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 ...
After you come up with the way it will supposedly pick my pocket, I will explain how to get out of the way of that alleged mechanism, and thereby demonstrate that vulnerability to inflation is voluntary.
Which position of mine is he destroying? In which post(s) is he doing so?
In the long run, there is no way for issuance of new credit to be the great deal you pretend, and bank debts such a lousy investment, without it resulting in bank stocks outperforming bank debts. You can be a banker in the economically relevant sense before tomorrow's market close. If you don't choose to be, it is because you are well aware your slanders of modern finance are lies.
Because the California housing market is the most immense house of cards imaginable. It has not been affordable for 2 decades. Price to income ratios are astronomical. Each point down increases the total accumulated negative equity, but actually brings housing very littel closer to being affordable. There is a long long long way to go before, on average, the average house in California can be purchased on the average income. For instance a house in Scripts Ranch that a few years ago would go in the mid $200,000's had recently peaked close to $700,000. It needs to get back to somehere in the $2-300,000 range to be "affordable" again. That is a black black black hole.
LOL!. Toddsterpatriot does not take positions. He just types “LOL!” and calls you an idiot.
Now you sound like you believe the Austrian argument.
The economically relevant sense is where I am a partner in a Wall Street firm and get enormous bonuses while I tank my firms equity holdings. I cannot believe you are so dense as to not know what everyone is talking about.
In your case, I’m right!
Yes, we all know that there are hedging strategies against this. But hedging strategies cannot work on average. So the folks who spend their time worrying about the best heding strategies like inflation because they benefit at the expense of others.
BTW inflation is personally very good for me because the value of my house has skyrocketed literally. But that doesn't mean I think that I came by the gain in a morally sound fashion. I came by it through hard work sitting on my floor drinking beer making sure no one came to cart it off.
“garbage backed securities”, I like that
Of course we would have to get rid of the 16th amendment first and you know they aint gonna do that power.
Oh well.
By the time they put up that border wall, it may be as much to keep us in as to keep others out.
Your position that inflation necessarily picks people's pockets is decidedly incoherent, after that, but I will take it at its most charitable.
The position of being short dollar debts while being long real assets like real estate is not exactly exceptional in the US. You are not the only one who has fully insulated themselves against the effects of inflation by such positioning.
In case you haven't notice, the entities taking the other side of that trade are precisely the banks you are pretending are picking everyone's pockets. They are long the dollar denominated mortgage debt that you are short. Moreover, they are still exposed to downswings in real estate prices, because of the implicit "put" involved in accepting the houses as collateral. More, they have also written "call" options on the long debt, effectively, because mortgage debtors are free to refinance when rates fall.
Some pickpockets. They've given you the sweetheart debt deal that has actually allowed you to avoid the effects of inflation. And now, precisely when some of those debts have gone sour, you turn around and pretend to denounce them for robbing *you*, when they are the ones who aren't being paid back by their contracting counterparties.
If you were deliberately playing a game of "heads I win, tails I welsh and denounce you to socialist goons", it wouldn't differ from your actual behavior in the matter in any essential.
Can hedging activities work on average? Of course they can. The overall effect of inflation can be determined pretty precisely. All the debt shorts are matched by someone else's longs, except for the position in the narrow money supply itself, defined as physical FRNs and non-interest bearing checking account deposits. All the other can simply earn interest as inflation changes. This is a total position of a couple trillion, and the total gain on it is two orders of magnitude less, or between $50 and 100 billion per year at typical recent rates.
This is literally a rounding error in GDP. More, it doesn't cover the running costs of the banking and payments system it supports. If it were all the banking system took in in revenue, that system couldn't afford to open all of the envelopes and process all the checks etc. Banks on the whole have actual expenses of about 40% of their gross revenue - the most efficient maybe 30-35% - and earn (net) around 1 to 1.25% on their total assets.
It is, moreover, a typical and voluntary seinorage, and the checkable deposits portion of it is voluntary - the sums involved could be moved to money markets or savings if those holding them wanted etc. Making the purely involuntary portion of inflation "losses" equal to the Fed's seinorage on physical FRNs. But then the Fed pays its net earnings from such things to the treasury every year, so it is six or one, half dozen of another, whether that is earned by FRN seinorage or collected in extra income taxes and the like.
The unavoidable costs of inflation are tiny, not worth worrying about. What actually happens is some position themselves better than others, and that can set up significant net transfers from benefitting groups to harmed ones - but those are results of their capital market trading with each other, same as there are winners and losers in the stock market, etc.
The Fed is instead slow and uses a CPI rule because the political forces in favor of boom financing are stronger than those in favor of long run price stability, as a policy objective for monetary policy. This results in booms a bit longer than we need, busts a bit deeper sometimes, and especially in a rate of inflation across full cycles that is 2% or so higher than it needs to be.
These issues are not instrinsic to a fiat money system with central banking, as better performances by other institutions have shown (e.g. the Bundesbank, Switzerland). But it is par for the course under present political conditions in the anglo saxon countries. It has also arguably kept the secular level of unemployment somewhat lower than it has averaged in tighter systems, with some real gains from that offsetting (somewhat) the capital market misallocation losses involved.
But all of the above is policy optima seeking, not liberty or justice principle about the right of institutions to issue new credit, or the expediency of central banking. The present monetary system is not perfect and it could be run better, but it isn't a "racket", as the populist luddites are pretending when they throw around their class warfare rhetoric, their "picking pockets" and their counterfeiting claims, and the like.
Too much is being asked of monetary policy by all concerned. Instead of demanding even more from it, we should be demanding decidedly less. More of the government's countercyclical policy should be conducted by tax policy changes and means testing of benefit payment systems, and a lot less by monetary policy intervention. Monetary policy should allow continued new credit issuance, but should moderate it sooner in booms (watching financial markets, commodity prices, and the balance of trade or the the savings rate), and should target full cycle inflation rates a percent or two lower than we've had historically, by doing so.
The reason to do that is not that inflation picks anyone's pocket, but that it interfers with rational intertemporal planning, and makes it harder to accurately forecast long run interest rates levels. That results in price swings to long dated assets that encourage capital misallocations through the cycle etc. The goal is not to abolish the cycle or abolish some supreme injustice in bare values changing - neither is achievable or worth aiming for - but simply to make private planning easier, by limiting (modestly) the amplitude of price swings.
In the busts, meanwhile, the system emphatically needs the flexibility to increase the money supply when private debts are rapidly contracting. The last time to get violently vigilant about inflation is when commercial paper is being run off at trillion dollar annual rates and major hundred billion dollar institutions are facing bankruptcy. That is simply stupid, the same sort of stupid as forcing the money supply to contract 30% in the early 1930s, trying to obey an idiotic gold rule.
Fiat money's one real benefit is its ability to replace deflationary absolute smashes with moderate real repricings, instead. That isn't something we should be trying to abolish, and crying over the split milk of the last cycle's slowness to tighten, is not helpful when you are already in the "smash" phase.
If you want to help the present system or improve it, calling it illegimate whenever there is a downswing isn't the way to do it. Calling for maximum tightness when everyone is deleveraging already, isn't the way to do it. You want to advocate greater tightness for the sake of price stability, fine, I'll support such calls - during a boom. We aren't in one.
I really resent the fact that folks caged in the New York condo's think that I resent them because they think that I think that they are somehow my social betters. I could not care a fig about them and what they do until they come to DC asking for bailouts, paper swaps or whatever the hell you want to call it from the Federal Reserve. Moral Hazard is a sound and sobering principle, and if they fall out of their tree and hurt their heads I am going to care little more than when they thought they wanted to go climb it in the first place.
But to create rampant inflation to bail out what they did to themselves is immoral and it is picking the pockets of folks who did nothing to create it in the first place.
I don't think you know them at all. Anyone who wants to check out how well you are representing the Austrian theory of the business cycle can go here. The Austrian Theory of the Trade Cycle
Despite what you claim, the Austrians do not claim to be able to abolish the business cycle. They merely claim that inflationary policies worsen the malinvestment that does occur as well as picking the pockets of innocents.
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