Posted on 03/10/2008 6:15:48 PM PDT by shrinkermd
With worsening strains in credit markets threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -- perhaps buying mortgage-backed securities directly.
"As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest
...Since 1932, the Fed has had the authority to lend, against collateral, to individuals, partnerships or corporations other than banks in "unusual and exigent circumstances," subject to the vote of five members of the Board of Governors. (The board has seven seats, but two are currently vacant.) This power has never been used.
Mr. Feroli noted that Congress in 1966 gave the Fed temporary authority, made permanent in 1979, to purchase obligations of government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
So far, the Fed hasn't purchased GSE obligations except in its short-term repurchase operations. When the federal budget was in surplus, the Fed considered outright purchases of GSE obligations, but judged against such a move as it would reinforce the perception of an implicit government guarantee.
Last week, the Fed said it would lend banks $100 billion starting this week in 28-day loans through its new Term Auction Facility, at which banks can post a wide variety of collateral, including mortgages, corporate loans and other items that have become harder to sell in the open market. And it said it would make money-market loans of as much as $100 billion to its network of 20 bond dealers for 28 days, double the usual maximum term, and structure them to encourage dealers to submit mortgage-backed securities guaranteed by Fannie and Freddie Mac.
Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking Committee, has suggested creating a new government corporation that could buy mortgage-backed securities
(Excerpt) Read more at online.wsj.com ...
See post 155. Bye now.
And then you reach the following infantile, idiotic, illogical conclusion:
But you still haven't managed to show the slightest harm to yourself in the matter.
Right after you just catalogued all kinds of financial horrors and disasters which hurt everyone in the economy who wasn't sucking off it to buy a park ave condo.
Try explaining to the old Toddstermeister what the Federal Reserve just explained to you. Good luck and LOL!
Careful Jason, your fear is starting to show. The sweat beads are popping for all to see.
Try to keep a stiff upper lip while you lie, like these financial geniuses.
"I cannot help but raise a dissenting voice to statements that we are living in a fool's paradise, and that prosperity in this country must necessarily diminish and recede in the near future." ~~E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928
"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months."~~Irving Fisher PhD, leading U.S. economist , New York Times, October 17, 1929
"If recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that the Federal Reserve System would take steps to ease the money market and so check the movement."~~Harvard Economic Society, October 19, 1929
"This is the time to buy stocks. This is the time to recall the words of the late J. P. Morgan... that any man who is bearish on America will go broke. Within a few days there is likely to be a bear panic rather than a bull panic. Many of the low prices as a result of this hysterical selling are not likely to be reached again in many years." ~~R. W. McNeel, market analyst, as quoted in the New York Herald Tribune, October 30, 1929
I have concluded that he is aware precisely of what is going on, but for some reason is posting here to mis-inform others. What’s unclear is why...perhaps his BAC long position is taking on too much water.
Oh, are you still sticking with the dean of deficits, JM "In the long run we're all dead, so spend like there's no tomorrow" Keynes?
What a threadbare joke. Keynes' "long run" is here, and you have nowhere left to hide from reality.
"Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump."~~Ludwig von Mises
"True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression."~~Ludwig von Mises
"Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness."~~Ludwig von Mises
"What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse."~~Ludwig von Mises
"If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders."~~Ludwig von Mises
Credit expansion alone does not cause economic crises. Economic crises are endogenous. We have always had them, under every monetary system, and we always will. They are the result of men being fallible and the economic problem being hard. The result is misallocations of capital which result in real losses to the society as a whole.
Yes, excessive credit creation can contribute to such misallocations. No, they do not cause them, in the specific sense that removing credit creation (not actually possible anyway) would not remove the effect - and in the sense that credit creation can operate without such misallocation necessarily resulting.
The operating mechanism is, mispricings induce misallocations of real capital. Credit facilitates reallocations of capital. The combination of temporarily misaligned prices (especially for long dated capital assets) and rapid credit expansion, can move lots of capital to poor uses rapidly, and temporarily make those moves appear justified.
Those effects could only be removed if (1) prices never changed, preventing eventual falsification of the price signals reacted to or (2) capital never moved, preventing reallocation to worse configurations. Either would also destroy economic freedom and the adaptability of the economy to new conditions, and with it would destroy economic growth and prosperity.
Economic crises are not removable, and attempt to prevent them by attacking economic liberties destroys liberty and prosperity without securing any meaningful economic security. Hayek already understood this. We put up with crises as the inevitable byproduct of other men's freedom. Liberty has costs. You have no right to perfect economic security. It cannot be achieved, and the things being sacrificed in its name are more valuable than it is, anyway.
This kind of pseudo sophistry an appeal to your own supreme knowledge above and beyond all of us peons out here is just the kind of montebank quackery that has characterized the state of the US financial system for years.
It and you are one great big puffed up rhetorical fallcy.
If you have an actual point to make, make it. Start by writing down a subject, a verb and an object. Use words that have dictionary meanings that we can look up in an economics or financial dictionary if we are too unsophisticated to udnerstand them. Connect the thoughts from one sentence to the next to create through cause and effect a logical argument that sustains a bigger point that you are trying to make.
The idiocy and ignorance of your audience is not one of those points you are allowed to make as an argument for why you are right. IOW, to demonstrate you are right you need to prove you are right through well-posed argument, in the English language, and not by heaping scorn on the fact that you are an intellectual fraud.
Yes. And dead wrong too.
And no you have not made an argument. Any. Anywhere, you intellectual swindling fraud.
who are you? is this a joke?
Well make up your mind. Either credit expansion contributes to the crisis or it doesn't. There is an excluded middle in this hair.
If this really is happening you can expect 18% rates when everyone starts covering for anticipated losses. Kinda like russian mortgage rates.
You are speaking out of your mouth and out another orifice at the same time. You just said credit expansion does not cause the problem, and now, here you say that rapid credit expansion can move lots of capital to poor uses rapidly.
Which orifice is saying what you mean, and which is meaning what you say? I really want to know.
I have a right to work and save and store my savings for my retirement in safe securities so that I have provided for my old age, and you are an immoral scoundral and rip-off artiste to suggest otherwise. You are a fraud, a huckster, and the lowest form of parasitic shill I can imagine. If Dante were to rewrite the Inferno you would be one of the three bodies being consumed by Satan himself in the lowest circle.
Is this lickspittle of a wall street toady gone yet?
And what, pray tell, is being sacrificed in the name of economic security? With inflation running wild, and asset values crumbling, the dollar collapsing, and gold skyrocketing, all I can see is that financial security has been sacrificed for a bunch of bankers on Wall Street. I just hope that you are getting some of the take for your pimping.
No, I am not a Keynesian. I am Hayekian, I've learned all the lessons from the Austrians there are, and I know them far better than you can hope to. But I also know their mistakes.
All booms end in slumps. The cycle is not removable.
Monetary policy, in particular, cannot remove booms and slumps from economic growth histories. The most it can ever hope to do is (1) slightly moderate their amplitude, (2) ease business dislocations and unemployment in the slumps, modestly, and (3) do so without deranging the long term price level too much, while still allowing either fluctuations of a factor of 2 in the short run, or progressive falls on the order of a few percent a year.
Asking more of monetary policy is asking of it what it can never deliver. Monetary policy does not cause the cycle, which is endogenous. Mises' specific policy prescriptions would not remove the cycle. They might well force the slumps to be vastly more severe than in recent times, while having the benefit of a relatively stable long term price level. But all he promises cannot be achieved by his prescriptions, because he misdiagnosed the operating cause.
Furthermore, even his policy prescription would require destruction of essential economic liberties, and not just on the part of authorities or the government. To prevent all issuance of credit without commodity cover would require a draconian government regulatory apparatus at least equal to that he himself rightly decried in exchange controls and the like. New money creation is also endogenous, as long as men are free.
Moreover, it is crazy to expect and to trust the government to run such policies for such ends. No one legal reform is going to outlaw booms or busts, and governments listen to other forces in such matters anyway, as Mises knew well himself.
"What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media."
That is what he thought, but it is demonstrably incorrect. What is actually needed is efficient allocation of capital in line with accurate estimates of future prices. Where that is present, none of the capital misallocation losses the cycle brings will occur, regardless of how investments are financed. And where that is absent, such real losses will occur, regardless of how much real capital inputs have been saved out of income beforehand.
You can save out of income enough real capital to build an empty building in the middle of nowhere that no one will ever use. Your having save the full value will not prevent the loss; the cause of the loss is the misallocation, that its actual present value to other men in the real conditions of the future, is less than you paid for it.
If you didn't save out of income but commanded the resource to build through credit issuance, but the actual present value to other men of in the real conditions of the future, of the use you put the commanded capital to, actually fully justifies the price you paid for it, then you can repay your debt in full and on schedule, from the capital gain the project creates.
Mises mistake is that he thought the first derivative of invested capital is net savings out of income. It isn't. That is one term in the first derivative of invested capital. But that derivative is actually dominated by changes to the value of existing capital caused by reallocations and adaptations to new uses. At bottom, this involved confusing the volume of physical capital and the *value* of that capital, or reflected a *book value* bias in understanding the *value* of capital.
Net new real savings can increase directly the *book value* of invested capital - but whether the value that results is equal to that, or higher, or lower, does not depend on what was paid for it. It depends on the accuracy of the forecast used to decide on that use of the capital.
In this Theory of Money and Credit, Mises makes the further mistake of thinking that both the scale and the composition of capital investments engaged in can be deduced from one single schedule that marches down simultaneously through the return the investment will achieve, and the period the investment will take in time, the latter from fastest to slowest. And this is a flat error. It was motivated by a desire to measure the total capital of the society as a time period, capital value divided by income, effectively, and to see all additions to net capital value as equivalent to lengthening the average capital period.
But there is no relation between the actual period of a particular use of capital, and the return it is expected to achieve. The allocation through uses of capital proceeds according to (risk adjusted) expected return, and not period. Mises thought average periods beyond what had already been saved ("book value" of capital) would be unsustainable, but this is the wage fund theory of capital in drag. That theory is thoroughly wrong; specifically it fails completely to account for changes in the value of the existing capital stock as demand shifts.
Moreover, the operative word is "expected" return, because the actual return will differ, and do so dramatically when the prices under which the decision is made differ from those actually seen. Hayek was the one who saw the critical importance of this factor, in the specific form of plan compatibility. It is entirely possible for the economy to enter specific allocations that must be falsified by any set of future prices. When that happens, backtracking and undoing past allocations will always be necessary and losses will always be taken - quite independent of original financing being monetary or otherwise. In other words, Hayek found the true nature of the cycle, not Mises.
Credit booms do not collapse because they are built on banknotes, they collapse because incorrect price signals reward incorrect capital allocations, and those mean losses. You could build them on real savings and they would still collapse if the prices directing them were wrong. And you can't remove the cause by removing the ability of the operative prices (especially long interest rates) to move; they are needed and needed to be flexible to solve the intertemporal allocation problem.
Mises remains wrong in the matter. The cycle is not removable. Credit issuance is not an economic sin. And it doesn't pick anybody's pocket.
The truth in Mises position is that the cycle does react to disequilibrium interest rates, and secondarily that price stability is an appropriate target for monetary policy. His criticism of naive inflationism remain entirely sound. But his attack on any issuance of fiduciary media beyond commodity cover is unsound as economics, and the hyperbole since built around that attack has become the new form of capitalist-bashing and a danger to essential economic liberties.
You really are a pompous jerk, aren't you?
If credit issuance is picking your pocket is stealing and fraud, then the entire financial class can be put in prison and you will applaud like a good little fascist. White male bankers are the new Jews.
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