Irrational Exuberance again...?

73Zeppelin

I don't have time at the moment to respond to your entire post, but the problem now is that interest rates are near zero, so the Fed at the moment doesn't have an effective monetary policy to help the economy. Government intervention is therefore impotent. Furthermore, assets are losing value rapidly (homes, stocks, etc...) which can lead to a deflationary spiral. Savings under deflation decreases consumption and, under an economy experiencing deflation, just exacerbates the problem - there is nobody consuming the devalued goods. With interest rates near zero and nobody consuming, monetary policy is ineffective, inventories build, costs go up (i.e. storage) businesses lose profitability, wages fall, unemployment rises and the economy fails. With no effective monetary policy, deflation can lead to depressions (like that in 1929) and a decade or more of economic growth can be lost. EDIT: I believe one of the reasons that monetary policy is ineffective is because inflation and deflation are not properly understood. I believe they are purely monetary phenomena arising from duplication of payments and have nothing to do with the price level/index of goods.

modified on Monday, March 2, 2009 11:27 AM

Lost User

John I understood every word you said. Yet, as you say, further expansion of credit is some economists answer to out present troubles. If only people could understand the concept of a personal financial statement they would not have got themselves in this position in the first place. You can't spend more than you have available to. And a mortgage, who in their right minds lends mortgage out of 125% of house value at a rate of 5x annual incomes. It was crazy. Although I'm not quite your age (I'm getting ever nearer!) but my assets dwarf my liabilities (no I am not bragging). And that statement is almost a rarity in this day and age.

Oakman wrote:

Don't you want to know how big the bill is?

Of course. But knowing how much is not dissimilar to knowing how many grains of sand on my local beach. They are just numbers, big numbers, but not within my influence to limit their effect if you grasp my meaning.

Oakman · modified on Monday, March 2, 2009 11:27 AM

73Zeppelin wrote:

so the Fed at the moment doesn't have an effective monetary policy to help the economy

Something I found out recently is exactly how the Fed helps the economy: Uncle Ben Bernanke goes out and buys a few million dollars worth of Treasury Bonds from 73Zep Securities, inc. He writes them a check for the bonds from the Fed Reserve funds on deposit with Oakman Savings & Loans, Ltd. So Zep debits bonds-on-hand and credits accounts receivable. Then when Zep cashes his check, Oakman gives him real money (Zep debits accounts receivable and credits cash-on-hand) and then Oak debits cash-on-hand and credits accounts receivable and passes the check back to Ben. Who give the order to credit Oakman's account with the amount of the check (Oak debits accounts receivable and credits cash on hand.) But here's the fun part: Ben has credited his bonds-on-hand account with all the Treasury notes he got from Zep. But he never, ever, debits anything - nothing, zip, nada, ze-bloody-ro. Out of thin air he has created money. It's electronic mother-messing alchemy! But the bills always come due. Don't they?

Jon Smith & Wesson: The original point and click interface Algoraphobia: An exaggerated fear of the outside world rooted in the belief that one might spontaneously combust due to global warming.

73Zeppelin

All government money is created this way. Confidence in a country's monetary system is, as I said, via sovereign credit ratings. So if a country gets its sovereign debt rating cut, disaster is not far behind. This is what I mean when I say I'd like to see money backed by production. The other ways the Fed invervenes is through open market operations and repos.

Oakman

73Zeppelin wrote:

The other ways the Fed invervenes is through open market operations

That was an open market operation I described, I believe. Remember Ben got the T-notes from you, not from the Treasury.

73Zeppelin wrote:

All government money is created this way

Only since 1971. This seems like a good point to point out that the Federal Reserve Bank is a private bank with public responsibilities. When it creates money, it is because Ben thinks it's a good idea, not because the government ordered him to do so.

Jon Smith & Wesson: The original point and click interface Algoraphobia: An exaggerated fear of the outside world rooted in the belief that one might spontaneously combust due to global warming.

Lost User

:thumbsup:

Oakman wrote:

But the bills always come due. Don't they?

From thin air, I'll write you a cheque to cover that. :)

73Zeppelin

Oakman wrote:

That was an open market operation I described, I believe. Remember Ben got the T-notes from you, not from the Treasury.

Yes, exactly.

Oakman wrote:

Only since 1971. This seems like a good point to point out that the Federal Reserve Bank is a private bank with public responsibilities. When it creates money, it is because Ben thinks it's a good idea, not because the government ordered him to do so.

Again, you are right. I should have said "since the end of Bretton Woods".

Oakman

Richard A. Abbott wrote:

From thin air, I'll write you a cheque to cover that

Round it off to the nearest whole bill - for the rest you can give me pocket change I believe in. ;)

Jon Smith & Wesson: The original point and click interface Algoraphobia: An exaggerated fear of the outside world rooted in the belief that one might spontaneously combust due to global warming.

Lost User

Will do. I'll just have to wait a short while as I check if my account has been credited with this [^] . . . . . . . . . . . Nope it's not there. Perhaps they sent it somewhere else :(( Wasn't sent to you in error was it?

Oakman

Richard A. Abbott wrote:

Nope it's not there. Perhaps they sent it somewhere else

Unfortunately mail from HSBC is being returned by the post office. It seems they are so broke they were cutting out the imprinted postage on letters being sent to them and gluing them onto the outgoing mail.

Jon Smith & Wesson: The original point and click interface Algoraphobia: An exaggerated fear of the outside world rooted in the belief that one might spontaneously combust due to global warming.

Ed Gadziemski

You're leaving the multiplier effect and leverage out of your analysis. When banks take deposits, they can lend multiples of the deposits depending on their reserve ratio. So $1 deposited can fund $5 in loans. That is the multiplier effect. If you loan me a dollar and I invest in inventory for my business that costs a dollar and sells for three, I can pay you back your dollar, keep one for myself, and pay my supplier his dollar. That is leverage. Both the multiplier effect and leverage increase the power of capital.

Oakman

Ed Gadziemski wrote:

When banks take deposits, they can lend multiples of the deposits depending on their reserve ratio. So $1 deposited can fund $5 in loans

Actually I thought about mentioning that Oakman Savings and Loan could lend out $10 for every $1 that the Federal Reserve magicked into our account. But that just makes it worse, doesn't it? Oak is then loaning out 10 funny money for every 1 funny money he has. It looks good on paper, it feels good to Oak and to the people he's loaned all that money to . . . but Funny Money or not, they lost their job when Lehman Bros went belly up so they can't pay it back and they don't want to because now that Oak has come to his senses and isn't loaning out money for "liar's mortgages" nobody wants to buy their house and it's value has been cut in half. So Good Ol' Oak discovers that he lent out 50 million (based on the five mil he has on the books) and now he can foreclose on the houses he let people buy that, in aggregate, might be worth 25 million. When he announces that little factoid, his bank's stock emulates a rocket sled heading straight down and that starts a run on the bank and he's only kept one mil in cash on hand. . . :omg: So he tries to borrow money from other banks, but even though Bank of America can get dollars from the Fed at o% interest, they aren't as crazy as they used to be and they won't loan Oak any money, he's a fracking lousy credit risk! Then Congress sends him a subpoena. Seems they want to know about that corporate Concorde he bought. . . And the bill comes due. The one for his new Glock.

Jon Smith & Wesson: The original point and click interface Algoraphobia: An exaggerated fear of the outside world rooted in the belief that one might spontaneously combust due to global warming.

Ed Gadziemski

Oakman wrote:

So Good Ol' Oak discovers that he lent out 50 million (based on the five mil he has on the books) and now he can foreclose on the houses he let people buy that, in aggregate, might be worth 25 million.

If that were the only problem. It would be very easy to cure. The bigger problem is that Bank of America took Oak's mortgages and bundled them with 950 million in other mortgages and sold them as derivatives. Ed's Hedge Fund & Car Wash took out insurance in the form of credit default swaps in anticipation of BofA's derivatives tanking. When they didn't tank fast enough, Ed jiggered the stock price of BofA through short selling which affected BofA's ability to raise capital and caused the government to tighten BofA's reserve ratio which forced BofA to default on the derivatives and other obligations, which caused Uncle Sam to step in and start throwing real money at what is effectively funny money (CDOs and CDSs). And before you knew it, 30 trillion dollars of phony wealth was destroyed and the world entered meltdown.

Oakman

Ed Gadziemski wrote:

which caused Uncle Sam to step in and start throwing real money at what is effectively funny money (CDOs and CDSs).

Don't you mean more funny money at what is effectively funny money? You do put your finger on something I hadn't been thinking about. How much of the wealth that has disappeared in the last six months never really existed? When people start noticing that the king has no clothes, his clothes don't disapear, because they weren't ever there.

Jon Smith & Wesson: The original point and click interface Algoraphobia: An exaggerated fear of the outside world rooted in the belief that one might spontaneously combust due to global warming.

Lost User

The next chapter ... (tongue in cheek reply) Good old Oak, being a excellent businessman and investor took out CDS with AIG with Oakman Savings and Loan as the reference entity for 5 years. As Oakman Savings and Loan's position worsens, Oakman Savings and Loan defaults on its debts and Good old Oak makes claim for payments from AIG and the CDS is completed and terminated. FDIC steps in to administer Oakman Savings and Loan with BoA buying Oakman Savings and Loan for a nominal sum. Oak is a happy bloke - he's got no more worries with Oakman Savings and Loan and has made himself a few dollars because of a wise purchase of CDS's, AIG have laid-off some of the value of the CDS with external banks in China and London. AIG have also received taxpayers subsidies to help meet this CDS payment, Bank of America have another acquisition to prop up but they are not too worried as the taxpayer are subsidizing their bad debts. Foreclosures are placed on hold whilst the POTUS finalizes the plans. Oak attend Congress and pleads the 5th Amendment and is dismissed and sent on his happy way with no further questions to answer.

Oakman

Richard A. Abbott wrote:

Oak attend Congress and pleads the 5th Amendment and is dismissed and sent on his happy way with no further questions to answer.

Until he realises that the fifty million he cleared from the CDS has been converted into the price of a few night's lodgings and meals at a medium priced hotel by Uncle Ben who has been sending funny money to all and sundry as fast as he can authorise the credits.

Jon Smith & Wesson: The original point and click interface Algoraphobia: An exaggerated fear of the outside world rooted in the belief that one might spontaneously combust due to global warming.

Ed Gadziemski

Oakman wrote:

How much of the wealth that has disappeared in the last six months never really existed?

I'd guess 90%. Bernie Madoff wasn't the only one running a Ponzi scheme.

Oakman

Ed Gadziemski wrote:

I'd guess 90%

But then the questions simply becomes how much real capital was traded for the monopoly money, convinced they were making a good trade?

Jon Smith & Wesson: The original point and click interface Algoraphobia: An exaggerated fear of the outside world rooted in the belief that one might spontaneously combust due to global warming.

Ed Gadziemski

Oakman wrote:

how much real capital was traded for the monopoly money, convinced they were making a good trade?

Good question. The total value of every single U.S. mortgage is $10.4 trillion. The real capital required to fund those U.S. mortgages was probably less than $3 trillion. The estimated total value of all financial "products" based on U.S. mortgages is $62 trillion, giving a multiplier of at least 20 and possibly more.

Oakman

Ed Gadziemski wrote:

The real capital required to fund those U.S. mortgages was probably less than $3 trillion.

Sure, but the builder and possibly the guy who financed him (although unlikely) used real capital during the construction phase. Those who did put down 10 - 20 - 30% are seeing their values drop just as fast as if they'd used a liar's loan.

Ed Gadziemski wrote:

The estimated total value of all financial "products" based on U.S. mortgages is $62 trillion, giving a multiplier of at least 20 and possibly more.

And we are supposed to fix this, how? Keep giving AIG money until it's paid off on all its bad bets? Get the banks to admit that they are not only broke, they owe so much money they can't see daylight? Have uncle Ben work his wizardry with Treasury notes until China realises that their vast supply of U.S. currency has been debased so much all they can buy one extra bowl of rice and a pair of chopsticks?

Jon Smith & Wesson: The original point and click interface Algoraphobia: An exaggerated fear of the outside world rooted in the belief that one might spontaneously combust due to global warming.