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 ...
Here you are an ignoramous.
I deny there is anything fundamentally wrong with credit issuance. Why would I see anything wrong with changing the number of dollars in existence?
No one said there is anything fundamentally wrong with credit issuance. The question is to what end? Who is borrowing, where is the money going, and who collects the interest.
What you forget is that when the FED creates the money out of thin air and loans it to a bank at below commercial rates (which is the point of the exercise from the banks point of view) who then lends it out at commercial rates, the Federal reserve transferred calls on goods and services to the borrower from the general public, and the financial returns on those loans go to the bank that made the loan and to some extent the federal reserve, but does not return to the general public whose pockets were picked to provide the invested goods and services in the first place.
Why do you think you have some prior right for the number of dollars in existence to remain unchanged for all time?
Now you are putting unuttered words in everyone's mouths.
Where would you acquire such a right?
I dunno, maybe like in the fundamental rights of property guaranteed by the constitution.
Dollars are the debts of the Fed - why should they be required to remain constant?
They are? Who does the FED owe the debt to? Does it may interest on this debt? I thought dollars were a medium of exhange and a store of value in return for goods and services provided.
Yes, Mises view is incorrectly all or nothing. Your view is not although you sometimes try to pretend that it is by saying there's nothing wrong with credit per se (which is not my argument). But Mises is correct about the consequences of credit booms, either there's a credit bust and recession or debt gets monetized and the currency is destroyed. That's one of the few all-or-nothing statements that I can agree with on either side of this argument and we are currently in a credit bust which the Fed is fighting by trying to extend the credit boom even more excessively.
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.
You keep proclaiming that your liberty to create debt is somehow tied to the Fed's. They are two different things, you are granted credit based on the presumption that your income stream can repay it. The Fed created its credit to trade it for other debt instruments. If I had an hand-written IOU from my neighbor and I came to you complaining about lack of liquidity, would you take that IOU as collateral and loan me T-Bills or FRNs? It would be ludicrous and probably illegal.
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.
Your argument seems to be extremely theoretical. Were there misallocations in real estate due to low interest rates in 2002/3? You seem to admit as much upthread. Were those because of price errors and essentially not the fault of the Fed? Observing the ongoing destruction of the currency which is a tiny taste of what we are in for, I can't help but think it is criminal.
Oh on time scales of 5 years or so economists have pretty well solved this problem. Short term changes due to changes in the velocity of money becuase of preference of holding versus spending cash is problematic, sure, but there are no surprises here.
No, I can't.
But when Congress borrows, they ARE pledging your assets, and unlike me, they can collect.
Oh my God. I am arguing with a Jimmy Carter supporter. Good grief.
We have nothing but beer here.
Beer itself.
Oh. Inflation is good for me. {smacks self on forehead). Eureka. Now I see. Stupid stupid stupid me. My most humble apologies o wise man. Thank you for enlightenting me.
Say if inflation is good is too much inflation too good. What should we shoot for. 10% per year. How about 30%. Maybe when we cart US$ around like CSA dollars in a wheelbarrow. Is that enough inflation. Is it too high if it looses 1/2 its value before I can get to the backery and the gasoline pump.
Suppose someone decides he cannot get rid of dollars fast enough and decides to stop taking them and wants euros instead. Is that economic freedom too? Or should we go out and shoot him? How about evil folks who drive down credit worthiness of banks (haha) by hoarding gold, and making dollars worthless by refusing to provide anything in exchange for them. Do we shoot them for interfering with the economic freedom of the banks to make the dollar worthless by expanding the volume of loans that no one can repay.
I just want to know where your economic freedom ends and the end of your nose that someone is going to punch you on, begins.
You need to invite Professor C to all of these threads. He is slowly but surely destroying your position by trying to defend it. I agree with him that pure Austrian economics does not explain booms and busts. Those are indeed creatures of human psychology. But he doesn't realize that in admitting excessive credit is a problem, he undermines his and your entire case for monetarism. The Fed is hopelessly reactive (inflation is a very lagging indicator), and because of that it can't stop the credit booms. We are now well on our way to either deep recession or high inflation. There are no other choices, the securities that are now "collateral" will have to be monetized, or rolled endlessly until the Fed can reflate the credit bubble (with the inevitable consequence of making what we are going through now seem like a picnic)
The little failure here is that this claim puts words in the mouths of the Austrian school, who understand the cycle nature of human activity including investing as well as the next guy. Their argument is that when you get to the end of the cycle where there are diminishing opportunities for sound investment, extending the boom by expanding credit makes the inevitable bust that much deeper.
But Professor C cannot even argue the strawman he stuffed with his own ego, much less deal with the argument of the Austrian school as it actually exists.
The reserve ratio has plummeted from about 20% in 1970 to about 6% today, it is the definition of credit bubble. The Fed is accepting junk debt for collateral and will soon monetize it, that's inflation. The Fed is currently lowering rates back down to ludicrously low levels which extends the credit bubble. Inflation is a lagging indicator and commodities are soaring. So between all those things we have inflation, a credit bubble which inevitably lead to either recession (credit contraction) or inflation, and production input (commodity) price inflation due to excessive credit.
IOW, the Fed has failed.
What's amazing to me is that by simply looking around at the real world, that's exactly what is happening. Where are the opportunities for sound long term investment? A 30 year bond at 5%? Equity in a company whose production costs are skyrocketing? No, I am not stupid, my money is in gold mining companies, some short term speculative stuff and cash. The funny thing is the defenders of monetarism are doing the exact same speculation while pretending they are not, by buying funds that are speculating for them.
You - "Here you are an ignoramous."
Abuse, no argument. My statement stands. It is possible you are ignorant enough about financial matters that you may not know how to position yourself so that inflation benefits you rather than being harmful, or so that you are indifferent to it for most of its likely future amounts. If so you simply need to pay a modest amount to a professional who knows such things as a matter of course. Tell him your expectations and he can prescribe the positioning to use. As with all things in finance, anything you are right about will get you paid, and any forecast error can cost you value, and you can fully control the scale or amounts, call the direction only or also the scale, etc. Perfectly garden variety, easy to do.
If you choose to adopt a position that is certain to lose value from mild inflation, then you are responsible for that positioning and the results. Since you can change it to any forecast, you pocket it not picked in the matter, one way or the other. You simply make your forecast and benefit if you are right.
"No one said there is anything fundamentally wrong with credit issuance."
Of course they have. If you don't wish to defend that proposition, fine, but plenty have, both on this thread and before it elsewhere.
"to what end? Who is borrowing, where is the money going"
Lots of independent economic actors decide such things, they do not require your approval, and they aren't robbing you when they don't show up at your door asking your permission before moving a muscle.
"loans it to a bank at below commercial rates"
Sorry, wrong answer, the Fed loans at commercial rates, not below them. In fact when the discount window is used, there is a "penalty rate" about half a point above commercial terms. In open market operations, as the very phrase "open market" implies, they are precisely on commercial terms. In auctions, obviously they are on commercial terms, that is sort of automatic in an auction format.
You continue to completely misunderstand the nature of the Fed's support for the banking system. Banks are profitable in their own right, they do not require subsidized intervention to make them so. They are profitable because their own credit is higher than that of those they extend credit to. Yes, the scale and facilities to deal directly with the Fed (and with other major money center banks) are part and parcel of that higher credit, and in that sense they benefit from the whole set up, and largely. (You are free to join them in that by owning their stock, of course). But they do not require ongoing interest subsidy concessions, remotely.
"the Federal reserve transferred calls on goods and services to the borrower from the general public"
Incorrect. "Calls on goods and services" can be made by wealth in any form, and are not restricted to money specifically, as the debt of the Federal Reserve. The assets the Fed buys are fully capable of acting as such "calls on goods and services". The total size of all the "calls on goods and services" running in favor of the banks, net, is unchanged by Fed transactions - that is the capital of the banks.
Transactions with the Fed, and simple loan issuance without dealing with the Fed, can change - increase or decrease - the size of the balance sheets of the banks, on both sides. Meaning they can have more of their own debts outstanding at one time than at another, and can own more loans and securities in direct proportion.
The only reason the banks "need" the Fed to increase reservable dollars in this is because of legal restrictions on their balance sheets, set by the Fed itself. Left entirely free of Fed influence, the banks could loan more at will, not less. The Fed restricts the size of their balance sheets as a whole by requiring deposits of dollars at the Fed, from each member bank, it is definite ratio to their total balance sheet. It is not making it possible for them to lend more when it creates new dollars, it is just loosening its legal restriction on their native and natural ability to expand their balance sheets as they like. A bank's native ability to expand its balance sheet is just any entity's freedom to decide how deep in debt to go, if others (not the Fed, the public) will willingly lend to it.
"does not return to the general public whose pockets were picked"
Nobody's pockets were picked, you haven't yet been able to point to a single way in which they would be.
Look, when money was convertible into gold, it was possible to run a "corner" in gold in a way that would increase its real value compared to bank debts, without limit. Banks "caught out" by such a corner could be forced to fail in their promise to convert all of their deposits into gold, if holders of gold were unwilling to part with it at any price. But there is no a priori right of people holding dollars to run a "dollar corner" to destroy the banks. All the Fed is doing when it issues more dollars because banks want to hold more dollars and fewer other securities, is breaking any such "corner", and removing any potential premium dollars might command during one.
This isn't picking anybody's pocket. It might be described as preventing a consortium from robbing the banks, but really it is free action not robbery either way. Banks no longer promise to convert their deposits into gold. Now they just promise you give you Federal Reserve Notes (FRNs) in physical dollar form, if you want to hold those instead of their bank deposits. The Fed can readily accomodate any demand in that direction that can possibly arise, and that suffices to make bank desposits "as good as" FRNs. It does not suffice to make either one "as good as" gold or anything else, but then they haven't promised you anything in the matter, either.
Part of what is happening here is that rhetoric invented for a previous era in which banks did make such promises is being translated into a fiat money era in which there aren't any such promises. It was possible to allege something dishonest or at least, reckless, in banks running up balance sheets so high they could be caught out in a gold "corner".
But there isn't anything remotely dishonest in the exchange value of FRNs or bank deposits changing. They simply never promised you that they wouldn't. If you hold them anyway, it is because they are useful to you without any such promise. You don't have to do so. You don't have any prior reason to think they won't change in value; they will change in value; everyone involved knows it completely. So where is there any pocket-picking?
"the fundamental rights of property"
Wrong, you can and do have rights to specific *assets*, but not to anything about the *value* of those assets remaining unchanged. The value of everything changes all the time. A demand that it never should, it a demand that all prices be fixed, and is incompatible with any form of economic freedom. You can own a bank deposit or an FRN. But you have no right to the amount of corn or whatever it will buy tomorrow being the same as today. You aren't being robbed if it changes, anymore than you are being robbed if the price of your house goes down compared to some silly price offered for it last year in different market conditions.
"They are?"
Yes. OMG, we still have to establish such an elementary point?
"Who does the FED owe the debt to?"
Whoever holds the FRN or the bank deposit denominated in FRNs. That is the whole point of the whole bleeding banking system. If you hold a $20 bill in your hand, it means the Fed owes you $20. If you have a bank deposit for $20 at Citicorp instead, Citi has agreed both with you and with the Fed to let you exchange it one for one for a physical FRN, on demand. In that case, Citicorp owes you a Federal Reserve Note with a "20" stamped on it.
"Does it may (sic) interest on this debt?"
The Fed earns "seinorage" precisely by having FRNs outstanding that do not pay interest, while itself holding mostly treasury securities that do pay interest. Along with some gold and other assets, to be sure. Every year it transfers its net interest earnings to the US treasury, as the beneficial owner of the Fed.
"I thought dollars were a medium of exhange and a store of value"
You say that as though they were mutually exclusive (lol). US dollars are the debts of the Federal Reserve. They are accepted as money by lots of people (including, as a matter of law, the US treasury in payment of income taxes, a minor point), as are checkable deposits denominated in US dollars and fully redeemable in physical FRNs on demand - and that makes both classes of item into money, in practice, in the US (and parts of the rest of the world, come to that). As for their role as a store of value, it is minor and secondary - most people use real assets or portfolio investment for that purpose, not bank deposits, let alone physical notes.
When bank deposits are used for it, typically enough interest is asked to cover inflation, though whether it will precisely or not is an empirical matter and changes over time. On the whole, since the Fed has been open in 1913, interest earning dollar deposits have kept their value in real term, but earned nothing to speak of in real terms. Financially speaking, the primary uses of "cash reserves" is for transactions balances on the one hand, and momentary "parking" between less liquid but higher paying assets, on the other.
US dollars (money generally) emphatically are not "wealth", the latter being much broader. The effects of changes in the price level of the purchasing power of any given person or company's whole *wealth*, are indeterminate and depend on their financial positioning. That is why I say there is no sense in which inflation picks your pocket or anybody else's. You might gain by it or you might lose; it depends on how you chose to invest, what assets you choose to hold (or to borrow in, a debt in dollars being in effect a "short" dollar position, etc).
I would think the drops mean that housing is becoming more available AND more affordable.
How can that be a crisis?
There are long bonds of sound financial companies available today for rates of 8% to 9%. I don't mean fly by nights, I mean Goldman and Bear Stearns. Preferreds yielding 7-8% are common, you can take your pick of industries. Muni debt yields 5% tax free. GNMA mortgages 5.5% with a federal guarantee, if you are highly risk averse.
These are the sorts of assets usually held at fairly high leverage by hedge funds and leveraged bond funds. Those can't sell their commercial paper right now, so they have been forced to liquidate existing positions and can't take on new ones. If you worry about the interest rate risk in such things, treasuries yielding only 2-4% can be sold in the futures market to lay off that component of the risk, isolating the credit risk involved.
Those are sound for the relatively risk averse. If you are willing to run higher risks, the entire financial sector is on sale right now, as is the construction industy. Debts of shakier companies are also at high levels - 12% for the likes of Ford, GM, and Sprint for example. There are also takeover arbitrage positions available that promise returns as high as 40% in a period of a year or less, due to deal risk - others with lower deal risk likely to return 15% or so are reasonably common.
Pretending there are no reasonable asset classes at these prices simply won't fly. Buffet has been a net buyer of stock to the tune of tens of billions over the last year, to take another signal. You can pick a comfortable risk level.
Can you just buy the highest flying stocks or the most overpriced real estate, as people tried to do in 1999 or 2005? No. But that never works, contrarian investing does. No change there.
I suppose they are now in the process of collecting his bonuses for the past 5 years when all of this nonsense was going on, too.
And in case there is any doubt, I don't confuse the run of the mill employee or the guy who has some shares of this in his porfolio with the officers of the company that run all of this stuff. But you seem to.
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