Off a Cliff with No Airbags: The FED Banking System Quivers in Fright

The Burning Platform ^ | 4-21-09 | Jake Towne

[iThinkBig]

First understand the FDIC, the NCUA, and the nature of the banking system. Here's the fastest lesson I can manage. Try my other writings or just search the net for more information. (Photo courtesy Luc Viator)

In brief, the FDIC (Federal Deposit Insurance Corporation) is a relic of the Great Depression designed to give depositors psychological assurance that the government will bail them out if the bank fails. It is funded by small fees on all deposits its 8,305 member banks hold.

The FDIC started 2008 with about $53 billion in reserves and ended the year with $18.9 billion. Based on the closings since January 1, Captain Calculator reports less than $15.8 billion is left.

[iThinkBig]

This is as blatant as it gets in terms where the culprit lies for our depression. It is in the monetary lending model itself.

[Nick Danger]

What aspect of the ‘lending model itself’ caused the current slowdown (I won’t call it a ‘depression’ yet, but that could happen next)?

[Nick Danger]

What aspect of the ‘lending model itself’ caused the current slowdown (I won’t call it a ‘depression’ yet, but that could happen next)?

[Rennes Templar]

Simple: Lending to those who were not qualified to borrow financially, but were politically.

[KoRn]

.

[algernonpj]

Fiat Money issued by an unconstitutional private cartel of global bankers aka the Federal Reserve.

[Nick Danger]

Fiat Money issued by an unconstitutional private cartel of global bankers aka the Federal Reser

Would fiat money issued some other way be OK with you?

What happens if you don't have fiat money and some unexpected technological change suddenly increases productivity a whole bunch, i.e. electricity, the automobile, computers, the Internet.

As I understand it, half of the Board of Governors, plus one, are appointed by the President and confirmed by the Senate. How does involving two layers of elected government officials in the process lead to a "private" cartel? Would a truly private cartel turn its profits over to the Treasury?

Whatever faults there may be in having an independent agency manage the size of the money supply, how could leaving the job to Congress -- meaning Chris Dodd and Barney Frank, our "banking committee" heads -- bring improvements? Wasn't the whole purpose of the Fed precisely to put distance between the money supply and the politicians?

[iThinkBig]

Very low short term interest rates. When the rates are set super low, you have business and the masses all borrowing to have today what they will pay for tomorrow. This creates a massive, unsustainable debt overhang. The banks stop lending because of the risks of default. American economy led to believe ‘credit’ is money. Wrong. Credit is just credit. Credit used is debt.

[Nick Danger]

Very low short term interest rates

It doesn't make a lot of sense to complain about low interest rates causing the current slowdown. As you said, when interest rates are low people will borrow to acquire today what they will pay for tomorrow.

OK, so if interest rates are high, people will not acquire today... they'll acquire when they've saved up enough to pay cash.

Which means we would have the same slowdown, except that it will happen at the front end with the higher interest rates, and at the back end with lower interest rates. The interest rates might shift the slowdown through time, but the borrowing didn't cause anything to happen that wasn't going to happen without the borrowing.

If interest rates are very low, borrowing to acquire some productive investment is a really good deal. If I can buy a machine on credit for 4% interest, and the machine generates a profit of 8% of its purchase price, I should do that deal every chance I get. To just call it "debt" and pretend that it is therefore "bad" makes no sense.

[iThinkBig]

“It doesn’t make a lot of sense to complain about low interest rates causing the current slowdown. As you said, when interest rates are low people will borrow to acquire today what they will pay for tomorrow.

OK, so if interest rates are high, people will not acquire today... they’ll acquire when they’ve saved up enough to pay cash.

Which means we would have the same slowdown, except that it will happen at the front end with the higher interest rates, and at the back end with lower interest rates. The interest rates might shift the slowdown through time, but the borrowing didn’t cause anything to happen that wasn’t going to happen without the borrowing.

If interest rates are very low, borrowing to acquire some productive investment is a really good deal. If I can buy a machine on credit for 4% interest, and the machine generates a profit of 8% of its purchase price, I should do that deal every chance I get. To just call it “debt” and pretend that it is therefore “bad” makes no sense.”

I am happy to get into a longer economic debate with you about this over freepmail if you want. My quick reply is that the short term rate must be adjusted higher to stymie the length of the debt overhang. Frankly, the market should set short terms rates, there should not be manipulations of interest rates. How is that for ‘should’ occur?

[Nick Danger]

Frankly, the market should set short terms rates

Surely you don't believe that nonsense in the papers about how the Fed "sets" interest rates. Reporters are all liberals; they think government runs everything.

The Fed sets only its own interest rate, the rate it charges banks. What do you suppose will happen if the Fed sets that rate higher than market? Banks needing money will get it somewhere else... London perhaps, or Dubai. The world is full of money. If the Fed sets the rate lower than market, the banks will borrow all of it and lend it out somewhere else. There is very little room for price fixing in a world where capital crosses borders at the speed of light.

[iThinkBig]

That is true. The Fed should not be setting short term rates. The market setting them would be banks.