Posted on 08/17/2007 5:22:20 AM PDT by Hydroshock
Fed declares "downside risks" to economy have increased, OKs half percentage point cut in discount rate on loans to banks. (Breaking
(Excerpt) Read more at cnn.com ...
Somehow..., all of our "Keynesian Economists" never read anything about paying down debt in good times! Actually, the economists read it but the politicians will only quote Keynes when endorsing deficit spending (which is all the time, good times or bad!)
BINGO, investors are finally scrutinizing all the golden mortgages and find that they are merely gilded lead!
The average person has no clue as to the magnitude of companies doing all they can to improve their bottom line on paper. The credit card industry and auto loan industry are large and have followed similar practices, not to mention recent changes in personal bankruptcy laws. I reckon this is the first time that tweaking the lending systems in the past and pushing the envelope (max profits) up till now has converged to see just how well the current system will work to prevent a major dive.
Same thing.
It takes Buyers in order to provide liquidity. Lending institutions have to sell old debt in order to get the money to make new loans.
With no buyers, there is no money to buy the old loans...which means there is no money to make new loans.
That's how you get a credit crunch.
That's mostly true but keep in mind that the major factor left out of your above analysis is foreign money.
The main difference between "now" from the last time a credit crunch hit is that export nations like China have such a vast, enormous Dollar surplus trade accounts that these export countries are distorting the Markets with where they choose to invest all of those massive amounts of surplus Dollars.
We are going to continue to see risks from these market distortions so long as the U.S. keeps importing so much crap (and exporting our Dollars).
It's in the release: "The Board is also announcing a change to the Reserve Banks' usual practices to allow the provision of term financing for as long as 30 days, renewable by the borrower."
"Thank goodness we won’t let some hedge funds and banks that made bad loans pay the price." A money losing CDO is still a money losing CDO.
Not if the underlying assets are financed by helicopter ben; no loss there, except to savers and taxpayers.
"Since we are socializing and monetizing all the crap mortgage loans, who wants dollars anymore?" How are we socializing and monetizing all the crap mortgage loans?
Gee, i dunno. let's see... I am a banker with some crap loans that I can't sell. well, shucks, lemme just put them on the fed for 30 days and kick the can down the road. let the fed take and finance what the market won't.
That's nice but how is that "lowering the cost for banks to offload crap"?
Not if the underlying assets are financed by helicopter ben; no loss there
The hedge fund still owns the CDO, the hedge fund still has the loss, not the taxpayer.
Gee, i dunno. let's see... I am a banker with some crap loans that I can't sell. well, shucks, lemme just put them on the fed for 30 days and kick the can down the road. let the fed take and finance what the market won't.
And in 30 days or 60 days or 90 days, after paying the Fed interest on my borrowings, I get the crap loan back. I'm still losing money. Try again?
The Treasury sells a 6 month T-Bill. I take money out of my checking account to buy it. Where is money created out of thin air?
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If the Fed offers the Bond directly to you (as it is allowed to do) then no new money is created. The Fed sells you the bond, transfers the money to the government with some lag so the money multiplier is actually negative and some money goes out of the system.
But that’s rare, what usually happens today is that the money comes at the first stage from a Federal Reserve Check to the Federal Treasury. The Fed now has an IOU and may remarket the IOU (the bond) to you. They can also hold it — the fed has Treasury debt of over a trillion dollars in it’s accounts. BUT the purchase by the Fed does not withdraw money from any commercial account. Meanwhile the government puts the Federal Reserve Check into it’s accounts and presto, a commercial banking deposit results, or the government pays a bill, which goes into a commercial banking deposit for whoever was paid. Blam. The banks have an asset. They lend out more money than they have assets to back at 100% . . . so the deficit spending is multiplied and a larger amount of money is put into the economy than the deficit amount itself. Part of that multiplied money may be drawn down from a commercial account (say yours) to buy the bond if the Fed doesn’t just hold it or hold it for a period of time. Open market operations — purchase and sale of debt.
When bonds are popular with private buyers then the effect is smaller in terms of money creation. But when the Fed holds the debt long term it’s fiat money . . .
Let me know if I’m wrong — every schoolboy should be taught how the Fed works — but we aren’t.
Somehow..., all of our “Keynesian Economists” never read anything about paying down debt in good times!
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Yah, it’s really never been tried as far as I know. I think I’m a Keynesian in theory, but it doesn’t work in a democracy! People would howl if the good times were limited or ended to pay off the debt. They’d rather have a party that ends than a steady economy I think . . . life is short, long term consequences are someone elses problem.
Excellent!
But that’s rare, what usually happens today is that the money comes at the first stage from a Federal Reserve Check to the Federal Treasury.
Bzzzt....wrong answer.
The Treasury conducts an auction, they sell the bonds directly to the public, the Fed is not involved.
They lend out more money than they have assets to back at 100% . . .
Huh? A new bank has assets of $1 billion, how much do you think they can lend out?
BINGO!!
In a sense, not only has the US exported tons of manufacturing to China, but, the US has also exported sound economic control of the US economy and now someone has to pay the fiddler.
All the pro 'free trade' globalists are about collecting the money today....nothing long term is secure in their mind today and their lobbying in DC, has pushed it to where they want it.
China has a lot more power now than most realize, but, politics is at play and a push (the hope) to convert the Chinese to a capitalist society will hopefully eventually lead to a democratic form of government. That is what the CFR and Trilateral Commission, The Bildebergs, etc. work to 'control' (economies and monies).
No it is not, you can not make someone want to buy. Particularly when so many mortgage backed securities are so toxic.
Perhaps you misunderstood my response?
If you do nto have anything I want to buy, then I do not care what terms you are offering.
Is it now over a trillion dollars? I looked at those numbers a while ago and I seem to remember that it was on the order of $1 trillion, but that it was under rather than over. From a quick glance at the August numbers, I think it is still a bit under (around $800 billion, it appears to me.)
I have to say that big position was a big surprise to me when I noticed it, because the Fed holding that debt is the epitome of debt monetization.
The fed has boosted the value of the underlying asset by being a buyer (financier) for crap that leveraged holders are choking on. It doesn’t get any simpler than that. I’d be happy to spell out how this action amounts to a bailout of CFC and the lenders to it, but if you won’t accept the top premise, then it’s pointless. have a great day!
BigMack
The Treasury conducts an auction, they sell the bonds directly to the public, the Fed is not involved.
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That’s not true at all. The Fed actually conducts the auction for the Treasury. But I get your point. The pass through of the sale won’t create additional money, regardless of who actually conducts the auction.
Now . . . how does the money supply grow FRiend? My understanding it is through open market operations related to purchase and sale of government securities by the Federal Reserve.
The deficit must be funded, so if you and China don’t buy, then the Fed must create the money to buy the debt, and hold it, or the US renegs on it’s debt and boom, a choice between a crash or inflation.
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They lend out more money than they have assets to back at 100% . . .
Huh? A new bank has assets of $1 billion, how much do you think they can lend out?
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Shorthand. Money multiplier. They lend out full amount minus reserves. When the loan is deposited, next bank lends out full amount minus reserves as well, more than the original deposit has been lent out at that point.
The Treasury conducts an auction, they sell the bonds directly to the public, the Fed is not involved.
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That’s not true at all. The Fed actually conducts the auction for the Treasury. But I get your point. The pass through of the sale won’t create additional money, regardless of who actually conducts the auction.
Now . . . how does the money supply grow FRiend? My understanding it is through open market operations related to purchase and sale of government securities by the Federal Reserve.
The deficit must be funded, so if you and China don’t buy, then the Fed must create the money to buy the debt, and hold it, or the US renegs on it’s debt and boom, a choice between a crash or inflation.
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They lend out more money than they have assets to back at 100% . . .
Huh? A new bank has assets of $1 billion, how much do you think they can lend out?
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Shorthand. Money multiplier. They lend out full amount minus reserves. When the loan is deposited, next bank lends out full amount minus reserves as well, more than the original deposit has been lent out at that point.
Yah, over a trillion. Treasuries at around 800 billion and then a couple hundred million of other instruments.
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