalists, want us to suffer for our sins. Me, I’ll take a short term spike in discount window borrowing to avoid a rapid Armageddon-like credit market meltdown.

    Of course, for some on here, that would be the economic equivalent of the Rapture.

    I’ll take a pass, thank you.

  5. Ken H. says:

    C’mon Barry, you know this is all your and the media’s fault. All this negativity man!

    The spin on CNBC yesterday with after the terrible consumer confidence number,..good grief! I forget who Erin tried to get to say it was just negative headlines bringing everyone down. That was met with a resounding no and that the negativity was because the food and gas consumers were buying was twice as much now! Still that twit tried to spin it?

    Erin, Do you realize you make yourself look like an idiot? No credibility. Even Steve L. refused to spin that horrible number. Good for you Steve.

    Sorry Bsrry, you can post this objective data about fundamentals but you will still get some baseless argument on here about why everything is okay. Still appreciate your blog. Housing was the same way. everything was fine,..until it wasn’t!

  6. wally says:

    Which is more significant – the height of the line or the area under the curve? This crisis certainly came on quickly, in comparison, but hasn’t shown legs yet.

  7. JustinTheSkeptic says:

    Karl K, why don’t we just keep on flooding the system with money so that we all can use it to wall-paper our homes, not just here in this country, but everywhere around the world. As all the FED Governors know, (but somehow seem not to want to admit too), once you let the inflationary genie out of her bottle it is near impossible to get her back in. In fact, the only time I can remember is when Paul Volcker, raised rates back in “81., which crushed the economy. Which means that the best thing to do is to suffer through a very fast deep recession/depression, feed the people, make sure no one goes hungry, etc. With our knowledge today, we could pick up the pieces very quickly, and more than likely, the rich that are fearing the loss of their wealth, would in the end get back their principle and more. If they know where to reinvest into the “new economy.” If they do not then they didn’t deserve their wealth in the first place. All the FED injections, whether through lower rates, open window policy, etc.,are doing is extending the agony. We have only just begun this process and it will take years, like Japan, to fix the problem. Unlike Japan once the system gets wrung-out we then should flood the system with money, not do it like they are now – prematurely. Yes, a financial Armageddon (Schumpeter called it creative destruction) is the best road to take. Some times problems don’t go away by just being able to “crying uncle!”

  8. bdphil says:

    That’s the same thing I was thinking, the area under the curve should eventually give the total dollars borrowed and better describe the “size” of the problem. Wouldn’t an inflation adjustment be warranted as well?

  9. Karl K says:

    Justin the Skeptic said

    …the best thing to do is to suffer through a very fast deep recession/depression, feed the people, make sure no one goes hungry, etc.

    See?? This what I mean. Economic fundamentalism that’s equivalent to religious fundamentalism. Very disturbing.

    Look, trust me..you DO NOT WANT THIS TO HAPPEN! This is a really really really BAD idea.

    Don’t get me wrong. I have no problem with economic downturns or bear markets. I have no problem with the fact that we need to set our currency ship aright again. I am very sympathetic to all the things you mention about our economic health.

    But we cannot have the economic engine seize up — even for an instant. The unintended consequences of such an event would be too horrifying to contemplate.

  10. Marcus Aurelius says:

    Everyone is missing the obvious cure for our current economic woes.

    George Bush needs to talk to God.

    Now that we have our fine Faith-based-Initiative infrastructure in place, all Bush needs to do is to ask The Almighty what he wants us to do with it. C’mon, folks – we’re talking the Creator of the Universe, here – and our President has a direct prayer line to him. Think of it as “the White Phone”.

    I can’t understand why Bush won’t do it. After all, that’s why God gave him the direct line in the first place. It’s not like we didn’t listen to God’s prophet. We elected Bush twice, just like God told us to. Why would he abandon us now?

    I’m beginning to doubt that Bush was being honest and forthright about his relationship with God. If that’s the case, I don’t think electing him was such a good idea.

    Live and learn.

  11. lurker says:

    But Justin, it is an election year…

  12. Marcus Aurelius says:

    But we cannot have the economic engine seize up — even for an instant. The unintended consequences of such an event would be too horrifying to contemplate.

    Posted by: Karl K | Mar 26, 2008 8:50:21 AM

    ______

    There have been many things too horrible to contemplate taking place over the past 8 years. Why is the one that roosts on your doorstep the only one “to horrible to contemplate”?

    Never thought you’d be next, did you?

  13. John Borchers says:

    Let’s not forget the Fed has already loaned out half it’s balance sheet. There’s not much more room for Fed lending until it can’t lend anymore.

    What happens when the lender of last resort can’t lend?????????

  14. JustinTheSkeptic says:

    Carl K, we have no choice – pay me now, or pay me later… What, would you rather go through Weimer Republic style agony, or meet the problem head-on? The U.S. goes bankrupt, we find the true value of things by having a fire-sale, and letting the market work… I’ll admit there are no easy answers.

  15. Rich Shinnick says:

    Durables down, GS estimates plus $1trillion in losses, consumer confidence non-existant, etc.. Whadyasay up 300 today? I think its a lock.

  16. Chief Tomahawk says:

    At what point does Ben Bernanke get vertigo?

  17. MitchN says:

    Let’s not forget the Fed has already loaned out half it’s balance sheet. There’s not much more room for Fed lending until it can’t lend anymore.

    What happens when the lender of last resort can’t lend?????????

    The Fed’s credit line is limitless; if they burn through the $800 billion and the crisis is still with us, Congress will increase the Fed’s reserves. The Fed will not run out of money to lend.

    That’s largely immaterial, though. As much as anything, the credit crisis is a crisis of confidence — as in, “I don’t believe, Mr. iBanker, that that crappy paper you’re trying to sell me is worth what you say it is. Take a hike.”

    Until that crappy paper is marked down to what it’s worth — nothing? — injections of liquidity by Fed will be of limited value.

  18. cinefoz says:

    Here’s a challenge to the phonies who claim we just need to hit bottom before all can be made right again.

    Please define ‘Bottom’ in numerical and narrative terms so that there is no disagreement as to exactly where ‘the bottom’ is. The lunatics who think a good credit market seizure is all that is required must have some idea where the end of the road lies. So, give me a number and describe the scenery at that location.

    I don’t mean the local S&P bottom that is defined as the local low some expect in a few months. I mean describe the number and consequences they expect to see when we are purged of all economic ills. How will the average day of the average person be affected in your description?

    Please don’t coward out of my challenge and whimper that nobody could possibly have the answer. You idiots are asking for a total economic collapse as a cure all. You must have an idea of how to recognize when that has happened. Let’s hear it.

    You ignorant phonies must also know what the natural state of the economy is for the country and the world. So, spill it. Define ‘perfect’ and explain how to get there. Hint: Herbert Hoover tried this in the Great Depression. He felt that aiding the economy was encouraging weakness and not enabling the bad stuff to work its way out naturally. How well did he do, in your exalted opinions?

    Let’s see if you clowns are just a chorus of tagalong wannabee doomsters or if you have the actual chops to describe the apocalypse you want so badly.

  19. mikkel says:

    I’ll tell you one thing, if our government doesn’t start getting ready for a seize up, and people don’t start preparing for it, then it will be horrifying.

    So far I have yet to read anyone that has a compelling answer about how to get out of the problem without massive hyperinflation that is guaranteed to ruin us. They all just say that we can’t go the other route because it is too bad to think about.

    Well I’ve never heard of a country that disappeared because of deflation (I could be wrong, please correct me) but there sure are a hell of a lot of countries that have fallen apart completely from hyperinflation.

    It’s not about fundamentalism, it’s about looking at history and concluding that at this point everyone is captive. If something fundamentally changes and negates the historical comparisons then I am willing to change my view.

  20. cinefoz says:

    Come on, mikkel. Spill out some details. Tell us all what the end game will look like after the purge. All I read is general hand wringing blabber.

  21. Ross says:

    That chart on the discount window looks like an inverted sonar pic of an iceberg.

  22. mikkel says:

    cinefoz I have a very succinct answer to what the bottom will look like.

    It will be when the only thing to fear is fear itself.

    Or in more numerical terms, it’ll be when minor changes in stimulus/productivity cause massive increases in GDP rather than visa versa.

    With our technology and egregious excess in resources, it would be unconscionable if there was widespread famine, disease or homelessness, but I fear that’s exactly what will happen if either a) there is a depression and there is no back up plan or b) they try to stave off one at all costs and it debases the currency so much that we have no buying power.

  23. C. Maoxian says:

    The Continental Illinois bailout was in 1984, not the 1960′s.

  24. mikkel says:

    I should have said when it’ll occur. What it’ll look like will hopefully be the “best” parts of the Great Depression, i.e. without the tent cities and massive famine. Maybe like Russia after the fall of the Soviet Union.

    So yes, it’ll be horrible.

  25. cinefoz says:

    so mikkel,

    You agree with the Herbert Hoover method of fighting bad paper in the markets? It sounds like it. Sorry, but history disagrees. You should read it sometime.

  26. mikkel says:

    Then at that point I’m all behind tons of Keynesian stimulus, which is what it was originally meant for.

    Massive infrastructure work. Tons of money to basic and applicative science. Huge expenditures into alternative forms of energy. The bottom isn’t going to magically go away, it needs to have a fundamental driver that will set up recovery.

    And people that read Minyanville should know that the idea that Hoover stood aside and did nothing is completely false. Minyanville has constantly pointed out that what we are doing now is almost exactly like Hoover’s admin and the Fed did then. Tax cuts for economic stimulus, creative borrowing, huge and fast interest rate cuts.

    It didn’t matter because they were doing it on the wrong side of the problem.

  27. hal says:

    everything is spin–just look how Obama and Hilary are spining things.

    I think its a baby boomer thing–in general we get more and more shallow each year.

    the CNBC thing–it plays to shallow minds not deep thinkers.

    the dumbing of America.

  28. wally says:

    “Please define ‘Bottom’ in numerical and narrative terms”

    This is not so hard as you seem to believe. The answer varies with what you look at, but the principle is this: there are historical ratios that ‘work’. Instances include: house prices to income, debt to GDP, wage rates to commodity prices, leverage ratios… When you let one of those jump the tracks, the others do too. The Fed’s real job, long term, is to preside over the orderly return to the norms, not to sustain the unsustainable.

  29. mikkel says:

    Cinefoz, I consider myself a progressive. I’m all for appropriate government regulation and our tax system and all sorts government intervention. I’m not some die hard free marketer by any stretch of the imagination.

    And I have read a lot of history. And I’ve looked at what the different schools think. How do you prove the Austrian economists wrong? I think the Austrians are wrong about the solution, for what they want caused needless suffering in the 1800s — regardless of what they try to say, it does cause more instability to have a fixed monetary system with no central bank.

    But they were right about what caused the Great Depression. Not having enough money available? Every one had so much debt it was impossible to take on any more! It’s all well and good to have stimulus and a monetarist outlook when there is credit appetite, but there was no appetite.

    People are starting to point to Finland as a potential cureall. OK, well what was the position of Finland at the time? They happened to have their crisis at the start of the largest global bull market in history, and their citizens weren’t completely tapped out, so the main problem was not having jobs. We could have 100% employment and it wouldn’t solve our housing or debt crisis because as a society we are completely tapped out. And since we are the lynchpin in the whole global economy, color me suspicious that we’re gonna get lucky with a massive macroeconomic change in other countries.

    Far more likely is what happened to Zimbabwe or Weimar, or post-Versailles France or Rome or South America in the 80s. Those are examples where the entire countries were tapped out and so any move just caused massive inflation.

  30. Marcus Aurelius says:

    The two schools of thought seem to be the ‘Let It Crash and We’ll Clean It Up School’, and the ‘A Slow and Orderly Unwinding Is The Best Way to Go School’.

    I prefer the ‘Crash’ philosophy for the reason that it would benefit more of us in the long run. In the Crash scenario, the burden of loss would be more concentrated in the upper wealth classes – those who profited most from the boom. The ‘Crash’ scenario prevents the transfer of debt and loss to the common taxpayer.

    The ‘Unwind’ scenario will accumulate additional debt, to the benefit of those who stand to lose the most (and who, being the beneficiaries of our current situation, probably deserve to lose the most), while shifting the burden to the taxpayer. This is taking place as we watch.

    It should also be noted that the ‘Unwind’ scenario might not have an end.

  31. cousin chris says:

    i thought CI NB&T Co was 1984, not 1960s?

  32. mikkel says:

    Marcus, it’s not just the taxpayers either. It is the increase in inflation that would most likely not coincide with wage increases (so it’d be even worse than the last 7 years, who has heard of a “recovery” where income was completely flat) and would absolutely kill people on fixed incomes.

  33. Karl K says:

    Marcus Aurelius wrote:

    I prefer the ‘Crash’ philosophy for the reason that it would benefit more of us in the long run. In the Crash scenario, the burden of loss would be more concentrated in the upper wealth classes – those who profited most from the boom. The ‘Crash’ scenario prevents the transfer of debt and loss to the common taxpayer.

    Wow. The most striking example of economic naivete I have seen on this board…. which is no small feat given the general tenor of posts around here, lemme tell ya.

    You know what the rich people are going to do if there is a depression? Shrink/shut down their businesses and lay off their workers.

    Because — and let me go slowly here because this is a hard concept for folks to grasp — it is the rich people who own businesses and hire workers.

    Anyway, this is all just bits and bytes on an Internet blog. Ben Bernanke doesn’t give a rat’s ass about what you think, and he isn’t going to allow a depression to occur. He knows, better than any person alive, what depressions do.

    You, and those economic fundamentalists on here like you who want sin-expiation to occur through drastic downturns, simply don’t have a clue.

  34. Acrossthepond says:

    That “Unwind” idea sounds an awful lot like Japan…

  35. Marcus Aurelius says:

    Posted by: Karl K | Mar 26, 2008 10:40:34 AM

    ____

    Glad you enjoyed it!

    Keep in mind: The business bottoming is going to happen anyway. It’s baked into the pudding, and you’re going to eat it. Don’t like that idea? Tough shit. Hold your nose and swallow.

    I might be naive, but you are self-deluded.

  36. mikkel says:

    Karl K, it’s arguable that my very liberal grandparents know better about what depressions do, since they you know, lived through it.

    And they completely agree with what I said and what Marcus said. My grandfather is a Lutheran pastor who spent much of his life tending to the sick and poor, who it’s not like it doesn’t pain him. They just see the exact same things now that they remember then.

    They just ask that we avoid global war this time.

  37. Marcus Aurelius says:

    BTW: Sin expiation? I never suggested such a thing. Just desserts, on the other hand…

  38. John Borchers says:

    And who’s money does the plunge protection team use? The Fed’s? If they run out of money to buy the market it will crash.

  39. Karl K says:

    But the analogy with sin expiation is obvious. We’ve sinned (easy money) we need to cleanse ourselves of the sin (crash/depression).

    Only suffering, therefore, can relieve us of our sins.

    Nothing is more rabidly fundamentalist than such an attitude.

    And with all due respect to Mikkel’s grandfather (the fact that he is a man of the cloth sorta proves my point) he is NOT an economist.

    As for the unwinding being “like Japan,” it may eventually be similar, although our economy is much more resilient and entrepreneurial. Also, financial institutions WILL take their losses, and have already begun to do so.

  40. pmorrisonfl says:

    Karl K writes:
    > we cannot have the economic engine seize up — even for an instant. The unintended consequences of such an event
    > would be too horrifying to contemplate.

    Gerald Weinberg has a saying that “the thought that disaster is impossible often leads to unthinkable disaster”… bearing that in mind, I think it’s worth characterizing what you mean by ‘too horrifying to contemplate’.

    Not thinking about consequences doesn’t have a great track record of avoiding them. What do you think we should be afraid of?

  41. Marcus Aurelius says:

    Karl K:

    If by “Financial Institutions” you mean common shareholders – I agree. That’s what the “Unwinding” is about. You will be left holding the debt, they will be left holding the assets/wealth.

    The past decade should have been a clear indication that working against one’s own self-interests isn’t very smart. Go ahead and empower the people who are robbing you.

  42. pmorrisonfl says:

    > Please define ‘Bottom’ in numerical and narrative terms so that there is no disagreement as to exactly where ‘the bottom’ is.

    I’ll bite:

    My definition of bottom: When houses again trade in the range of 2.5x median income/when owners can carry the houses for what they collect in rent while keeping the money supply stable (say less than 3% growth in M3 per year).

  43. mikkel says:

    Karl K, when Alan Greenspan comes out and says that we are just as bad as predicting what will happen as when he started in the business, I tend to be suspicious of economists.

    Especially since my field is studying non-linear dynamics and I strongly disagree with many of their models underlying assumptions about normality and other things. Things that Mandelbrot and other people have severely criticized them for. Almost all of economics seems to be about assuming that all movement is within the 95% range (basically, they’ve linearized a nonlinear system by looking at it near the equilibrium point) and whenever there is an extreme move in either direction their models fall apart completely.

    There is even a recent economics paper that says that because of the faulty assumptions, the risk mitigation techniques actually create positive feedback loops whenever the system gets to the point that they are actually needed.

    I’m not exactly blaming them. In my work, the outlook is entirely positive. If we figure out how to account for the highly nonlinear nature of the body then we will save lots of people. In their work, they are constantly pressed to make things work or are blamed for it. I couldn’t take the pressure and I would probably resort to trying a linear regression model made up of 20 variables too.

    I will agree with you on one thing though, and that’s the moralistic aspect in all of this. I am definitely not religious, but in my view most religions have captured a part of the universal truth of how nature actually works…and many of their ideas about morality and other things have that grain of truth. So yes, he does look at it as a moral issue, not because he thinks we must have penance, but because the materialistic outlook is unsustainable. He might say it’s on a spiritual level, while I would say that the spiritual level exists because of people’s nature.

  44. Estragon says:

    Consider the longer history:
    1919-Present

    Granted, this is in nominal dollars, and nominal dollars aint what they used to be.

    Now consider the 1919-1939 period.

    The fed regularly used lending as a tool to provide liquidity through the 1920′s, and into the 1930′s. This tool did succeed to the extent that recessions in the 1920′s were softened, but in hindsight it looks like it was just kicking the can down the road.

    It’s also worth noting that the US is now heavily reliant on foreign debt (official sources in particular). This time around, someone offshore may be making the choices for us.

    There’s a view that had Benjamin Strong lived into the 1930′s, he would have applied the liquidity tonic more forcefully c.1930, and the worst of the depression would have been avoided. This appears to be Ben B’s view.

    We’ll see.

    I have a feeling we’ll regret this in five years or so.

  45. Ross says:

    Appologies to Mandeville

    As pride and luxury decrease

    so by degrees they leave the seas

    not merchants now but companies

    remove whole manufacturies

    all arts and crafts neglected lie

    content the bane of industry

    makes ‘em admire their homely store

    and neither seek nor covet more.

  46. Marcus Aurelius says:

    Posted by: pmorrisonfl | Mar 26, 2008 11:21:16 AM

    ___________________

    I agree, but there are so many variables, there’s no telling when that will be (in the event of collapsing wages – increasingly likely – that measure might not be met fot a long, long time).

    The bottom can only be seen in the rear-view mirror. We’ll know the bottom 1 – 2 years after it happens. Anything else is conjecture, and as such, is equally valid (or equally fictional).

  47. Shane says:

    mikkel,
    If you look at the 1800s some of the greatest times of prosperity were when the country had a stable hard-money currency. The panics were ALWAYS brought on b/c of an overextension/extension of credit/money.

    The first grand scheme to introduce a fiat currency-the Greenback during the Civil War was a colossal failure. During the War it provided a boom for the war effect and afterwards the subsequent collapse.

    Before the National Banking System (the predecessor to the Fed), each bank controlled its own notes and expanded at will. The expansion of the notes was uncoordinated. The NBS enabled all banks to pyramid their expansion upon the NBS, and thus lead to a coordinated expansion of credit across the country. This is one reason why for banks it is preferable to have a Fed vs. no Fed. it coordinates the expansion of money.

    It’s too long to go into here, but the entire root of the boom/bust problem is
    fractional-reserve banking. It is b/c of fractional-reserve banking that banks wanted the Fed (to avoid bank runs from FRB), and fractional-reserve banking is a MAJOR way in why we have money inflation/deflation.

    FRB is nothing more than legalized counterfeit and theft. A good treatise on it is “The Case Against the Fed” by Rothbard, it’s short ~150 pages and you can read all of it on-line from Google books.

    The real solution to our entire mess is 100% reserve banking. I.e. you can’t lend out more money then you have. With that you wouldn’t need a Central Bank to raise lower interest rates, they would do so on their own at a market rate.

    Not only does FRB cause inflation, but it also re-distributes wealth unevenly across the population. Those who get access to the loans 1st get the greatest benefit to it.

    I don’t wish economic ill on the US as a country, but by allowing bailouts it is nothing more than legalized stealing of wealth from my pocket to the banker. Sure it may not be much . . . maybe .05 cents on the dollar, but still it is stealing from me to pay for the stupid mistakes of bankers. If you want to pass a law and tax me, fine we can discuss that . . . but don’t inflate the money supply and secretly steal money from me.

    It seems that very few people understand the concepts of fractional reserve banking, pyramiding by the Feds and how much transfer of wealth these actions cause.

  48. pmorrisonfl says:

    MA: note that I neither say when or how we well reach it, just my approximate sketch of what I think it looks like.

    Your post on ‘husbandry’ a couple of weeks ago is one of the finest things I’ve read on a blog. Thank you.

    Karl K:
    > Because — and let me go slowly here because this is a
    > hard concept for folks to grasp — it is the rich people > who own businesses and hire workers.
    Karl K. I think you have an old-fashioned view of rich people. There are moderately to mildly wealthy people who do as you describe. But that’s not where the action is. The wealthiest people/corporations on the planet seem to be owning businesses in the US and hiring workers somewhere else. It’s all good economics and capitalism, but for that reason it is counter to the interests of the worker. There don’t seem to be many Henry Fords these days, who recongize that their workers need to be able to afford their products.

  49. Marcus Aurelius says:

    pmorrisonfl

    _____

    Thank you. I’m truly flattered.

  50. David says:

    The Continental Illinois bailout was in 1984, not the 1960′s

  51. The Big Picture | Discount Window Borrowing

    Link: The Big Picture | Discount Window Borrowing. The Big Picture has a chart of discount window borrowing.

  52. Boiled Frog says:

    I am not an expert but what is going on seems unsustainable. Therefore things are going to collapse in some fashion. Am I rooting for that outcome because I can see it coming?

    I certainly don’t want to live through a depression, especially with young children but if one is coming I would like to prepare.

  53. montaigne says:

    cinefoz,

    Hoover was certainly NOT a do nothing president. You might want to read up on some history before you try and attack the realists by aligning them with Hoover. It’s an extremely poor argument based on assumptions perpuated by FDR defenders.

    Left vs. Right (free market, not kudlow)on the depression.

    http://www.intellectualtakeout.com/ideastogo/documents/Depression-To-Go.pdf

    Pres. Hoover intervened by cutting taxes, increasing government spending, expanding credit, expanding public works projects, keeping wages high, and restricting trade through high tariffs – That’s from Paul Johnson’s History of the American People.

    Let me know if you need things spelled out in more detail.

  54. Kp says:

    I am much more interested in what happened after the last great financial crisis then what preceded it. We all know how/why it happens.

    Last time it was rampant deflation. This time we have a Fed determined to prevent that…which in a period of deflating wages seem like blatant cruelty.

    But how it is all really going to play out.

    Can we export cheaply enough despite high energy input costs to help climb out of the hole we are in?

    Seems to me like we need some sort of proprietary IP or technological innovation that we can sell with low transaction costs. That’s gonna be tough to do when our educational system has been raped and pillaged by the wealthy via tax cuts.

    The more I mull all of this over, the more unsettled I become. We have depleted our national resources for the sake of faux capitalistic conquest.

  55. William says:

    The Continental Illinois bailout was in 1984, not 1960, but yes that is an interesting graph.

  56. montaigne says:

    “That’s gonna be tough to do when our educational system has been raped and pillaged by the wealthy via tax cuts”

    What are you talking about?

    The education system spends gobs of $ on students. Not to mention the gobs of money thrown at college students.

    More money does not = better education. That’s a myth perpetuated by the NEA and other teacher labor unions. Shocking that a group would actually try and spin things so as to get more money and maintain the status quo. At least the NAR never did anything like that.

    The failure of education is that we have a system designed for a factory worker environment (read some Dewey) that was created in the late 1800′s. It’s time to break the system and allow for more choice and freedom. Additionally, I expect that as the boomers retire and the gov’t goes belly up that economics will force education to be more efficient so that workers enter the workforce sooner.

  57. Stormrunner says:

    This is the debate I was trying to entertain 8 months ago

    Commodity Money \vs

    State Sponsored Chartilism (Lincoln’s Greenbacks)\vs

    Debt-Based Monetary Fiat (The Fed)

    Month’s of reading and my layman’s conclusion FWIW, this debate will never be settled. Debt-based fractional reserve banking, is a Top Down approach to controlling the store of value that is our currency, likewise is the State Sponsored Debt Free issuance of chartilism, both dependant on honesty and integrity of the control mechanism. It comes down to whom to you trust Corporation or The Federal Government which in many ways mirrors the mechanics of a corporation.

    Hard money in the digital age would likely not be the restrictive growth inhibitor that it is perceived to be.

    The Parallel Currency ideology of, for instance heaven help us “Ron Paul” where PM’s are monetized,(no tax on nominal increase resulting from currency debasement) then allowed to float not your Grandfathers Peg but a float should moderate expansion of the currency base and act as a systemic as opposed to regulatory deterrent. No one has countered this for me articulately, with the exception of Denninger (Market Ticker)who simply states that increases in gold price are more closely related to geopolitical turmoil than inflation, on this I disagree but point taken.

    In the mean time we must exist in the system as designed which calls for regulation via legislation that is always over ridden, Glass-Steagal repeal being the most obvious answer. People like Kudlow blaming legislators for not allowing investment banks access to the discount window when they are rally not banks at all is ludicrous. Allowing mortgage assets to be bundled and sold, by the very institution originating the loans to cycle fraudulently AAA rated securities into pension funds and the like is the, mechanism or vehicle created by Graham Leach that precipitated this debacle. I have great reservation believing this is an accident. It’s just another wave in the Minsky Credit Cycle. These cycles will continue regardless of the regulating mechanism as “boys will be boys” best anyone can do ids to try to anticipate and step out of the way.

  58. Karl K says:

    You know, I was wondering how long it would take for someone to come on this board and rail against Fractional Reserve Banking.

    ANOTHER symptom of Economic Fundamentalism.

    A well-managed fractional reserve banking system is one of the great advances of modern capitalism. Why? Because it allows the for accelerated wealth creation across a large diversified economy. There’s a reason, all you Economic Fundamentialists out there, that our standard of living has increase so dramatically in the last 75-100 years.

    In the ideal world of FRB, systemic risks are diversified and modulated by the normal distribution of asset prices. A large and flexible economy like ours can handle the leverage of well-managed FRB quite easily.

    The problem today is a combination of extended leverage and financial instrument creation out of thin air. When the bright boys and girls our of Business School are creating “liquidity puts” — well, time to rein the brains in.

    I think we do need some sensible regulation of non-bank financials in order to keep this sort of mess from happening again. What form that takes I am not so sure and, of course, never underestimate the ability of Congress to impose really dumb constraints.

    But we should never get rid of leverage and securitization of assets. THAT would be really idiotic.

  59. Kp says:

    Securitization creates correlation were none previously existed, and since no one knows what anyone else is holding anymore(as you could probably determine when everything used to be localized)…determining risk profiles is next to impossible as everyone has now learned. It has its down sides.

    Leverage is also, as we have all learned AGAIN is always the enabler of and highly correlated with financial stupidity. akin to giving loaded guns to primates…in a mall. Leverage is like adrenaline, only to be used in the case of an emergency.

  60. BG says:

    With all this bad data and market psychology, it’s going to be time to feed the Gods once again in a few more days. I wonder who the next so-called “lamb” will be.

  61. zort says:

    Yes, worthless without being adjusted for inflation.

  62. Shane says:

    Karl . . .
    I believe that FRB and leverage are two different, but somewhat related beasts. With leverage, with a house for example, I take pay out 10-20% to buy an item, with a promise to pay back 80-90% w/ interest. Or with futures, maybe I put down 5% to buy a full contract with the promise to to pay the rest at the contract expiration date.

    With FRB of today (10% reserves) however, the bank can lend out 1000% what it has on hand.

    With normal leverage, no new money has been created. It’s no different than borrowing 100k from the bank for a business venture that goes kaput. You still owe the bank the money, but no money has been created in the process . . . it has just gone from you to someone else.

    With FRB, new money HAS been created, thus depreciating the value of all dollar bills.

    Now if the brokerage firm you are operating with that you are borrowing the 95% from (in the case of futures), is lending out more than they have in assets, then I believe that yes they are engaged in some form of FRB-and new money has been created.

    However, a key difference is that a least with a brokerage firm they aren’t FDIC insured which encourages them to not take as much risk, so if 20 out of 100 customers default on their contracts the other 80 can still cash out. Banks on the other hand . . since they are FDIC insured can take more risks than otherwise, and don’t have to worry about a run.

    A well-managed FRB . . . and who would manage it . . . the CB . . . yeah they’ve done a great job managing it. When you have a system as complex as an economy no one entity can “manage” it . . . the free market would have to do so. In a normal free market ANY type of FRB is self-correcting. In the quasi-free market of money creation, FRB is not so self-correcting b/c of the Fed.

    To mistake our increase in the standard of living due to FRB I think is a grave, grave error. A few general reasons are increases in technology, economies of scale, and a more or less free society.

    I think without FRB we would prob. be a LOT better off today than with it. Either argument pro for FRB over the last 50 years or con FRB over the last 50 has no basis or merit. We can in no wise predict what might have happened had we had no FRB over the past 100.

    We might have more stuff today but the price we pay is a HIGHLY indebted society, where most people live paycheck to paycheck. We also have a much greater divergence between the rich and the poor. I believe this divergence is directly related to the transfer of wealth that occurs from FRB. This state-sanctioned legalized method of stealth theft and stealth redistribution of wealth is the real reason why FRB is a horribly bad idea.

    If we want to inflate the money supply-and consequently rob J6P-fine . . . allow Congress to vote on it so that J6P can have a say in it. Allow the people to actually determine if we should have inflation or not. You say that’s ridiculous . . . I agree . . .but no more ridiculous than allowing some almighty Federal Reserve Bank to do the same deed.

    The other fact is that the end result of any fiat currency is its ultimate destruction. We have not played the end-game of FRB . . . and I will wager that the end-game of the current iteration of FRB with not be kind . . . and if we didn’t have it we would be more secure.

    I also love the spin on words that you put. . . economic fundamentalists . . . just like religious fundamentalist . . . etc, yes the big bad economic fundamentalists :-).

    So instead of debating on the merits of one vs. the other please continue to throw around derogatory terms such as xxxx “fundamentalists” . . . it makes your point more salient.

    Without FRB wild growth is inhibited just as wild recessions/depressions are inhibited . . . hmmm an almost complete abolishment of the boom/bust cycle . . . now that would be awesome! Steady growth . . . hmmm.

  63. wunsacon says:

    >> You know what the rich people are going to do if there is a depression? Shrink/shut down their businesses and lay off their workers.

    My take:
    - The writeoffs demonstrate the business “value” provided in the past 7 years has been overstated. Many businesses must cease operation. Keeping them in businesses is a waste of human labor.
    - Businesses that continue to provide value will not shut down.
    - Businesses that do cease operations will provide workers to new businesses.
    - As long as we subsidize the past, it’s just more costly to move into the future.
    - If we’re going to give handouts, we should target them directly at the people more in need (fired workers) than the people who made the poor decisions leading to layoffs. We could even hire the fired workers to actually do something constructive, which is where public works come in.

  64. Philippe says:

    Sorry, but this chart seems nonsensical….

    The Discount Window has been almost non utilised by banks (because so callded stigma). That’s why the Fed has created TAF & so on.

    The TAF facility is about 80 bn that’s all.

    And from where would thoses hundred of bn comme from ? The Fed has only 800 bn as assets.

    I guess Bill King has made something like adding all the OMO lending since august, like thoses headlines talking of “hundred of bn injected” whitch is absolutely irrevelant. It just forget that they are (generaly speaking) overnight lendings. So 100 bn today and 100 to morrow sums up zero, nada, nothing at D+2

  65. Trader says:

    This is an interesting thread. I’d like to add a few comments, addressing some of the points noted, if this isn’t private.

    Where to get started. Well, let’s start with the Great Depression: the crash occured in ’29, the bottom wasn’t hit until ’32 and the markets didn’t recover their ’29 level of DOW 400 or so until 1954, if memory serves me, and even that great generator of prosperity – war – didn’t really jolt the economy enough to overcome the depression. We really don’t want to go through 22 years of a stagnant economy after the bottom has been hit, which I’m sure I’d get some agreement on, that we aren’t there yet.

    Much of the hyper-inflation in Germany between the wars and lack of prosperity in Germany and England was the result of the war reparations and debts owed to the US by England and France – that they had to pay in gold, putting to rest, I hope, the idea that a currency based on gold would be as good as gold – and all that gold flowing into the US certainly had some impact on the roaring twenties.

    Whether Hoover was or wasn’t a good president, or whether or not he was doing the right things is another matter altogether. The Smoot Hawley Act, blamed by many for actually causing the depression wasn’t passed until since its discussion predated the crash was another blunder that exasperated the Great Depression. I’ll quote from Wikipedia: “…as the greatest policy blunder in American economic history, coming as it did after the 1929 recession and preventing the economy from a full, natural recovery which had already started by the Spring of 1930. Many countries retaliated with their own versions…” We don’t want that to happen either, but note the statement “full, natural recovery” and the statement that the recession was already in the process of recovery. Long before the act was passed it was known to have had a chilling affect on trade relations internationally.

    The Great Depression is full of “shoulda’s” and “shouldn’ta’s” but it did not grow as a natural result of the crash of ’29, rather it was created.

    There was no housing crisis then, nor was “subprime” or even “vigorous lending” or fraudulent lending practices; those are a product of our times, and for a variety of reasons.

    Does no one remember “the ownership society” championed by our President only a short time ago? Thought not; you weren’t paying attention. But, when the lending industry heard the president speak they thought it was a mandate to open the spiggots in sympathy and make money while they had the president’s tacit endorsement. And everything would have okay for a few more years if Americans had just not stopped buying houses…

    Do you know what causes a housing boom? It isn’t cheap money, although that helps, it’s extra cash in the hands of the marginal home-buyers who find they can afford to buy a house. The feed into the system, new buyers and new home-owners who didn’t exist one year earlier, buying homes on the bottom rungs of the ladder and in turn pushing everyone else up one rung on the ladder.

    The more people at the bottom buying, the quicker housing prices go up, a classic form of demand forcing supply and increasing prices. Checking tax records in VA I’ve found the first move in prices, not coincidentally, was in 1995. I’ll withold why it was not coincidental only because I’ve taken knee-jerk flack for the answer in the past, so let’s just say that it was a prosperous economy, and leave it at that.

    And what busted the housing bubble, lack of money or higher interest rates? Neither, again, not coincidentally. Wage stagnation, then? Well, no, wage stagnation had been around for a while. In many ways, the economy was almost perfect since wages weren’t appreciably increasing, feeding inflation, which is the usually classic form of inflation.

    Then there’s the fall of the dollar that occured starting early this century, “aiding imports” (did you ever wonder why if a falling dollar is good for imports why our balance of trade is in deficit?) if you believe the classic response. “We’re for a strong US dollar” the administration could be heard to say throughout this time, and even now. Then why didn’t it strengthen any time during this period, and what does a government normally do to strengthen its currency?

    What Ben is trying to do is actually create a soft landing, something that in my readings I’ve never seen or read about the fed or any administration actually trying to do. They bailed out BSC – did you really believe the “negotiated” $2 per share sale price? That WOULD have been naive. Still, it did forestall, perhaps prevent a serious market slowdown/fall/or crash, depending on your perspective.

    “Reagan was right; deficits don’t matter” famously uttered by VP Cheney; doesn’t anyone remember the crash of ’87? Where did that come from and why is it given such a free pass when conservatives talk about Reagan? Many, if not most historians would argue that the deficits caused the ’87 crash; certainly, to be charitable to both sides, it would be hard to imagine the crash having occured if the economy had been in surplus, wouldn’t it?

    We weren’t the only country involved in “creating an ownership society” by making housing loans. In England there were signs by the roadside advertising that “If you’ve lost your pay stub, we’ll creat a duplicate for you.” which was a way of saying if you’d like a phony pay stub that you can present to a mortgage broker so you can get a mortgage that you probably can’t afford, we’ll print one for you. But with housing prices going up 25% a year, who wouldn’t want to play the game? And the enablers weren’t the ones obliged to pay; they were just making the money available.

    We had a boom economy, not a booming economy. All of the players were making money except for the home buyers in the last rounds. When the music stopped, there was no where to sit for many of them. Naturally, the brokers were shocked – SHOCKED – to find that no one knew where the actual mortgage holders were or are.

    But that wasn’t the crux of much of the discussion here. The moralists say let it crash, the bleeding heart liberals say let’s save the small guy. It’s religion; no, it’s a practical matter. If we don’t do this now then something bad will happen later. Well, you’re all right, it’s going to get worse before it gets better, and the government will feel compelled to bail out the Bear Stearns’ when they collapse. Not that anything will do much real good in the long run. It’s going to be ugly and people, lots of people, 2 million more or less this year, are going to lose homes to foreclosure and banks or mortgage lenders or Wall St brokerage houses or for all I know shareholders of those companies will inherit houses they don’t know what to do with. And then next year, another 2 million. And credit card debt will bury a lot of people, especially those that took out second mortgages to pay for their lifestyles and then borrowed on their credit cards to maintain their lifestyles.

    Say what you will about historic precedent for “this time” but it truely is different, driven by over-consumption, and an “I want mine” attitude that disregards any social contract with neighbor and nation that started not with the protestors of the ’60′s and ’70′s but with the politically and socially sanctioned draft dodging that led “ordinary” and “normal” citizens to imagine that they could support a war without actually having to take part in it, believing that they were extraordinary in that they were above it and “smarter” for having avoided their debt to society.

    Not unlike what we have today, for example. A war that was loudly applauded at the beginning by those who had no intention of fighting it – and it’s about oil, lest we forget and nothing more and nothing less – who now aren’t quite so sure we should have become involved, but still sorta support the idea of exporting democracy to “the world.”

    Ultimately, the country let itself get suckered into a downward spiral sanctioned by the top bananas in the country telling them that “to consume is to fight the possibility of a slowing economy” – you remember that, don’t you? We’re the worst savers in the world with a negative savings rate because the president tells us to spend more than we make so that his administration can look like it can provide a no-cost level of prosperity? Think about it, and the “ownership society.”

    Americans really are stupid, aren’t they, when it comes right down to it, and up and down every level of social strata they’re gonna get hurt just like it’s, well, not 1929 because that was just a recession, but the 1930s and 1940s because administrations are and were more worried about reelection than they are about continuing to build a sound and prosperous nation.

    And now those same people are trying to save us from their folly, while convincing us that it’s our fault and we should suffer for it. Pulleeezzze forgive me for not thinking they’ve ever done anything for my benefit, or that they’re doing something now for my benefit.

    When did you last hear a president urging that Americans should “buy bonds” and save money even if the affect is to slow down the economy (note to self: hmmm, if buying bonds backs the economy at the same time taking “excess” cash out of the hands of consumers and actually helps to make the dollar strong, why aren’t we doing that?) at the benefit to its citizens? Why is the government encouraging us to become the biggest consumer society ever?

    Yeh, yeh, the economy sucks and folks are gonna get creamed one way or the other and Wall St bankers will be out of work, yes it will take years to recover, but we’ll be wiser next time, right? I mean we learned something from it this time, didn’t we? Pardon me if I don’t beleive that for one moment. I’ll survive – I’ll just short the market and make money on the way down.

    Well, so much for my screed – go back to the regularly scheduled arguement about whether ’tis better to have a morally punishing outcome or a brokered outcome where the guilty are protected from the consequences of their actions. Which is which, by the way?