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 ...
Do you know the difference between a capital good and capital, a monetary instrument? They are not the same thing at all.
And when folks siphon off unearned profits from banks to buy hookers, condos, private jets and vacation palaces in remote locations, that is misallocation of capital (money). There was no predicted future return because these assets are fundamentally unproductive. There might have been a fanciful expectation of a gain through the inflation of the valuation of these assets, but that is very different.
Once again the shollowness of your thinking, however large the words you toss around, stares out at even the most casual reader.
Self-loathing is a pitiful condition. I suggest counseling and prayer. Drugs can help with the manic depressive condition.
As to credibility, you might try sound argument rather than berating your interlocutors.
Well, fortunately for me, he must limit his activities to rolling in his grave, unless he climb out to haunt his persecutors.
Meanwhile, you might try a sound argument for why von Mises was actually wrong. It might be way over my head, but I seriously doubt it.
Now you have turned to rascist stereotyping. You are a moral bankrupt aren't you?
I agree, basic human psychology results in overproduction booms and subsequent busts.
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.
Credit creation is a path to misallocation. Your credit card slip in the merchant's register is backed by capital in a realistic amount of time because the bank pays the merchant. The credit creation by the Fed (the recent 200B) is not backed by capital because the Fed is taking debt as collateral instead. This new credit created by the Fed is prone to severe misallocation as was the extremely easy credit in 2002/3. The results are obvious, you can try to rationalize some other cause (like pure psychology), but the evidence points to Fed-caused credit bubble.
Economic crises are not removable, and attempt to prevent them by attacking economic liberties destroys liberty
It is completely specious and false to defend Fed actions as anything to do with liberty. In the long run the consequences of their actions will reduce or eliminate liberty.
Capital isn't a monetary instrument, money is one good among others. And I know the difference between capital goods, the value of those capital goods under various realized economic conditions or assumptions, and legal claims against those goods on the one hand, and those values on the other.
But you can't seem to keep any of them straight. Now you think capital misallocation losses through the cycle are the consumption expenditures of financiers, a mistake so elementary only tendentious socialist rhetoric can account for it.
The present financial difficulties are not caused by wall street workers living high, they are caused by too many new houses borrowed against at fancy prices, themselves justified temporarily by low interest rates. Capital that had more urgent uses increasing e.g. the supply of basic commodities like metals and energy etc, was instead directed at creating more Arizona McMansions.
If those McMansions have really been worth $500,000 apiece and commodity prices had stayed low, there would have been no loss. But in fact those two things were mutually incompatible - at present levels of demand for shorter dated industrial commodities, the demand for such houses is half what is looked like it might be 3 years ago, their real value is half what it looked like, etc.
Your imaginary slanders of financiers over their chosen forms of consumption have precisely nothing to do with any of it. You might as well blame the present crisis on blue collar people losing too much at casinos, or LA glamouritti putting too much blow up their noses. None of which have anything to do with banking or fiduciary media or any of it, it is pure classist slander and red herring.
The freedom of economic actors to borrow as they choose, to freely contract to do so, to command capital assets when and as they are willing to run the risks involved in doing so. At bottom what is currently being attacked in the name of security against momentary financial crisis, is the permanent direction of capital allocation by free and private, competitive means. You are already hearing the ginned up demands for nationalizations, for wholesale prosecutions of financiers, for star chambers, for criminalizing financial mistakes (see FBI, countrywide etc), for bailing out debtors at the expense of the contractual rights of creditors (see mortgage proposals, and you ain't seen nothing yet), and also for just burning down wall street as a competitor with Washington, because the Dems do not intend to let others direct any of the nation's affairs. .
What does free and private capital have to do with anything when you are trying to defend the actions of the federal reserve in bailing out the consequences of the actions of private capitalists to save them from the legal consequences of their fraud by using public funds.
Bankers can do what they want with their own money. They can act within the banking laws when using money on deposit. The line gets drawn when the come to the public trough to bail them out for having imprudently exercised their economic freedoms.
There is a straight line from the latter to the former.
Eliot Spitzer was done in by an imaginary hooker? Tell me, is it philandering to have an imaginary as opposed to a real asignation. Was Eliot Spitzer single handedly sustaining the economy of the Emperor's Club paying for imaginary hookers?
There is also cause and effect between overinvestment in housing and the run up in the cost of the commodities required to build those houses. The cost of materials in the construction of a house is a small fraction of the cost of construction, about 80% being labor, licenses, taxes, architects fees, etc.
What I know is that this sentence is not constructed under the rules of grammar of the English language.
Capital produces nothing except to the extent that it is invested in productive assets, and those productive assets are what are normally referred to as capital goods. Although we all need housing, and housing has a value that can be stored, it is a consumed commodity, service or product. It is not a means of production.
Which side of the balance sheet realestate "assets" belong on has always been a problem, and it depends upon which side of the boom or bust cycle you happen to be on because of its mixed nature. Ranch land, farm land, land that is productive of mineral wealth, forrest land, etc. are clearly capital goods. A residential building on a piece of land is not so clearly a capital good. Yes, someone can rent it out and make money, but the capital good was the construction company, with equipment that could produce the housing in the first place, or the landlord and his maintenance crew that maintains it.
The housing itself, however is a consumed item, not a productive asset, like, say a power plant, a steel mill, or an factory to produce automibiles that are not GM's Fords or Chryslers.
What is the fed prime rate right now??
When every second sentence has a logical or factual problem, the overall argument that you are smarter than all the rest of us in ways we cannot even imagine, cannot be sustained. You need to be correct in detail.
Except to you and a few of your pals on this thread.
If I could take bunch of worthless, illiquid toxic waste securities to the discount window, and get a $200billion loan from the fed, which I then to repair my balance sheet so I can then lend 10 to 1 on it and further multiply the money supply
Let's start a new bank. We'll call it the "dollarbull bank of economic ignorance". Now have the Fed loan this new bank $200 billion in T Bills that DBEI will use as reserves. On day one, how much does this bank have as deposits? How much can they loan?
Walk it thru step by step, slow enough so even Andy and Travis can understand.
It can be, it needn't be, misallocation can occur without it and rational allocation can occur with it. The two are logically orthogonal. Mises pretended that anything funded by prior savings would be sound, but this is a flat error. Mises pretend that anything not so funded had to be unsound, but this is again a flat error. The accuracy of the forecast and the means of funding it are not correlates. And the future value of the use brought about depends on the first, not the second.
Grant for the sake of argument (I do not conceed it in fact, but for this one point so you can see mine) that a beneficiary of a new loan simply took someone else's use of the capital involved. Does this suffice to establish that the new use of it will involve a loss? It does not. Assume for the sake of argument (same terms) that the prior desires of the society's members, as to composition of demand and as to time preference, have been distorted by an asset transfer. Does this suffice to establish that the old desired allocations will actually prevail in the future, not the new ones? It does not.
How would it? Wouldn't the old owners have to first take it back? To put it with maximum hyperbolic concession to Mises' view, if a financier took the assets outright at gunpoint and used them differently, would that necessarily imply using them worse, economically speaking? Would the fact that the financier's views of time preference and demand composition prevailed, mean that they were irrelevant and the previous holders supposedly "natural" preferences, would still prevail, even after he lost the asset? By what magical process would that supposedly natural set of preferences reassert themselves?
That is a quibble, Mises' main error I detailed above and is different (his "book value" focus as to future capital *value*, or his seeing savings as the derivative of capital value). But it is still illuminating - Mises' is at bottom registering a moral disapproval of reallocated resources and imagining that their prior distribution is somehow "more natural" and thereby more likely to prevail in future time preferences, prices, and demand schedules. And there is simply no reason to believe that.
"Your credit card slip in the merchant's register is backed by capital in a realistic amount of time" Sorry, that is incoherent. One, what replaces it once it is "cashed" is bank debt, not a final claim to anything. And second, there is always a volume of them outstanding. They are "float". So are checks in processing, so is consumer installment debt, etc. What actually stands behind my CC debt is the credit extended to me by a bank when they issued the card, and thereby agreed to underwrite my script. It remains my script.
This is not a hypothetical matter. In the past, long before we saw fiat money, entire financial bubbles were financed by entirely similar means. E.g. chains of bills of exchange, post dated checks, warehouse receipts, unpaid shares of trade enterprises, etc. Money substitutes are endogenous. Legally restrict one sort and another will replace it.
"The credit creation by the Fed (the recent 200B) is not backed by capital because the Fed is taking debt as collateral instead."
Um, all credit is backed by debt, somebody or others. In the case of the CC, the merchant takes it because he thinks it tradable for a bank debt, and the bank pays it because the bank thinks my debt to it is quite as good as its own debt to the merchant, when the terms of the two are included in the pricing and all of it pooled and averaged etc. I do not have to have any new capital for the bank to treat an increase in its own balance sheet with the asset side running against me, as perfectly sound. It is quite sufficient that I pay my debts, or on a group basis that interest covers the defaults and loan losses etc.
"is prone to severe misallocation as was the extremely easy credit"
It was not the process of creating it that made it prone to misallocation. It was the prices prevailing at the time, and the fact that they are different from those prevailing now and expected to prevail over the life of the assets.
Men were also perfectly free to allocate it better than they did - there were plenty of unforced errors, the simple result of free men being fallible. You can't take away that risk without taking away the freedom to allocate capital as the contracting parties see fit. If you take the latter away, then we are left not with sounder capitalism, but with no capitalism at all.
"you can try to rationalize some other cause"
I don't have to, I am the one arguing that the cycle is endogenous, natural, not removable by policy changes. Yes the Fed being too loose for too long in the period 2003-2005 was a contributing factor in the present mess; they tightened too slowly, following their quarter point "don't surprise 'em" plans, and too late because they waited for lagging CPI signals instead of watching financial markets and housing specifically. Bagehot could have told them better over a hundred years ago. But these were minor policy errors in a fundamentally legitimate discretionary system, not some illegitimate or corrupt insider game etc.
Don't criminalize minor policy recommendation differences, don't promise economic security that cannot be delivered and the desire for which is incompatible with capitalism. Boom and bust is as normal as the weather, and not something to try to criminalize by calling it robbery or pickpocketing etc.
"It is completely specious and false to defend Fed actions as anything to do with liberty"
Wrong. If the argument used to attack some Fed action strikes at an essential economic liberty - here, the ability to command resources through debt issuance, to redirect capital to new uses, in ways that may change the value of goods held by other parties - then letting that pass because you don't like the Fed can indeed destroy liberty.
Suppose some government agent misuses a firearm and the result is harm to an innocent party. An ideologue then appears on the scene and says "firearms are evil, they must be abolished, no one should have any right to own a firearm, the government should take them all away", and points at the recent incident as evidence of his case. I say, "I have the right to bear arms, I should not be asked to give it up". Is my liberty at stake? Of course it is.
The fact that the immediate accused is the government not me doesn't matter - the charge being leveled isn't government specific, the demand isn't government specific, the proposed remedy does not restrict only government actions but also my own, so my liberty is assailed. The same happens if the allegation involved is that any issuance of credit beyond commodity cover, is theft. If the charge is true, it would be theft if I did it. If I let the charge pass, then I am surrendering my own right, and not just someone else's.
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