Posted on 07/08/2006 4:44:32 PM PDT by churchillbuff
Most of America is in league with the Fed devil. We secretly hope and believe the Fed money machine will continue to work, so our mortgages can be paid off with cheaper dollars. We have met the enemy and he is *us*.
1) Jobs are going overseas, where dollar-induced inflation is less.
2) The bubble WILL burst, forcing a severe social and financial crisis upon us (say I).
3) Government-supplied estimates of inflation are gross understatements. Financial media like CNBC are virtual propaganda mills, diverting public attention from the real cause of inflation: too much (fake) money in circulation.
4) There aren't enough Iraqs, Irans and Koreas in the world for America to exploit. Every time there is an international crisis with a military dimension, foreign dollars return here. Eventually, this game too will END.
If the free market is such a good thing (and by and large I believe it is) then why can't interest rates be subject to free market pressures as well?
Credit card companies charge whatever interest they can get their customers to tolerate. Why not so for banks?
Thank you for the cogent analysis.
By law the Federal Reserve is supposed to maintain a constant domestic value for the dollar, while also trying to achieve full employment. It fails miserably at both. In practice the Federal Reserve exists to blame all bad things like inflation on the private economy rather than on the government where it belongs.
"Can anyone tell me why banks need the Fed to tell them what they should be charging their customers for interest?
If the free market is such a good thing (and by and large I believe it is) then why can't interest rates be subject to free market pressures as well?"
That's a good question. I'd have to answer it by saying that when you say "banks" you're lumping together "lending institutions" with "depositary institutions". A combo lender/depositary inst could easily, easily get itself into serious [lack of funds] trouble should it lend out a "nominal" amount of its' deposits when suddenly, a big depositor wants to draw/cash a big fat check. What does the bank do when it cannot cash a check out of depositors' funds? It has to borrow from the Fed. And so, very schematically, you can see the value of this ONE aspect of Fed "lender of last resort" activity. Lest you think this is total fantasy, I have actually walked into a Bank of America and tried to cash a $4000. check and had the teller tell me they DIDN'T HAVE enough funds on hand to cash the check! I was going to buy some silver, LOL. But I couldn't believe it. $4000? Gotta be kidding me. Yes, it was near the end of the day on a Friday, but 4 grand for the B of A? That ain't spit!
"Credit card companies charge whatever interest they can get their customers to tolerate. Why not so for banks?"
Well, not exactly, there are usury laws limiting interest rates, though if you look at some of 23.9% "penalty" rates some CCs charge, you may doubt the statement.
On the level you're speaking about, even extrapolated to national banks with multi-state operations, the Fed's willingness to supply currency and credit to member banks and by extension most other retail establishments we think of as "banks" is IMO rooted in preventing the type of "bank runs" that occurred during the depression and keeping a high degree of confidence in the banking system in general. And much as I personally am down on the Fed, this aspect is important.
So...if banks want to expand their business (borrow from depositors and lend out the funds at margin) then they BETTER not get themselves into a situation; either by making bad loans OR competing for lending biz (via low interest rates) such that they get into a jam and have to borrow from the cookie jar at a rate that's HIGHER than what they may be charging their customers.
Now....when the Fed gets into expanding and contracting the money supply, fiddling with interest rates, and coming to the rescue of the biggest players on Wall Street...then I would argue that they are not only exceeding their mandate, but also distorting the economy annd financial markets in ways that are complex and convoluted. But you didn't ask about that, so I won't go there!
Yah, the Liberty Dollar would be the SECOND biggest fraud. OTOH, if you can sell an ounce of silver nominally worth $11.35 for $20, then good for you.
The money they lend out is backed by Treasury Securities.
Part of a president's success is dependent on having these people loan out money wisely such that the government breaks even (or even makes a little profit) in lending out the money and doesn't get stuck with too many delinquent loans.
These folks could also indirectly set the reserve ratio by either only lending to banks with a reserve ratio above a certain amount, or charging more to banks with lower reserve ratios.
Banks would be regulated to some extent by some other agency. That other agency might provide a grade to each bank in terms of their past performance and current financial state. This grade could also influence the rate at which these banks could borrow money.
Also, these banks would also be able to loan money back to the government to help the government cover other bank loans without having to issue more Treasury securities. Sort of how some businesses/people can sell power back to the power companies if they are a net generator.
In this way the Fed (or whatever we call it) is more a passive loaner of last resort rather than a mover-and-shaker in the world of finance.
It sounds fairly logical, but the world has a way of exceeding or transcending mere logic. You're for sure hinting at some of the macro-intractions that go on, but hard experience has a way of outwitting some best-laid plans. It's very ironic that I find myself defending the money-creation power of the Fed, but it's IMO clearly necessary in some cases. And yet it can clearly be taken to extremes (and in the last five years this has been done, in spades) For example. Hurricane Andrew blows thru Florida and 3 million people suddenly a: have no way to make a living, b: have no place to live, c: cannot make their existing mortgage pmts. Some of the losses are paid for by insurances of various types and personal savings, but...should these folks have to wait until McDonalds, then Home Depot, then some restaurants, then some mortgage cos all decide to go back into business in the general area...everyone starts as if they are teenagers with minimum wage jobs, living in tents, then some work their way to being managers, then some entrepreneurs start some other businesses, indeed, a whole economy gets rebuilt only from savings? I mean, that could take 10 or 15 or 20 years.
Secondly, what about bad debt? I mean if someone simply cannot pay back their debt, let's ignore fault, should the entire financial system be made to suffer the shortage of funds that result? If funds for lending ran dry, then rates would have to rise, perhaps dramatically, reflecting the scarcity of funds. Rates rising so much would then attract investment in Treasury debt, and maybe the attractiveness of investing in that debt would preclude those funds starting or continuing actual productive businesses. Perhaps taxes would have to rise drastically to resupply the lending pool. Again, the participants of the system would seem to be punished for the bad debts of a few. I dunno, maybe it should be that way. If those rates rose dramatically, probably the stock market would decline and there would be a much wider "impoverishment" than just the poor schnooks who couldn't pay back their debts AS WELL AS the banks that made the bad loans.
In the mystery room you propose with the guys lending out money depending upon supply and demand, believe me, that is not that far from the way it actually works! And that system isn't that bad. You're saying the the pool of funds is (or might be) backed by Treas securities....but...what are THOSE backed by? The short answer is, the govt's taxing ability. Odd indeed is the fact the Fed was born in 1913...the same year as the Fed income tax!
What's more, this doesn't all happen in a US-centric bowl. Foreigners and foreign banks are involved as well. Japan as I'm sure you know has had a ZIRP zero interest rate policy for many years, and this so-called "carry-trade" has had a large impact on worldwide liquidity. Now...I think Japan is going to raise it's rates to just under .1%! Can you imagine?
Anyway, it's a tangled web, and what's more, what the Fed is, or does, or is supposed to do, has taken on the philosophies of its' leaders under stressful times: Volcker in the 80's and Greenspan in the 90's.
That's true -- but it didn't stop panics and depressions in the 19th century. We had a depression in the 1830's, we had a big bust when a German bank panic spread throughout Europe and America in the 1870's, and the economy and markets went into the dumps in 1892/3 -- that's why there weren't any dimes minted in 1893, and only five die-test dimes survive from the San Francisco mint for that year (one of them, spent by the mint director's daughter on an ice-cream cone, finally surfaced in Utah some 70-80 years later, much worn but still valuable because of its rarity).
Convertibility doesn't stop the boom-and-bust cycle. I'm a hard-money guy and I wish we were still on a gold or silver standard (the Roman Empire was on a silver standard), but there are certain things that pegged currency valuations just won't do for you. Repeal of economic cycles isn't one of them.
I've heard Rush praising the "booming" housing market - as if 30 percent per year inflation is a good thing.
We don't have 30% inflation, nor anything like it.
.....Rush is a parrot for the Republican establishment, not an independent, genuinely conservative thinker.
That must be why Rush split so cleanly from the Bush Administration on immigration policy. I heard Rush do it on his show last year. Hell, he sounded like an old-timey "lunch-bucket Democrat" from the 1920's, and his advocacy of American labor couldn't have been more forthright it he'd been a UAW shop steward. No, Rush Limbaugh is not a "tool" or "parrot" or anything else, of the guys down at the Yacht Club Wing of the GOP.
How to steal someone else's labor without really trying.
Didn't you get the memo? The government says inflation is low.
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I am sure the government would not mislead me but I just don't seem to have the intelligence to understand it all. Now, let me see, the inflation rate that was so bad that Richard Nixon felt compelled to instigate a wage and price freeze is now a good thing....................sorry, I still just don't get it.
Does anyone think these houses will still be standing 100 years from now?
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I have seen some high end mobile homes that are much better built than most of the houses of the type you refer to.
3) Government-supplied estimates of inflation are gross understatements. Financial media like CNBC are virtual propaganda mills, diverting public attention from the real cause of inflation: too much (fake) money in circulation.
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Too much truth in one paragraph, you will set off the truth detectors and the thread will be overrun by people who believe that flipping a house within thirty days of purchase actually creates new wealth.
My two cents says they were lying when they dishonored your check, that there was a policy in place not to pay out any big checks under certain circumstances. But whatever their reason, "no" is always the wrong answer when you want your money, so you'd be well-advised to move your funds elsewhere, someplace where the answer is always "yes".
What if someone in your family had an accident and the hospital demanded a large deposit as proof of ability to pay? I've had a hospital demand $100 cash on the barrel just to talk to me -- and I had health insurance! You might need bail for a cousin or money for an emergency trip out of town (funeral, family crisis, family members trapped in a city riot, fire wiped out your apartment) -- who the hell cares? If you need the money, you need the money, and "no" is never the right answer. The right answer is, we will get you your money, even if we have to send a courier on a pogo stick over to three of our branch offices after five o'clock -- the right answer is, "would you like to take a seat while we get the lead out and get your money?"
Thanks for the warning and their "service if we feel like it" attitude.
I remember that, and I remember all the talking heads that came on immediately afterward for some "instant analysis", telling us how Richard Nixon "grew" overnight. How prudent, far-sighted, and wise he seemed that evening, as he matured from typical GOP lackeydom of the hate-able sort, to a statesman's wise and far-sighted view of the world. I wanted to throw up, listening to all those bloviators massaging Nixon's ego as a reward for throwing over Republican monetary and governmental principles.
We paid for that "freeze" with some very noticeable inflation during the next two or three years. By 1976, a fully-loaded Chevy Caprice that had stickered for about $4500 in 1968-1970 had a sticker of $5600 or so. And thanks in part to decisions taken by President Carter and Fed chairman Arthur Burns in the later 70's in response to the first round of Arab price demands for their oil, when oil went from $2 to around $13/bbl, that same Chevy would be well over $12,000 by 1985 -- and less well-built.
Nixon's "freeze" was just another stumble on the road to 70's "stagflation". (That term, I read recently, was actually coined by a Brit.)
I think I've started reading this 5 times now. Just rebumping it to keep it in my 'my comments' view.
Remember the processing points: The old dolar was backed by gold, and gold represents labor already perfurmed and constitutes real, portable wealth.
FRN's are I.O.U.'s -- a promise for someone to perform labor at some future point to pay the interest on what we are borrowing and spending today. All we do when we spend an FRN is pass the I.O.U. on to somebody else to worry about working it off in the future in exchange for goods and services we consume today.
It's a lose-lose situation. Expansion, contraction policy is the mechanism for skimming and scamming off the meger savings people are able to sock away by the periodic loss of the purchasing power of their saved assets.
You just can't put an FRN in the bank and expect to buy a loaf of bread for it 10 years down the road as you could with gold-backed currency.
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