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 ...
Look at the max length stock price charts... it’s like the price of both literally fell off a cliff. In one year they lost 15 years’ worth of share price.
Why?
Paper profits are just that - paper.
The economy - the real one - will be much healthier when those houses are down to $200K again.
Boy do you not understand how things have been working in California. People have been taking their paper profits to invest in other property, cascading debt. Furthermore, lots of folks take out equity and spend it to live on. So it is not paper profits that are dwindling, but real debt secured by real estate of diminishing value that is growing by the mountains.
And lest you spurn paper, it was all done with paper money.
Make up your mind. Which is it?
In the middle ages, usury was denounced as theft, and moneylenders are parasites and bloodsuckers. The illusion involved was that the real value of future wealth used to repay a loan, is exactly the same as the value originally lent, when and only when the two physical quantities were numerically identical. This amounted to the illusion that the *value* of the two *must* be the same, if they are the same commodity, and the only difference between them is *time*.
The belief that the value of a commodity must be the same if the only difference is time, is simultaneously the denial of the existence of time-preference, and at belief that value cannot change. It was peculiarly common with money, as opposed to all other goods, undoubtedly because something in the human mind resists the proposition that the yardstick being used to make a measurement of other things, is itself subject to change.
The fallacy involved is exposed by the fairness of the rule, you cut and I choose. A man who maintains that usury is unjust believes that loans should be made without interest, not as a matter of accomodation or gift on the lender's part, but as a matter of strict justice. He claims to believe that anyone who asks for more than this is committing a form of robbery.
But he is not himself willing to stand in the lender's position, on his own demanded terms. He won't lend me half the value he will ever produce at zero interest, today, for example. He therefore does not honestly believe the value of the two things he is demanded by treated equally, are in fact equal. Instead he is using other people's possible confusion in the matter, to "talk down" the other side of a trade, that he intends to take himself, exclusively on one side.
In the early 19th century, right after usury was legalized by the last traditional institutions opposed to it, socialists developed the exploitation theory of value, which extended anti-interest reasoning to the income from capital, aka ordinary profit. Previous defenses of interest had by then pointed out the effective equivalence between interest and profit. The socialists exploited this equivalence, and the lack of a fully developed theory of interest, to attack all profit in the terms once reserve to denunciations of usury.
They claimed that the only fair price for labor was one that made regular profits zero, and that any non-zero profit arose solely from exploitation. They sought to equalize two values - the total labor input to some good, all previous raw materials being viewed as "embodied labor", and the value of the eventual finished good at sale. Therefore, they claimed, profit is theft.
Again they were effectively ignoring the time factor, and in this case also a coordination factor or dedication of various assemblies of goods to specific combined uses. Bohm Bawerk pointed this out, and thus reduced the question of the truth of the exploitation theory to the question of the justness of interest.
Before him, however, Proudhon had generalized from proft to include rent, and thereby all income from property. His principle, that property is theft, stated where the view ends, in all of its forms.
The same principle of you cut I choose demolishes these claims. The socialist is not willing to have the laborers lend the full value of their labor to the employers for the entire duration of the productive process, and to only be paid the future value of sold final goods. The time value argument showed what is really happening, as well. Basically, a correct theory of interest refutes all these previous slanders against property income.
The argument against property as such having failed, socialists next took refugue in the swamps of monetary theory. Inflationists pretended that only restriction on the production of money supported the "restrictionist" interests of cartelized capitalists. It was to answer this argument that Mises wrote Money and Credit in the first place. He was pursuing an evasion of his teacher, Bohm Bawerk's, arguments.
In the course of doing so, however, he was driven to denouncing modern forms of banking as supposedly causing the trade cycle. He also unfortunately fell for the argument that just about anything is justified by the need to avoid that cycle, which he denounced in terms fit for Weimar's war aftermath and occupation driven inflation, or the great depression. This is in marked contrast to Hayek, who correctly identified the principle that economic liberty should not be sacrificed for a merely alleged economic security, which is actually incompatible with freedom.
This has since led to the near obscenity that pretended followers of von Mises denounce capitalism as a banker's ramp. They hold, just like their medieval and modern socialist predecessors, that banking is theft. The medievals taught that banking it theft because it involved interest, the socialists because it involved property and profit, and the Pauleans because it involves credit. Their position, at bottom, is that *credit is theft*. They are the heirs to Proudhon.
And the practical import of all these positions is precisely the same. They all justify unrestrained attacks on financial capital and justify any measures taking against it, both personal criminal action against specific financiers, and taxations or expropriations directed at the profits of financial capital. At bottom the exact same class warfare rhetoric is used by all of them. Even the basic debating tactic is the same - any weakness in economic theory available at the time, is blown up into an indictment of financial capitalism as a whole, which is denounced as an oppressive racket, justifying any desired response.
Against all of these claims, the same argument must be deployed and insisted upon, by all defenders of economic liberty and capitalism. Interest is not theft. Profit is not theft. Credit is not theft. The profits of capital are entirely legitimate. The profits of finance are entirely legitimate.
Capitalists and financiers are fine upstanding men performing vital services to the entire society, and largely responsible for its efficiency organization. Their social and economic positions rest on the fair rewards of the risks they take and the degree of their insights. No pretended perfection on their part is required to justify their incomes or their position. Their wealth does not exist at the expense of others. Others do not have any prior right to their wealth or their profits, or for financiers not to earn them in the first place.
And anyone alleging otherwise should be asked to stand in their place on the terms they advocate as supposedly fair. If you cut, then I choose which side of the cut you shall stand on, and which side of it I shall take. When they are unwilling to do so, they stand exposed as consciously unjust toward those they are denouncing. When a man who will not expose himself to the dangers of owning Citicorp stock, denounces bankers as thieves, that man is an utter fraud.
Exactly like Proudhon or Marx. Just exactly the same.
I point this out because you pretended that the banks are free to do whatever they want and you won't care, until the government steps in and helps them do something. Supposedly on libertarian anti-government principle, I suppose. The fact is, everything you denounce the Fed for supposedly helping the banks do, they could do even more if the Fed did not exist.
The incoherence is in your own position. You say on the one hand you dislike the banks inflating, and on the other hand that they can do whatever they please as long as the government stays out of it. Um, unless the government gets smack into it and in a big way, they can inflate.
Are you sure you are not a Keynesian?
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.
We are in the deleveraging part of the boom that started, more or less in 1913 and WWI, peaked in 1938, started up in earnest in the 70's, paused briefly under Volker and became insane under Greenspan. Your assertion in previous posts is partly true, the Fed chairmen, including Bernanke, not including the ignorant windbag Greenspan, are good men trying to do the best job they can with the tools and rules they are given. The problem is that their job is based on a contradiction of Mises correct theory that credit booms must end in recession or destruction of the currency, no exceptions.
There were wars and other events outside of their control, but they applied the same doomed policy response every time: credit expansion. The early peak was 1938 at 2.8X GDP. The cure for that credit bubble was 1939 depression, the extreme sacrifice of WWII, and the postwar boom. I strongly believe in economic growth to pay down debt and that some debt can result in sustainable economic growth. But that has clearly not been the case in the creation of 2 million houses that nobody lives in.
Greenspan's problem was he applied credit expansion in spades to every potential economic problem, the 1987 crash (granted he was new on the job then), the 1988-1990 regional housing meltdown and S&L crisis fallout, the Asian crisis, the LTCM crisis, the tech and networking bubble popping, y2k, 9/11, and the general slump in equities into 2002. Granted he did tighten in between some of those events, but for the most part he responded to the markets, not to the economic indicators that he claimed to respond to. Greenspan is the person most responsible for the current credit bubble: $47T against a GDP of $14T.
That ratio is staggering, it means that 15% of GDP goes to debt payments, it means that even strong growth in GDP for decades would not bring it to sustainable levels. The only rational choice is to allow debt to evaporate through defaults and let the losers take their lumps. But even a tiny defaulting of a trillion or so (I don't know the numbers, but the banks are writing down in the 100's of billions) has thrown the markets and Fed into a panic. That is a trivial portion of the 47T.
The next step for the Fed is to monetize the "collateral". They have accepted these junk securities for 28 days and will keep rolling and extending the credit. Eventually they will stop demanding repayment of the T-Bills. After that they will run out of T-Bills to give away and will give away FRNs instead. That is the inevitable result as Mises has stated. The only other choice is recession, a severe one in our case due to the magnitude of the problem. The policy being advocated by you and Toddster, growing the credit bubble, does not avoid that choice. It postpones the decision, but it makes the resulting depression worse. It also makes it more likely that the solution will be not be depression, but destruction of the currency.
In reality what will probably happen is the currency will be destroyed and replaced with a new one to great cheers by you and your colleagues.
It already did. The banks turning in their debt as "collateral" (soon to be monetized) must do so because they leveraged their actual capital 10 or 20 to 1 and are getting margin calls. The Fed is simply approving the leverage after the fact instead of before. So it is a fact that the Fed's credit dollar is allowing the existence $10 or $20 in bank credit.
You are free to hold all the commodity positions you like, if you want to hedge against changes in the value of dollars. Nothing stopping you, the more nearly right you are, the better for you. Go nuts.
I know, supreme master. Forget my lying eyes and listen to the great master. Some of us, I hate to say it, have very advanced degrees earned by proving that we could read, think, calculate, comprehend, criticize and theorize.
But believe in your own magnificence if you will.
For my part, all you have done is convince me that I want to see 30% interest rates, now, today, and if it shakes smary folks like you and your overlords and paymasters out of your trees, to be shot at by the ground squirrels who will be out of work looking for food, well, you damn well deserve it.
But just stop going around acting like you are so much smarter than the rest of us. I don't care how much your lords and masters have been able to amass. You aren't.
Why didn't I think of that. Why oh why oh why. That is brilliant. Baghdad Todd. Love it.
Feel free to use that...it fits
Tell us all something else we didn’t know, oh supreme master of the universe.
The Fed is allowing financial institutions to post those "securities" as "collateral" so they can meet margin calls using the T-Bills borrowed from the Fed. Otherwise there's no point in doing it.
I hope it is not THAT bad, but I agree with your basic point. Rates will have to rise.
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