Posted on 09/16/2008 4:49:39 PM PDT by BGHater
However, the Treasury debt paper sold to third parties will end up passing through the Fed as well, when it is eventually cashed in for money (dollars). Either the Treasury debt paper will be cashed eventually in at a bank, which will deposit that paper with the Federal Reserve as reserves for more money to loan out, or else that Treasury debt paper will be returned to the Treasury Department for the original money, leaving the Treasury Department back at square one, with debt paper it can either (re)sell, or immediately monetize.
By whatever circuitous path it takes, our national debt becomes dollars. It's dollars we spend and dollars that are the reserve currency of the world's financial system. The (private) Federal Reserve has the monopoly on creating dollars, and it does so, in considerable part, in exchange for Treasury debt paper. The American tax payer pays the interest on that debt.
Furthermore, the Federal Reserve in turn uses those Treasuries as reserves in its fractional reserve banking system, creating about $10 of new private debt for each $1 of reserves. So for each dollar of debt that our government has created through issuing Treasury debt paper, some ten dollars of private debt (with typically higher interest rates) are supported as well.
For those more highly leveraged institutions (which seems to include all the major banks, investment firms, insurance companies and hedge funds in the headlines these days) even more debt (and attendant income and risk) is supported.
So, yes, the Fed certainly doesn't earn all, or even most, of the interest that the government pays on its debt. Most of that interest goes to the other investors, large and small, holding that debt paper. But eventually, all that debt paper (Treasuries) is exchanged for dollars (whether actual paper dollars or electronic bank credits), and it is the Federal Reserve that has the monopoly on doing that, by the 1913 Federal Reserve Act.
So, yes, the Federal Reserve has a lot to do with our debt. It monetizes it, and also uses it as part of the asset base for its fractional reserve banking system. Sorry.
Unfortunately, of late, that wasn't nearly large enough an asset base to satisfy the greed of our fine bankers, so they set about handing out mortgages to every Tom, Dick and Harry who could fog up a mirror, and then turning that mortgage debt paper into more fictitiously rated AAA securities which could be used as reserves for more debt.
That would be OK, accept that they did it on such a grand scale as to be able to blackmail us into backing that toxic waste with yet more U.S. Treasury debt, which will eventually, as that debt paper winds through the above circuitous paths, dramatically inflate our money supply and lower further the value of our savings, investments and income streams from such programs as Social Security.
If you owe the bank a million dollars, they own you.
If you owe the bank a trillion dollars, you own them.
AIG, Fannie and Freddie p0wn3d the U.S.
The Fed holds the stock as collateral. They can sell their collateral. This will need to happen in the near future, so America can once again own this company.
Lehman's CEO lost all $500 million or so that he had in Lehman stock, as well as his job and most of his reputation. He's not quite unscathed.
I don't know about AIG's current CEO, but Hank Greenberg, the guy who ran it for 35 years, has lost more than $3 billion. He's been hurt pretty badly by this.
However, I think what AuntB was saying is that these guys may have lost quite a bit, but losing 600m and being left with 'only' 120m is FAR better than some poor chap losing 600,000 and only being left with 12,000. All the principals past and present (ranging from S. Oneal to H. Greenberg) have had financial hits, but none of them will be wanting for money. They got hit by the broadside, but the effect on Joe Citizen is quite different. Joe Citizen will not be able to walk away with tens to hundreds of millions.
So you are both right. You are right in that the CEOs and other principals also got affected (and lost many millions, and in the case of Greenberg over a billion), but AuntB is also right in that while the individual magnitude for loss for the CEOs may be higher than that suffered by joe Citizen, the truly applicable impact on Joe Citizen will be far higher. Sure, Joe Citizen may 'only' have lost a several hundred thousand retirement nestegg while Hank lost over a billion, but Hank is still fabulously rich while Joe is left with a (real) big zero.
Anyways, it will be interesting to see how all of this unwinds.
I don't know about AIG's current CEO, but Hank Greenberg, the guy who ran it for 35 years, has lost more than $3 billion. He's been hurt pretty badly by this.
Precisely, the upper management of these companies will be hit very hard personally. However, unlike Enron or Worldcom, there is no indication that they violated any law.
Worldcom and Enron created a populist and ignorant mindset among some that any time a large corporation fails, its senior executives should go to prison. This is simply not true, there is no law against bad management; the executives at Enron and other companies are in jail because they falsified financial records to make their companies seem healthy, this is not the case with AIG or Lehman.
No matter how many times you repeat this error, it still won't be true. The Fed does not buy securities from the Treasury. Sorry.
By whatever circuitous path it takes, our national debt becomes dollars.
The Treasury borrows dollars, so of course the debt is measured in dollars.
The (private) Federal Reserve has the monopoly on creating dollars, and it does so, in considerable part, in exchange for Treasury debt paper. The American tax payer pays the interest on that debt.
The government borrows dollars and of course pays interest on those borrowings. Which has nothing to do with the Fed. Sorry.
Furthermore, the Federal Reserve in turn uses those Treasuries as reserves in its fractional reserve banking system, creating about $10 of new private debt for each $1 of reserves.
The Federal Reserve does not create private debt. The Federal Reserve does not create public debt. Sorry.
So, yes, the Fed certainly doesn't earn all, or even most, of the interest that the government pays on its debt. Most of that interest goes to the other investors, large and small, holding that debt paper.
Glad I could straighten you out on this.
But eventually, all that debt paper (Treasuries) is exchanged for dollars
Bond buyers used dollars to buy the debt in the first place. Of course, when it matures, they receive dollars. They also receive semi-annual interest payments that are dollars.
Except, Richard S. Fuld, Lehman's CEO, received $22 million in 2007 as a bonus: "As recently as March, Fuld was awarded a $22 million bonus for 2007 -- a generous pay package to be sure, but one that also reflected a year in which the bank's net profit had risen 5 percent to a record $4.2 billion."
How did a company go from recording a record profit to busted broke in a few mere months??
He is hardly scathed as he still walks aways with that $22 million and I am sure millions more since he has worked for Lehman since 1969.
... No matter how many times you claim I am in error, you are still wrong. The Fed does buy Treasuries. Sorry.The mechanics of U.S. Government debt
When the expenses of the U.S. Government exceed the revenue collected, it issues new debt to cover the deficit. This debt typically takes the form of new issues of government bonds which are sold on the open market. However, the debt can also be monetized by which the Federal Reserve creates an entry on its books to credit the US Government for an amount equal to the dollar amount of the bonds the Federal Reserve is acquiring.
Keep in mind that much of that $22 million was in options and restricted LEH stock that wouldn't vest for years. And at LEH even more than most companies there was a culture discouraging employees from selling their stock. So his pay package was worth $22 million at the time, but he's lucky if it's worth a fraction of that now.
“Keep in mind that much of that $22 million was in options and restricted LEH stock that wouldn’t vest for years.”
Do you have a reference on that or are you guessing because all reports indicate that was a cash payment.
The Fed does not buy securities directly from the Treasury.
Chairman Greenspan was eloquent in 1991 in opposing the Treasury's proposal that would authorize the Federal Reserve Banks to lend up to $25 billion to the FDIC to absorb losses sustained by the Bank Insurance Fund in resolving failed banks. He stated: "Not only would use of the Reserve Banks for funding the BIF serve no economic purpose, it could create potential problems of precedent and perception of the Federal Reserve. In particular, the proposal involves the Federal Reserve directly funding the government. The Congress has always severely limited and, more recently, has forbidden the direct placement of Treasury debt with the Federal Reserve, apparently out of concern that such a practice could compromise the independent conduct of monetary policy and would allow the Treasury to escape the discipline of selling its debt directly to the market. . . . In addition, if implementation of the proposal created a precedent for further loans to the BIF or to other entities, the liquidity of the Federal Reserve's portfolio could be reduced sufficiently to create concerns about the ability of the Federal Reserve to control the supply of reserves and, thereby, to achieve its monetary policy objectives" (FRB June 1991. pp. 435-36).
The Fed does buy Treasuries.
You bet, from Primary Dealers.
How do ya git a “wet wit?” Is it BOOZE???
The Wikipedia entry you cite could be interpreted to show that the debt is purchased directly from the Treasury. That's why Wikipedia is a poor source.
I can't believe you are still defending this system. Everything the worst doomsters is coming true. I hope this ends with central bankers hanging from lamp posts, like Mussolini.
I'm defending the system? I thought I was correcting someone's faulty understanding.
I hope this ends with central bankers hanging from lamp posts
Or energy traders.
No comment on #211? LOL!
Lehman's Fuld gets $22 mln in fiscal '07
As far as the company going from a profit to bankruptcy within a year, broker-dealers are completely different than ordinary companies. Lehman's operating units were likely still profitable (which is why Barclays is buying some of them), but because the company was so highly leveraged even a small fall in the value of its assets was enough to drive, combined with uncertainty that make it very hard for it to get needed loans, was enough to drive it into bankruptcy.
Thanks.
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