Posted on 07/19/2008 8:02:48 AM PDT by Ron Jeremy
"Raise less corn and more hell," Mary Elizabeth Lease harangued Kansas farmers during America's Populist era, but no such voice cries out today. America's 21st-century financial victims make no protest against the Federal Reserve's policy of showering dollars on the people who would seem to need them least. Long ago and far away, a brilliant man of letters floated an idea. To stop a financial panic cold, he proposed, a central bank should lend freely, though at a high rate of interest. Nonsense, countered a certain hard-headed commercial banker. Such a policy would only instigate more crises by egging on lenders and borrowers to take more risks. The commercial banker wrote clumsily, the man of letters fluently. It was no contest.
(Excerpt) Read more at online.wsj.com ...
Of course not. The way I resolve the lack of a “logic and wisdom” candidate is because we as a country have lost most of the “logic and wisdom” we had 20-50 years ago. If the people have lost their sight of what life is supposed to be like, the candidates (being people also...sort of) are going to have lost that sight also. Most accept life the way it is now instead of how it was or should be. Blame education, blame complacency, blame laziness. Either way everything is declining at roughly the same rate with a catch-22 coat tail.
Deleveraging is absolutely essential to restoring some semblance of soundness to the economy, but who will be the first to step up to the plate? I've thought for a number of years that it is and will be necessary to break up the big investment banks into smaller units, AND make the resulting smaller companies off-limits for purchase by HSBC and Fortis and Societe General and so forth.
If an institution becomes ''too big to fail'', a la Bear in March, then -- for the sake of the taxpayers' pocketbooks if for no other reason -- said institution must be downsized (and deleveraged, while we're at it).
I think the former.
Huey Long, who rhetorically picked up where Lease left off, once compared John D. Rockefeller to the fat guy who ruins a good barbecue by taking too much. Wall Street habitually takes too much.
Pleonexia, saith the Preacher, all is pleonexia.
There is not outrage because it’s complicated. 90% of people could not tell you what an investment bank does. 99% of people couldn’t tell you what was done to bail them out, or why it’s going to hurt normal citizens. Given this it’s not surprising there is little outrage.
But there should be. Where is our press? Fawning over Obama photo ops, doing coverage of celebrity births, and ignoring the biggest insider theft in American History. Even the S&L crisis was national news, and that was only 20 years ago. There were bad guys (Charles Keating, Silverado Thrift). There were hearings, trials, jailings.
This thing is alreay 10 times bigger and may go to 100 times bigger. Yet it’s all Sunday night press releases and a few hours of testimony at some little committee on Tuesay and out.
Nice work, if you can get it.
And another surge of intervention is likely. Government is the only thing under the sun that starts fires and then gains more authority to put them out.
Keating and the others were involved in pretty straight deception & fraud.
As the author notes, this time around, American home owners both participated & benefited from the housing inflation.
While some large Wall St firms may have taken on tremendous risk, it was as virtual partners with institutions which reflected US policy to lend to all regardless of credit risk.
I’m in absolute agreement.
Holding illiquid investments is OK. Lots of folks own illiquid assets of value. Take a gun collection, for example. Fine and rare firearms tend to go up about 8% a year... IF you are willing to wait for the right buyer to come along. If you need to cash them out “today” — you’re going to take a huge hit.
When these bankers and hedge funds (not to mention Freddie/Fannie) lever themselves up 16, 25, 30 or more times... they’re doing it to chase the last bit of alpha, while hanging their butts waaaay out there over the edge in a high-wire act.
I’d like to see an across-the-board limit on margin, no matter how large an operator, to no more than 5:1. I think that would go a long ways towards preventing any single entity from becoming both “too big to fail” and prone to spectacular and rapid failures, ala Bear.
The problem is that none of them (with the possible exception of Ron Paul) understands the issue. You could hand them this op-ed piece to read and you wouldn’t see any flicker of comprehension in their eyes.
The first who dares to tell the average American that with leverage removed and true values restored, his house and retirement portfolio are going to stand at about 20% of their current value.
In other words, nobody. They are waiting for a ten sigma event to knock values down for them, so they have something other than their own malfeasance to blame.
First, every futures exchange in the US will close, or at best be hanging by a thread. No big deal, you say? Sorry, it's a huge deal. The existence of liquid futures mkts in the US lowers the cost of every commodity good in the nation because of the insurance they offer to both producers and users.
''Margin'' in futures -- more accurately, the size of the performance bond -- is invariably less than 15% of gross contract value, thus not less than 6.67:1 leverage. Ah, you say, didn't know that...well, let's raise the performance bond requirement.
Game over. That **might** work if the US were the only place that futures were traded. It isn't, and every trader and MOST hedgers will go to whichever mkt offers the most favourable margining. Kiss CBT corn goodbye -- we'll trade it in Tokyo. Kiss NYMEX crude goodbye; we'll trade it in London or Dubai or Singapore. Kiss the CBT soybean contract goodbye; we'll trade beans in Sao Paulo or Tokyo or Mumbai. Get the idea?
Worse, raising margins significantly will absolutely HAMMER the American farmer. Try telling a farmer that, in order to insure against a price drop in, say, corn while he's busily growing it, he has to put up, say, 15% of his future crop's total value (the p.b. right now is about 4% or lower). Farmers, in case you don't know it, are notoriously cash-poor during the crop year. EVEN IF he is inclined to put up the 15% (or whatever amount), where's he going to get it? Only place? Borrow from a bank, IF they'll lend to him...and there goes your leverage, way back up again.
Now, if instead you'd like to restrict ''margin'' on financial instruments to a max of 5:1, you've got a different problem. Most of the time, except in straight stock/bond/option purchases, you flat can't tell me what 5:1 represents.
If I'm bear spreading the Euro yield curve and bull spreading the US curve against it, $1 MM face value each way, what is 5:1 ? If you naively divide $2 million by 5 and get a figure of $400K...then absolutely not one soul will trade that double spread given that performance bond...in the US.
OK, so you didn't mean 5:1 against nominal face value of a financial derivative that is both low delta and gamma, and low vega. Well, what then do you mean? Shall we do a delta-vega mod of that $400K figure (which is, btw, statistically quire a reasonable idea) and come up with a figure of (about) $18,500? Traders will laugh at you, and go off and make the trade in London or Frankfurt, for about $3000-4000 performance bond per trade.
I cannot begin to calculate what damage a 5:1 restriction on all leverage in the US economy would cost. Certainly not less than $2-3 trillion/year off GDP within a couple of years, conceivably much more.
Nope, you must deleverage institutionally, not on a per transaction basis. Raise the fractional reserve requirement -- SLOWLY -- on Fed member banks. This will lower aggregate loan demand, and lead to lower interest rates over time. Also, somehow (I've no idea how), there must be a mechanism put in place to limit -- ABSOLUTELY limit -- the Regress' insane spending, which levers the American future against the present, and which is much more corrosive in gross than overgearing by, say, Goldman Sachs.
There are a couple of other constructive tactics that could be used for institutional deleveraging, too. INSIST on X% down payment on real property transactions; the damage that the ''no-money-down'' orgy of speculation has caused in the past decade is staggering. Bar, at law, repackaging of mortgage instruments -- if someone wants to buy up mortgage loans, have him/it do it the old-fashioned way: one at a time.
Deleveraging is necessary, not a doubt of it. However, doing it with the spiked club of a ''maximum'' allowable gearing is rather like the old practice of treating syphilis with mercury oxide: the ''cure'' is invariably worse than the disease, ultimately.
Yep. Nicely said, too!
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I have a different take, normal people aren't outraged because they haven't been grossly harmed. The greedy and the stupid got hurt, again. But they often do.
That's the ugly truth. It's the result of the old political adage "you can fool most of the people most of the time." Politicians of both parties have helped build this house of cards since WWII. Eventually a big puff of ill wind will topple it and the guilty will scurry off their offshore bank accounts and villas in the south of France.
The amazing thing is that mortgage lending for those less qualified already been nationalized and that is the problem.
What are all the snake oil salesmen of yesteryear supposed to sell as their remedy? Socialism? Freer fiat money? Easier terms for defaulters? All on parade in spades in the crisis itself.
Left out of Grant's account is the epic default by the deadbeat main street Americans at the root of it all. Who borrowed all the money Wall Street lent? Who didn't pay it back?
Why would the deadbeat people rail against the suckers who gave them acres of free money and then let said deadbeat stiff them? Wasn't that the populist program all along?
Financial stockholders have lost $1 trillion since last July, and numbskulls like Grant try to paint them as the profiteering villians. If they were really clever they would have lost a negative number.
Yes, human beings err. No, it isn't reasonable to expect the smart bankers to all see it coming and step clear - that would amount to it not happening in the first place. At every top of every cycle, the majority will be wrong. That is sort of the definition of "cycle". If masses of men weren't grossly wrong, we'd call it "equilibrium" and prices wouldn't move an inch.
Bagehot was entirely right about every particle of this stuff, including the solution of the lender of last resort. The Fed was right to raise rates and smash the bubble - in case everybody forgot that they did so. You can accuse them of being a year or so late. You can accuse the bankers of being dumber than usual. You also have to accuse main street of being greedier and less honest than in all previous cycles, making off with a bigger sum of the capitalist's money.
But with a negative savings rate, importing $700 billion in foreign capital per year, cashing out refinancing at rock bottom rates to milk a bubble and mailing the keys to the master of the universe at Citi and Fannie and the rest, what you can't do is paint the American people as wronged rubes.
They are epic gamblers on a bender who are welshing on $2 trillion of their own dodgy paper. If that is supposed to constitute outraged virtue, shall we repaint Jay Gould as a saint?
Enough, freedom means the ability to err, and other people's freedom is sometimes awkward. But it beats everything else, by miles.
Just populist drivel.
James Grant a populist?
What are all the snake oil salesmen of yesteryear supposed to sell as their remedy? Socialism? Freer fiat money? Easier terms for defaulters? All on parade in spades in the crisis itself.
Uh, no. Freedom, with the government having less control over the money supply.
Left out of Grant's account is the epic default by the deadbeat main street Americans at the root of it all. Who borrowed all the money Wall Street lent? Who didn't pay it back?
He's not for bailing them out... he is also against baling out those who did the lending.
Why would the deadbeat people rail against the suckers who gave them acres of free money and then let said deadbeat stiff them? Wasn't that the populist program all along?
Who are you arguing with? Not Grant.
Financial stockholders have lost $1 trillion since last July, and numbskulls like Grant try to paint them as the profiteering villians. If they were really clever they would have lost a negative number.
Actually, he specifically says it is not the stockholders, but rather the managers and employees who make short term decisions.
Yes, human beings err. No, it isn't reasonable to expect the smart bankers to all see it coming and step clear - that would amount to it not happening in the first place. At every top of every cycle, the majority will be wrong. That is sort of the definition of "cycle". If masses of men weren't grossly wrong, we'd call it "equilibrium" and prices wouldn't move an inch.
OK. So? Does that mean you are for the taxpayers bailing out the banks?
Bagehot was entirely right about every particle of this stuff, including the solution of the lender of last resort. The Fed was right to raise rates and smash the bubble - in case everybody forgot that they did so. You can accuse them of being a year or so late. You can accuse the bankers of being dumber than usual. You also have to accuse main street of being greedier and less honest than in all previous cycles, making off with a bigger sum of the capitalist's money.
I, and Grant, accuse the Fed of causing the bubble in the first place.
But with a negative savings rate, importing $700 billion in foreign capital per year, cashing out refinancing at rock bottom rates to milk a bubble and mailing the keys to the master of the universe at Citi and Fannie and the rest, what you can't do is paint the American people as wronged rubes.
Some are, some aren't. Why should those of us who save and behave responsibly be taxed (via inflation) to bail out the banks?
They are epic gamblers on a bender who are welshing on $2 trillion of their own dodgy paper. If that is supposed to constitute outraged virtue, shall we repaint Jay Gould as a saint?
Once again, I did not participate in this on either side, but I am paying the price.
Enough, freedom means the ability to err, and other people's freedom is sometimes awkward. But it beats everything else, by miles.
Again, who are you arguing against? Freedom means the ability to err, but also to bear the costs of said error. The banks and the fed are making you and I pay for their errors.
Did you even read the article?
Confronted with an actual opinion different from your own, you can't believe it is possible, and are reduced to sputtering. Not a sign of an open mind.
"James Grant a populist?"
An Austrian can spout Keynesianism if he likes. The content of the article is populist nonsense. Why the author of Interest Rate Observor chooses to spout populist nonsense is his own affair. The description remains accurate.
"Uh, no. Freedom, with the government having less control over the money supply."
Sorry, the characters that Grant is quoting were all advocates of populist snake oil, since adopted, as the article itself describes. Grant's own puzzlement is why such populist screamers are missing from today's crisis. I have told you why - because they are the deadbeats who caused it all by promising and not performing.
And the government didn't make bankers increase the broad money supply by $2 trillion since March of 2005. M1 hasn't moved an inch since then, and that is what Fed reserve requirements directly control. The government didn't make homebuyers pay three times what they could afford, then default. The government isn't the epic deadbeat here. All the Pauleans pretending it is all the Fed's doing haven't been paying attention to the reality, they are merely reading from their script.
"He's not for bailing them out... he is also against baling out those who did the lending."
Where are they in his account, to begin with? Where is ordinary commercial morality? He wonders why the populist notes aren't blowing forth from a thousand trumpets, but the reason is transparent. The rubes are all Jay Gould, this time around.
"Who are you arguing with? Not Grant."
Grant, all the Pauleans, all the pols, all the financial press writers, everyone pretending it is all nefarious Wall Street and the people are virtuous put upon saints pure as the driven snow, all the people pretending it is the gubmints fault and the Fed's fault and Wall Street's fault and capitalism's fault, and who knows, maybe China's fault and Iran's fault too, but glory be, not the American people's fault. Because, you know, somebody put a gun to their heads to make them save nothing and borrow five times what they could afford to chase gossamer bubble fantasies.
"Actually, he specifically says it is not the stockholders, but rather the managers and employees who make short term decisions."
They lost their shirts, and their jobs, and their options, and... It is just obscene, that's all. Everyone wants to hang a capitalist, same old populist claptrap, same dishonest nonsense. Utter rogues promise and welsh, then they turn around and want to hang those who believed them for believing them.
Cycles are dealt with by countercyclical lending by the central bank. Bagehot had every scrap of it right. Which part can't you understand?
"I, and Grant, accuse the Fed of causing the bubble in the first place."
And you are flat wrong. They broke it. Yes, the Fed left IRs too low too long in the early oughts. No, nothing any central bank can ever do can remove cycles. Cycles are endogenous, caused merely by other people's freedom. And Grant is here railing against other people's freedom as painting it as an awful thing. The upshot of which will be its destruction. Which is criminally stupid of him.
"those of us who save and behave responsibly"
First, return to me every scrap of value that has accrued to your favor due to monetary policy.
Oh wait. You are practicing one entry accounting - all the gains are yours, all the costs are caused by the evil gubmint. It is horsefeathers, from start to finish.
"I did not participate in this on either side"
Like heck you didn't. If you touched a dollar in the last seven years, you participated in it and reaped upside from it.
You are free to hold whatever assets you like, and anything that happens to their exchange value is your affair, and no it isn't being "taxed" when the value of what you choose to hold changes. Any more than you are taxing me, when something you own appreciates in value.
"who are you arguing against?"
You, all Pauleans, the whole financial press, Grant, the lot of you. It is all a smear against financial capitalism and the associated freedom, and utter nonsense, from start to finish.
"to bear the costs of said error."
On the contrary, you bear the costs of reality. If you predict what happens to the value of anything, you can benefit - if you do not, you can be harmed. Without any of it being anyone else's "fault", but your own. No economic action can occur at all without changing the value of everything you could possible own. If changing the value of things you own, were a sufficient reason to forbid other mean from acting economically as they see fit, no economic freedom would be left to anyone.
"The banks and the fed are making you and I pay for their errors."
I'm not paying anything for anyone's errors but my own. I deny being harmed in the matter in the slightest. I am responsible for what I choose to hold or trade in or own or contract with others about, and nobody else has ever guaranteed to me that the value of anything I do shall remain unchanged by their actions. I didn't ask them to, nobody could perform it, and I don't want you or anyone else requiring it of me or anyone else, either.
Yes I read the article, and a great deal more besides. No, nobody is oppressing me. And no, you may not use the pretence that anyone is, to take away any of my economic freedoms, or anyone else's, nor to dictate public policies that I vehemently disagree with, nor to slander fine upstanding businessmen because they happened to be wrong about something, sometime, in a way that inconveniences you.
If you think Banks leveraging up massively and then getting bailed out by the Fed when it inevitably goes bad is Freedom, well then, we are just operating on different planes of reality and there is no point for further discussion.
>>>No, it isn’t reasonable to expect the smart bankers to all see it coming and step clear
It’s strictly a matter of a little historical statistics: leverage against assets with any kind of volatility must be limited to the outlier—to protect against the wipeout situation. Real estate went down before.
Financial companies knew this, and they levered way beyond the traditional 10:1 (up to nearly 40:1) and now they (and we) pay the consequences. Worse, the cross-promises in the extremely leveraged derivatives market allows the default of one financial company to cause a terrible chain reaction.
No, they were stupid and greedy (see Grant’s percentage of revenues taken as salary). Grant wrote a very interesting article, I think he could have been more critical.
We can now prepare for financials to head back down to a much smaller role in the economy. All those physics students who switched to economics in order to grab a high paying job in finance, might want to reconsider a switch over to engineering—or medicine.
Grant’s tome bump.
Finance will never be fixed by pretending it shouldn't exist, or that it is easy. If bright people go elsewhere, finance will simply remain disfunctional longer, and no they won't do better anywhere else. Their efforts may be individually wonderful but they will remain poorly directed and uncoordinated. All the coordination the economy actually manages to achieve, it achieves because of successful, intelligent finance. Ask an Argentine.
Morality plays fix nothing.
Next you will explain that soldiers shot in a firefight in Afghanistan were reckless, object to paying for their medical care when they got themselves shot, demand they win without a scratch or they aren't professional enough, express outrage that their pay in peacetime isn't enough, tell them all to switch to other professions, etc.
It is transparently stupid. Modern society requires a division of labor and needs all cylinders firing successfully. It cannot function without good finance. When finance is done poorly, yes we are all inconvenienced. That is true of absolutely every human activity, that anyone around us does. When it is done successfully, ungrateful bigots and idiots accept the positive consequences as their natural rights, and pretend they did it all themselves. They didn't.
That is equivalent to saying "if banks exist". That is what a bank is - lending many times its investors capital of money borrowed from depositers and other creditors.
"getting bailed out by the Fed when it inevitably goes bad"
That is in fact the Fed's entire reason for existing. Banks created the Fed. Before it existed as a public institution, they did the same themselves. The government wanted a role in it precisely because it was so central to the economy, and bankers agreed to that.
"is Freedom, well then, we are just operating on different planes of reality"
Of course it is freedom, free men freely legislated it and freely choose to participate in every particle of it. And no, you are simply living in a fantasy world, there aren't different planes of reality, only reality. And in reality, the Fed is a pillar of capitalism, a creature of free markets and liberal democracy, which along with the valor and justice of the US military (and OK, 3-4 allies) are the source of every particle of justice you or anyone else alive today have ever known.
Banks are free to create credit. The Fed limits that freedom, without abolishing it. Pauleans want to abolish it, and pretend abolition of the freedom of credit is somehow libertarian. It isn't, remotely, and their desired policies could only actually be implemented by draconian state action, that would not leave a particle of real economy freedom remaining.
If a US navy trident sub nuked NYC in 2004, it would have stopped the credit boom in mortgage derivatives. So, is the US navy responsible for the credit bubble? No. Because free men with no guns held to their heads freely engaged in every transaction that made up that bubble.
I despise ingraditude, I despise men deliberately trying to make whole classes of others hated for their mere social role. The only thing missing from Grant's screed was a epithet or two about them darn joos and bloodsucking. It is obscene. Men trying to do a challenging job have lost a trillion dollars, and a crowd gathers to bay for their heads as well. If they go their way they'd all be in a soup line for the next ten years. But they won't.
Silly. Of course banks are leveraged. The fact that they are always leveraged doesn't justify the extreme leverage we just saw.
That is in fact the Fed's entire reason for existing.
The Fed exists to bail out banks when their bets go bad? You obviously work for a bank, if that is what you think the job of the Fed is.
Of course it is freedom, free men freely legislated it
So if men freely legislate national health care, that is freedom? Your arguments are getting worse and worse.
Banks are free to create credit. The Fed limits that freedom, without abolishing it. Pauleans want to abolish it, and pretend abolition of the freedom of credit is somehow libertarian. It isn't, remotely, and their desired policies could only actually be implemented by draconian state action, that would not leave a particle of real economy freedom remaining.
I have no idea what Pauleans do or don't want to do. Stop bringing up straw men. Grant is not a Paulean, and neither am I.
If a US navy trident sub nuked NYC in 2004, it would have stopped the credit boom in mortgage derivatives. So, is the US navy responsible for the credit bubble? No. Because free men with no guns held to their heads freely engaged in every transaction that made up that bubble.
OK, so what? So why should taxpayers bail out the banks?
I despise ingraditude,
I despise silly straw men arguments by people who want to justify the taxpayers bailing out their businesses.
I despise men deliberately trying to make whole classes of others hated for their mere social role. The only thing missing from Grant's screed was a epithet or two about them darn joos and bloodsucking.
Ahh, playing the joo card.. that makes you look really rational.
It is obscene. Men trying to do a challenging job have lost a trillion dollars,
BS. The employees have pocketed 50% of profits. Once in every ten years they have a bad year, and then they whine that the fed should bail them out.
and a crowd gathers to bay for their heads as well. If they go their way they'd all be in a soup line for the next ten years. But they won't.
So which bank do(did) you work for?
>>>Finance will never be fixed by pretending it shouldn’t exist, or that it is easy. If bright people go elsewhere, finance will simply remain disfunctional longer, and no they won’t do better anywhere else. Their efforts may be individually wonderful but they will remain poorly directed and uncoordinated. All the coordination the economy actually manages to achieve, it achieves because of successful, intelligent finance. Ask an Argentine.
After this cycle down, it will be doubtful that all this “alpha seeking” added anything. Just like the Enron boys, recent finance companies believed in one thing: “If it moves, leverage it.” This just doesn’t work in all markets. And when it doesn’t it work, you give all your profits back... and then some.
After these fiasco’s, “Finance” will remain a bad name for at least a decade or two. Worse, it will take a long time for banks to earn back their trust. Take Wachovia, which at one time at one of the most respected names in banking. Now it is on a watch list by the traders who are glued to Bloomberg. Their previous president frittered away their brand and reputation, and that is quite sad. So prepare for the finance function to be no more than a commodity—with only some of the innovations of finance having any relevance.
Yep, I’m aware of that. I know exactly what I mean.
The problem is that we’re about to cross $10T in debt this year - before we start heaping the problems of Fannie/Freddie on top of that - that $10T will just happen at the rate of the deficit by December ‘08 to February ‘09.
When I see our illustrious Secretary of the Treasury propose such lunatic BS as the government buying equity in Fannie/Freddie to bail them out... that’s it. I’ve had it. We’re rapidly approaching a point where we’re going to be debating whether we’re going to use a .357 or .45, and in which ear we’re going to put the muzzle.
It is time to decide we’re going to follow one of two courses:
1. We’re going to have a fiat money economy, and we’re going to prevent the use of excessive debt, from mortgages upwards in the economy. That, BTW, is where I came up with the 5:1 - I’d require 20% down on all real estate purchases, period, end of discussion. I’m completely immune to sob stories about “the poor” who won’t be able to afford “the American dream,” BTW.
Giving mortgages to deadbeats is what has caused the problems we’re in now, and we’re nowhere close to done flushing out the debt problems yet. We’ve got to get through all the option-ARM crap yet. And since I grew up poor, and now (through busting my buttocks) I’m doing pretty well, and I always put down 20% on any real estate I bought, I’m rather immune to the usual wailing, sackcloth and ashes from Congress and the “advocates” for the poor on this issue. They can learn how to save, like the rest of us.
Then we prevent the various captains of finance from creating a situation where they blow up and become a situation where the Fed has to step in to prevent counterparty failure, again, ala Bear (but we can also put up Citi, Lehman or others as examples).
2. We’re going to go back to an asset-backed currency. Let’s not debate the issue of what asset - the usual Ron Paulian dream is gold, but it doesn’t have to be gold. Just a hard asset or (as I think would be a better idea) a basket of assets.
I don’t see #2 happening anytime soon, because the Congress wouldn’t let it happen - it would bring the problems with Social Security right up into their faces, and they don’t want to deal with future unfunded obligations by any other means than gradual inflation of the currency. So the only way to [relatively - ie, relative to the last two years] stabilize the US currency going forward is to come down like a ton of bricks on the financial sector. They’ve brought this crap down on us, and by having the unmitigated gall to ask for bailouts from the Fed, they want to socialize losses and privatize gains.
Well, the socialization of their losses will come with a price. If they wanted no interference, they should have taken their lumps with their nuggets.
As for farmers in the futures markets: the USDA already makes “marketing loans” avialable for farmers to hedge their crops. The only reason why I was able to be a farmer and not hedge was that I was farming the largest crop to never be commoditized in the US - hay (#3 crop by annual value). The hay market is a completely cash or private contract market, with no commodities futures ever traded on it.
It also has the least amount of interference from Uncle Sugar in terms of subsidies.
As a result, the hay market has year-over-year price stability that the commoditized/subsidized crops can only dream of, and that’s because within two years, the hay producers/consumers react to supply/demand signals, not a futures market. You’re about to see a year-over-year price whip in wheat like you haven’t seen in a while - because the wheat guys were chasing last year’s spike in wheat prices, which wasn’t a result of US wheat production, but because of trade tariffs, export restrictions by Russia/Ukraine and drought in Oz. US wheat futures got jacked up. What did all the pundits blame for the rise in the price of wheat?
Ethanol.
Idiots.
With that type of stupidity... US farmers would likely be better off with a cash market. As it is now, the rocketing cost of fuel and fertilizer, coupled with the increased margin requirements of high commodity prices has pretty much forced a lot of guys to the sidelines in the markets. They don’t have the money to keep their usual positions open.
It certainly isn’t helping the consumer side of the contract either:
http://www.startribune.com/business/25629164.html?location_refer=Homepage:highlightModules:6
Leverage is the entire raison d’etre for the Fed. Fiat money is all about debt, and if its all about debt then its all about leverage.
The problem fixes itself, in time, via inflation.
Now the Fed will treat Wall Street like it treats banks. Only a few Wall Street firms oppose it, since most would like to borrow from the Fed.
The system punishes savers. The system encourages speculation, risk, debt and leverage.
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