Archive for November, 2011
The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.
The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.
Why did they have to “fight”, and what were they “fighting”?
The rest of this article makes it sound like the government was interested in the little guy on the street, and Bloomberg fought the good fight with the government against those e-vile bastards at The Fed.
Nothing could be further from the truth.
Oh, it’s true that Bloomberg sued. And it’s true that they won.
But it’s false to assert that government and The Fed are on opposite sides of this issue. They most-certainly are not.
“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”
That’s a lie.
The Fed and Congress are complicit. They’re both in what would be called a “deadly embrace” if it was adversarial in some fashion but it is not. In point of fact The Fed is the sole enabler of Congressional and Executive overspending, which in turn allows pretending that our “economy” is somehow healthy or recovering and that the “programs” put forward by the Government have “helped” our economy.
The employment data says otherwise. Housing says otherwise. But The Fed continues to try to “protect” the bubble mentality it created along with Congress, to wit:
The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries.
Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the 10 firms that provided estimates.
Remember folks where this came from. It’s embedded in our psyche now, but it wasn’t always this way. Go look in rural America or older near-urban places and you will see “shotgun” construction — original buildings that were made with three load-bearing walls and two or three rooms (a place to live, a place to cook, and somewhere to sleep along with a small bathroom) with the rear wall designed to be knocked out.
Because those homes, inclusive of the land, were sold at 1x average incomes or less, and families added to the building as they grew — often across generations.
Then came the 1920s. Balloon notes were the “preferred” means of financing, damnably like “Option ARMs” of today less the fancy computers. Home prices and real estate costs soared. And then, of course, crashed.
What was done then? FNMA happened — in 1938. Now known as “Fannie Mae”, its purpose was to provide a means of financializing homes. With it ended the practice of a young couple saving 10 or 20% of their incomes for five to ten years and purchasing their home outright for cash.
Suddenly it became “chic” to have more and better than you could afford right now, today. You couldn’t buy it but we’ll lend you the money — you just need to pay a little interest.
There never was a future in this, because ultimately such a practice is nothing more than pulling forward into today that which you would have bought tomorrow, and the skimming that takes place through interest and fees means that your labor simply gets turned into a foil for slavery — of you, to the banksters.
Has any of this changed since the crash? Oh hell no.
But while the Fed’s wheel-spinning and desperation both within The Fed and Congress hasn’t changed, it is changing among the population. The latest is the screed coming from colleges:
Even as college prices and average student loan debt rise, educators in some sectors of higher education report they’re also seeing plenty of students like Yeh. After watching debt cause widespread damage in their families and communities, they’re determined to avoid loans no matter what.
What’s surprising is this: Educators aren’t sure that’s always such a good thing.
Of course they’re not “sure” it’s a good thing. Why their outsized salaries and pensions might be threatened, not to mention all the bond issues that were floated by colleges to build palaces that look more like a luxury hotel than an educational establishment and do exactly nothing to improve the quality of instruction in Calculus.
More to the point some of those “educators” might realize that education, like everything else, responds to supply and demand. If students are waking up to the idiocy of taking out $70,000 in debt to pursue a 4-year degree that earns $30,000/year then the price of that degree must come down — a lot, by like more than half — in order to meet the available supply of money!
But back to the central point: Congress enables The Fed’s lawless behavior on purpose despite the absolute ability to stop it any time it wants. It does so because this is how Congress is able to promise you, dear reader, programs that they cannot pay for with current tax revenues.
The error is that Congress seems to think that this can go on basically forever. It cannot.
That’s the lesson coming from Europe — validation of my central thesis, that the math always wins and the longer you keep screwing around the worse the damage will be that you must absorb.
The only question is whether Congress will stop acting like a two-year old that wants another piece of candy before or after the entire economy and financial system melts into radioactive slag.
I’ll take the under on that.
If you’re wondering why I support Bill Still’s Presidential run, this is the reason right here.
One 20 minute or so interview that you, in my opinion, simply must listen to.
Bill, unlike all the other candidates from both sides of the aisle, is focusing like a laser on the actual underlying rot in our economy and political system. He proposes to actually fix that rot, which is how this nation can return to greatness and prosperity.
No, that path is not easy. No, it is not painless. No, it won’t happen without you.
Invest the 20 minutes folks. Consider what you’re hearing, and let it sink in. Then, if you support this path forward — something real for a change in the political system — then support Bill Still for President in 2012. Please click the button to listen.
The sequel to the popular, Money As Debt. This video will be permanently featured on our Educational Video Page for future reference.
BANKS CREATE MONEY vs. BANKS LEND DEPOSITORS’ MONEY
The idea that “all bank loans are new money” and “banks lend depositors’ savings” are often viewed as contradictory, mutually exclusive ideas. But, both loans and deposits are bank credit. They are the two ends of the banker’s magic money-creating wand. The same bank credit that was created as borrower debt is loaned back to the bank as deposits.
Here is a detailed description of the full loan and repayment structure of the banking system, as I understand it.
STEP 1. The borrower promises the bank FUTURE repayment in legal tender and/or bank promises to pay legal tender, ie. “bank credit“.This may or may not be backed up with collateral that the bank may seize and sell to compensate for non-payment.
STEP 2. The bank Promises legal tender it does not have and does not have the resources to obtain without borrowing. Therefore the CURRENT EQUITY VALUE of the BANK’S PROMISE is somewhere close to ZERO.
STEP 3. The borrower ACCEPTS this ZERO in exchange for his/her FUTURE VALUE (repayment) and spends it NOW. The CURRENT EQUITY VALUE of the borrower’s promise is also ZERO as the borrower has DONE NOTHING YET TO EARN THE CREDIT.
STEP 4. Real Production in the World ACCEPTS this ZERO for VALUE and provides the borrower with GOODS and/or SERVICES NOW.
This ACCEPTANCE FOR VALUE by society is what turns the bank’s promise worth NOTHING and the borrower’s promise of FUTURE REPAYMENT into MONEY, a DEMAND for REAL VALUE NOW. The goods & services exchanged for this NOTHING now make that MONEY EARNED.
We all know what would happen if we all simultaneously demanded payment in physical cash and coin. The bank doesn’t have it. It doesn’t even exist. So why do we accept these obviously fraudulent promises? Because the bank offers a service, a “system” that is far more convenient and secure from theft and loss than cash.
STEP 5. The DEPOSITOR, having given REAL VALUE for NOTHING, has EARNED IT and IMPARTED REAL VALUE to this “money”. The Commercial Law System ENFORCES DEBTS that have been exchanged for REAL VALUE.(“consideration”)
Because there is NOWHERE TO KEEP BANK CREDIT EXCEPT AT A BANK, the DEPOSITOR is FORCED by the DESIGN OF THE SYSTEM, to:
A. CLAIM LEGAL TENDER from the bank, (a small proportion exists in this form- typically 1-10% in developed countries)
B. LEND (same money lent twice) the EMPTY PROMISE back to the bank as a “DEPOSIT”, thus DEFERRING THE NEED for the BANK TO MAKE GOOD on its EMPTY PROMISE of legal tender. This INDEFINITE DEFERRAL of DEMAND for LEGAL TENDER (SAVINGS) is what makes it possible to create a DEMAND for REAL VALUE NOW from a BORROWER’s promise of FUTURE PAYMENT (DEBT) without having the LEGAL TENDER.
STEP 6. The DEMAND FOR PAYMENT IN LEGAL TENDER is only DEFERRED for as long as the DEPOSITS (SAVINGS) that BALANCE the initial LIABILITIES, are NOT WITHDRAWN from the banking system in legal tender notes and coins.
Thus, bank lending is completely dependent on depositors, just as if it were lending out depositors’ money. And the bank “profits” only from the “spread” between the interest paid to depositors and the interest collected from borrowers just as if it were lending out depositors’ money.
But the bank isn’t lending out depositors’ money. It is deferring its unfunded obligations to pay legal tender by having depositors lend these obligations back to the bank. Money has been CREATED AND SPENT, EARNED AND DEPOSITED, with NO PRESENT VALUE to back it, and the banking system has NO NET LIABILITY, for as long as DEPOSITORS DO NOT DEMAND LEGAL TENDER.
For a synopsis of highlights of the video see Money As Debt Analysis of Banking.
To purchase the entire 3 video set go to Money As Debt.
Comes now this morning into my email notification that The Daily Bell has not only ripped off my commentary and opined upon it (legitimate) they further attributed it to CNBC (not kosher folks.)
But let’s examine their opinion a bit, shall we?
Dominant Social Theme: By expanding the regulatory state, we can make things better.
Free-Market Analysis: One of the main emergent US dominant social themes is that the government and regulators must step in to clean up the market and make it safe for investors. The idea is that the larger modern marketplace is very necessary for the functioning of modern society and that one must “clean up fraud” so that people will “trust” the market again.
This meme is being enunciated aggressively all over the place lately, and we have done our best to point it out. It is based on a misapprehension and is placing good people into rhetorical boxes where they decry modern finance but turn to the US’s penitentiary-industrial complex for solutions. Here’s more from the article excerpted above:
Expand the regulatory state? How about we actually enforce the laws that already exist? And for those that are not laws but written as laws, how about if we either turn them into actual laws (instead of lying about what they are) or repeal them so that nobody thinks they’re a law when they are not?
It is against the law, for example, to swindle people. It’s a crime. And as I pointed out here, the Right side of the aisle, including the Tea Party, refuses to address the fact that our nation’s largest financial institutions are serial violators of the law to the point that nearly all would have committed their “third strike” and be disbanded (the equivalent to life imprisonment) by now.
There is no shortage of laws under which to actually prosecute.
The Daily Bell goes on to sling around the common mud of “fiat funny money” and allege that but for The Fed there would be no problem at all. This, however, is a lie, for two simple reasons:
- The Fed is already constrained in what it can do — it has a mandate for stable prices (that is, zero inflation) that it has serially and repeatedly violated for its entire 100 year history, even prior to the implementation of the so-called “dual mandate”, and yet there has been no enforcement. Why not? There is no punishment called out in that law, just as there is no punishment called out in the former enabling law for the OTS and thus “backdating” deposits by IndyMac bank didn’t lead to a criminal indictment against either IndyMac or the so-called “regulator” who did it. A “law” or “regulation” without a punishment for violations is no law or regulation at all — it is a mere suggestion. As such these so-called “laws” are nothing more than sops for the fools at places like The Daily Bell who love to point to all these “laws” and then claim that “more regulation” is futile. That would be true if those were actual ineffectual laws but due to the lack of a punishment clause they stand as nothing more than blank pieces of paper.
- The proffered solution, free market currencies, is just another sop to idiocy. Government will always denominate its current taxes due in something. Whatever that something is will be the defacto currency of the nation and will be the majority — by far — currency that is used for transactions. The “why” is simple: Nobody in their right mind wants to wake up some morning and find that their currency du jour has been devalued by some sort of debauchery and their taxes due but not yet paid have suddenly doubled or more, instantly bankrupting them. The simplest and “zero cost” way to hedge against such an event is to transact in the currency you pay your taxes in. Sorry folks, but logic resolves this conflict and it doesn’t go where the Paulites would like; you must employ magical thinking to get to their claimed nirvana.
Indeed, the problem with the “free market” currency solution is that if you do not resolve the actual problem — the lack of The Rule of Law (that is, #1) so-called “free market” people will intentionally create the situation in #2 and get away with it!
That, incidentally, is the history of monetary systems going all the way back to the American Revolution and beyond. Indeed if you look at historical inflation rates prior to The Fed you will find ridiculous changes in the valuation of the currency over very short periods of time. 10, 20, even 30% swings in valuation were common. If you happen to believe that the fact that over the long haul the “more or less stable value” was preferable to what we have today you’re cherry-picking your timeline — get it wrong by a year or so and you’d either have made a bundle or been bankrupted.
Unfortunately life doesn’t work this way; you fall in love, you get sick, you get well, you find a job, you lose a job, your roof leaks, you get hit by a bus and you die all on a very unpredictable timeline. But those who pull the strings through government are more than happy to use your series of unfortunate events to screw you blind and steal everything you have — and absent The Rule of Law, they will.
Our latest little corruption was sent to me here, from the Fed weekly balance sheet:
Where did that $45 billion go? Oh, in the nice catch-all bucket called “Other”, right? What’s in “Other”?
Let’s see…. the GSEs are in there (Fannie/Freddie), the IMF is in there, the UN is in there, a lot of things are in there. So which “other” was this and why wasn’t it identified with specificity? Oh that’s simple: There is no rule of law when it comes to Fed operations as there is no “or else” to be found anywhere in the Federal Reserve Act of 1913, as amended.
Thus The Fed could “decide” that Fannie and Freddie paper was “ok” to buy, even though the black letter of the law says otherwise. They could point to their own “interpretation” and since there was no “or else”, if they interpreted wrong, even intentionally wrong, there was no cost to them personally that could be imposed. Ditto for “Maiden Lane” and their other machinations.
In this case it appears they bailed out someone yet didn’t tell us who it was. Gee, with all the turmoil in the markets you can’t find someone who needed to be bailed out, can you?
Those who argue for “End The Fed” have yet to reconcile the fundamental nature of the problem: It is not The Fed that is the issue, it is the presence of so-called “laws” with no penalty for non-compliance that is where the problem resides.
In point of fact The Fed’s actual mandate for stable prices is exactly correct. Followed to the letter we have no debasement of the currency over time, no inflation, and you can save a mere 7% of your income — if your Social Security taxes were then to be merely returned to you in retirement along with that 7% you would have an effective 20% saving rate for retirement and would need exactly nothing beyond that for a reasonable retirement lifestyle similar to that of your working years! If you saved nothing you would still have a 13% saving rate and we would meet the mandate of the “social safety net” allegedly to be provided.
If the “law” had actually been followed there would have been no ramp in credit compared to GDP because it could not have been funded. There would have been no Internet bubble, no Housing bubble and no crash. House prices never would have gone materially over 2x incomes and likely would be between 1x and 2x. Medical and college costs would be what they were then. Wages would have risen with productivity but not beyond, and you would have kept that standard of living increase instead of having it stolen by the vipers of Wall Street and the Capitol. Jobs would not have been offshored and there would have been no incentive to hire illegal aliens and displace American workers.
So why didn’t it happen this way? That’s easy: There is no “or else” in these so-called “laws.”
Ending The Fed will do exactly nothing without fixing this problem. Competing currencies will do nothing without fixing this problem. In point of fact essentially every current economic issue we face is found, at some point, in this singular premise.
Those who continue to beat on the “End The Fed”, “Competing Currencies” and other similar-sounding drums are either missing the mark because they fail to analyze the problem or worse, they’re shilling for those who are looking for yet another way to rob you blind when the current scam, which is about to collapse, comes down around their ears.
Don’t fall for it.
And you wonder if it can happen — it, incidentally, being the people banding together and saying “no more fraud damnit!”
Yes, it can. Note who this is, where he’s speaking, and think very, very carefully about whether attacking a group that is listening and willing to act on this correct perspective is wise.
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