Posted on 04/20/2016 4:35:09 AM PDT by expat_panama
It's rumored that the FR loaned out upwards of 20 trillion all over the world in 08 to re-inflate the credit bubble. We don't know for sure because the Fed can't be audited.
I don’t think they were trying to reinflate the bubble so much as save the banking system. The Fed was trying to fend off another huge banking collapse like what occurred 1930-33, when fully one third of America’s banks failed. That collapse was largely American, 2008 had the possibility to go global.
Enormous sums of mortgages and derivatives based upon them had been bought by banks all over the globe. When those began imploding on a vast scale banks that held them were at risk of collapse. Unfortunately when banks fail the damage spreads beyond the stockholders of the bank otherwise we should stand back and let them fail.
All they did was screw the American worker and increase the size of the coming depression.
Depression are a fact of life with intrest bearing loans and banks. The first civilization to use them was Sumer and they quickly ran into debt bubbles and depressions. Thier solution was a debt jubilee evertime a new king came to the throne. Debt bubbles have become a problem for us because we no longer allow a proper liquidation of the debts through failure and bankruptcy and instead bail out the debtors prolonging the problem.
If you read what I said carefully, I never said that we do away with fractional reserves — but they should be at set at much more conservative reserve ratios — to not have an “over extended factional reserve system.”
With much more conservative reserve ratios based on real asset reserves — not debt instruments as reserves — the impact of bank runs will be much more managable and not require lenders of last resort.
For thousands of years, we had no lenders of last resort because societies as a whole shied away from funny money — fiat. It’s when we start monkeying around with true weights and measures (the basis of sound money) we bring about all kinds of trouble.
Currently, most bank reserves are debt instruments that by nature have counter party risks. If the reserves were to be much more based on real assets with little or no counter party risk (Gold) then systemic panics are far less likely.
One of the reasons Gold is not used as reserves at most banks is because it is classified as a tier 3 asset — which only recognizes 50% of Gold’s value. This obviously should change back to tier 1.
With debt instruments(tier 1) being the main feature of bank reserves that are re-hypotheticated, systemic panic is far more likely as if one debt instrument fails it can have a cascading effect on many bank balance sheets.
Interestingly, since debt instrumnets are the bulk of bank reserves by which money is created, in theory, if there was no debt then there would be no money. Ponder that one for a while! :^)
With gold, there is no counter party risk and if it is not re-hypotheticated then the risk for systemic panic is greatly reduced as the cascading effects are very limited.
Furthermore, as Gold returns to its rightful place as true money with no counterparts risk, the banks assets will always be liquid because it is “good as Gold!”
I would strongly suggest reading “The Creature from Jekyll Island” by Edward Griffin to get a fuller understanding of the situation we are in. This is the book the banksters hope you never read and it also explains why the “elites” are fighting Trump tooth and nail.
The power to create money out of thin air via debt instruments will not be given up easily.
Hope that helps
If by real asset reserves you mean gold we had the gold standard in both 1907 and 1930. The credit portion of the money supply under the gold standard is still subject to collapse, which it did in both cases.
During such times banks under pressure from bank runs always need someone who can lend them money against their illiquid assets. That’s the role of a lender of last resort. No modern economy operates without one, because without one then otherwise sound banks can be wiped out by short term panics, and that contagion can take down a whole series of banks like a row of dominoes.
“For thousands of years, we had no lenders of last resort because societies as a whole shied away from funny money”
Banking itself is not even 1,000 years old. It dates back to around 1500 and the invention of double entry bookkeeping. Medieval trading houses like the Medicis and the Fuggers began issuing bills of exchange which then began to circulate because they were safer and easier than carrying around specie. Fiat money based on a Medieval ‘Real Bills’ doctrine.
Anyway we can’t return to the banking practices of the Medicis and Fuggers without also returning to the level of the Medieval economy. There is no magic formula for monetary and banking perfection that will prevent the business cycle, the Kondratieff cycle, the credit cycle, and all of the other factors that drive economic booms and busts. The best that we can do is to learn from previous experience and try to moderate the next bust.
And not to be harsh but Griffin’s book is not what I’d recommend for anyone wanting to study the history of banking.
I am not saying that the Gold Standard prevents the credit portion of the money supply from collapsing. Instead, because Gold without counter party risk has always been a LIQUID asset for thousands of years, it greatly mitigates problems of banks “illquid assets” when panic strikes. This is only if they would go back to using gold for it’s rightful purpose — true money.
Thus, with conservative reserve ratios backed significantly with gold reserves (once again always very LIQUID) contagion can be much better contained. There is less damage due to far less re-hypothecation of debt instrument assets that can be illiquid and perhaps rendered worthless when interest cannot be paid. Exhibit A — Greece.
I fully understand there will always be problem banks. The point I believe you are failing to recognize is that these problems can be far better contained by returning to sound money principles, much more conservative reserve ratios and avoiding the “lenders of last resort” like the plague.
It seems to me it is better to let the markets sort it out than go to “lenders of last resorts” for constant interventions.
With all the lenders of last resort interventions we have these days, we no longer have markets, we mostly have interventions — a sad and scary state of affairs — created by “lenders of last resort” using evermore debt instraments to “save the day.”
It might be painful at times, as the banksters need to learn their lessons of excessive credit backed on debt-instruments even more credit by which serious can contagion happens.
On top of that all the derivates the banksters play with in the derivatives casino — see “The Big Short.”
Let history teach the consquences of listening to the banksters. We may very well be getting a historically unforgettable lesson VERY soon — watch China, Russia and India as they move towards backing their currencies with gold. BTW China just opened the SGE(Shang-hi Gold Exchange) because they know exactly how the game is played to the banksters advantage for many years.
The SGE contracts are 100% tied to physical gold, whereas, the COMEX contract has been 200 contracts for each once of Gold — 200-1!!!
I believe all this will be changing very soon with a major gold price reset as the physical assets always wins over the paper no matter how hard men may try.
We’ll have to agree to disagree on Griffin’s book. He exposed the banksters game like no one else. IMHO, Trump knows this and that is why they are deathly afraid of him — he will not bail them out like in 2008. There are trillions at stake and they will not go quietly into the night.
We need to move away from an economy of financial engineering of major international banks and big corporations back to supporting entrepreneurial small businesses.
God Bless.
“these problems can be far better contained by returning to sound money principles, much more conservative reserve ratios”
We had sound money as recently as 1907 and 1930 while the gold standard was still in effect. It doesn’t keep banks from requiring a place to borrow during a panic. They aren’t eager to seek a lender of last resort because that costs them money, and under the Fed it ties up some of their reserves. They go to a lender of last resort in order to keep from collapsing. The one innovation that has done more to reduce bank panics was the creation of FDIC, what Milton Friedman called the most significant legislation to come out of the Great Depression.
” it greatly mitigates problems of banks “illquid assets” when panic strikes.”’
Not at all. A bank’s main assets are its loans and they are always illiquid because they aren’t cash. Banks keep the amount of cash necessary for normal transactions, they don’t operate as if a panic is about to occur. If every bank did that then the amount of available credit would be drastically reduced.
If not having a lender of last resort was a good idea then the 1930s wouldn’t have played out as they did. The Fed sat on its hands for three years and in effect we had no lender of last resort. Banks couldn’t get cash when they desperately needed it and one third of America’s banks collapsed even though they were otherwise sound. And the lack of FDIC meant that depositors were wiped out as well as investors.
“On top of that all the derivates the banksters play with in the derivatives casino — see “The Big Short.””
You’re conflating investment banks with commercial banks. Not the same thing. Quants at investment banks developed complex derivatives during the 1990s, and they really took off during the low-interest 2000s.
Clinton and a gang of Republicans did the bidding of investment bankers with the Commodities Futures Modernization Act of 2000 and prevented any regulation of derivatives. The widespread use of David Li’s Gaussian copula function fooled the entire financial industry into vastly underestimating the risk of non-conforming mortgage paper, and rating agencies set up investors by giving triple A ratings to junk.
If anything the disaster wrought by the housing collapse re-emphasized the necessity of having a backstop for the banking system. Bernanke is a student of Friedman and Schwartz’s ‘The Great Contraction’ and made sure that he flooded the banking system with liquidity to prevent a repeat of the 1930s.
“We’ll have to agree to disagree on Griffin’s book. “
Conspiracy theories are always entertaining but they are junk food for the mind. Vera Smith’s The Rationale of Central Banking and the Free Banking Alternative is available for free, online, for something on central banking. Hayek oversaw its writing.
Trusting China, Russia, India... good luck with that. A replay of the BRIC theme but without Brazil this time.
“We need to move away from an economy of financial engineering of major international banks and big corporations back to supporting entrepreneurial small businesses.”
Investment banks have always been about financial engineering. It’s what they do. They aren’t commercial banks and they don’t lend to small businesses. In the 1930s we forced the separation of investment banking and commercial banking with the Glass Steagall act. That was dismantled over the years and then we blundered into the financial crisis of 2008. Maybe not a coincidence.
Once again, as you admitted, the problem is that the banks main assets are loans — debt instruments. Yes, the amount of available credit should be reduced to the level of living within our means as opposed to being a lifestyle that enslaves us to the masters of debt.
I guess we will have to agree to disagree, I am not going to waste more time responding to you as I have much better things to do.
I dust off my sandles and move on.
God Bless.
“Once again, as you admitted, the problem is that the banks main assets are loans — debt instruments. “
Other than that there isn’t any problem. The very business of banking is making loans. Those loans, or ‘debt instruments’, are how they earn their money. Those are their assets. The deposits of their customers are their liabilities.
If they aren’t dealing in loans then they aren’t banks.
“I guess we will have to agree to disagree, I am not going to waste more time responding to you as I have much better things to do.”
Yeah, you’re a regular scholar on the history of banking and money, and it would be a total waste of your valuable time to share your pearls of wisdom. Somehow I’ll get over it.
Yes, banks make loans, but it used to be BACKED MOSTLY by savings and real assets — not debt instruments.
BTW, these days main street businesses are having a very difficult time getting the loans they need (the function of banks) because of all the financial engineering going on with debt instruments and derivatives.
The banksters get the “lender of last resort loans” to save their bacon from all the financial engineering mistakes they have made — while main street businesses suffer at the mercy of high-minded banking pencil necks who never picked up a hammer and actually built something in their lives.
I know of this personally with all the landscapers, carpenters, plumbers and many well qualified tradesmen who have worked for me couldn’t get the line of credits needed to effectively run their businesses.
Once again, had the banks stuck to making loans backed by savings and real assets, main street businesses would not be suffering as they are now.
One does not need to be a scholar on the history of banking to see and know what is going on. Scholars often lack basic real world common sense — thus I am glad not to be associated with them. They can remain in their ivory towers until the citizens start to revolt — as it is happening right now.
God Bless!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.