In the United States, maybe. But meanwhile, the rest of the world was a mess which ultimately led to WW2.
How are these bubbles killing us? Growth over the last 20-30 years has been as steady as ever. Recessions have been milder, growth bubbles have been milder, no depressions, etc.
Pleeeeaaassse! That is not education, that is indoctrination and brainwashing. The Fed is a private for profit bank. There is nothing federal about it. It is just a bank (actually several banks) owned by very wealthy individuals. Fiat money is nothing but debt certificates. Inflation is only caused by the Fed by the manipulation of credit and the money supply. Fiat money alone can cause inflation. You don't need a gold standard, just any sound intrensic value to your money. Paper (fiat money) has zero value. What is the value of green ink on paper? Today we don't even need paper it is mostly electronic entries. That means that all the debt is monitized electronically and you still are holding the note. A lack of understanding economics is exactly why this country is on the brink. Please research the Fed. Their are about 12 member banks. They are just private banks that are ripping you off. They might as well be organized crime they are stripping this nation of its last remaining wealth. Do you remember when things made in the USA were coveted around the world and foreign products were considered junk? I do. But those days will never return and neither will sound valued money. We better understand the Fed and like it because they have every one of us by the throat. You must understand that we are way over our heads in debt or you do not understand fiat currency at all.
Growth bubbles have been milder? Has there ever been a bubble bigger than the current housing bubble? And I'm talking about 1990 forward. Greenspan bailed out hedge funds during the 1997 Asian financial crisis. That was quickly followed by the dot- come bubble, and again Greenspan bailed everyone out with super low interest rates. And that was followed ny the housing bubble. I think Volcker did great being at the Fed througbh '87 because he made inflation the #1 enemy, but we have gone away from that. The dollar is tanking, national and consumer debt are out of control, growth is slowing, inflation is at the high end of the FED's comfort zone, the trade deficit is out of whack, credit markets are facing a credit crunch. In light of all this, I don't see how you can possibly call our monetary policy of the '90s a success, or the best possible way to do things. One suggestion some economists have made is to look at asset prices (such as houses and commodities) and take that into account when deciding on rate moves instead of just looking at CPI.
Just to be clear, you are blaming the demise of American manufacturing on the introduction paper money? Your position seems to be mostly about insinuating greed among muckety-mucks, and Huey Long style populism rather than any specific economic concerns. You despise and distrust rich bankers. Ok. How does that affect the elimination of deflation? Respectfully, your positions on 'real value of money' sound like a 19th century railroad baron talking about intellectual property rights and the value of Microsoft.
The failure of central banking Stephen S. Roach Chairman, Morgan Stanley Asia For the second time in seven years, the bursting of a major-asset bubble has inflicted great damage on world financial markets. In both cases--the equity bubble in 2000 and the credit bubble in 2007--central banks were asleep at the switch. The lack of monetary discipline has become a hallmark of unfettered globalization. Central banks have failed to provide a stable underpinning to world financial markets and to an increasingly asset-dependent global economy. The current post-bubble shakeout is hardly an isolated development. Basking in the warm glow of a successful battle against inflation, central banks decided that easy money was the world's just reward. That set in motion a chain of events that has allowed one bubble to beget another--from equities to housing to credit. When the bubble burst in early 2000, the optimists said not to worry. After all, Internet stocks accounted for only about 6% of total U.S. equity-market capitalization at the end of 1999. Unfortunately, the broad S&P 500 index tumbled some 49% over the ensuing 2 1/2 years, and an overextended corporate America led the U.S. and global economy into recession. Similarly, today's optimists are preaching the same gospel: Why worry, they say, if subprime is only about 10% of total U.S. securitized mortgage debt? Yet the unwinding of the far broader credit cycle gives good reason for concern--especially for overextended American consumers and a U.S.-centric global economy. Central banks have now been forced into making emergency liquidity injections, leaving little doubt of the mounting risks of another financial crisis. The jury is out on whether these efforts will succeed in stemming the rout in still overvalued credit markets. Is this any way to run a modern-day world economy? The answer is an unequivocal "no." It is high time for monetary authorities to adopt new procedures--namely, taking the state of asset markets into explicit consideration when framing policy options. As the increasing prevalence of bubbles indicates, a failure to recognize the interplay between the state of asset markets and the real economy is an egregious policy error. That doesn't mean central banks should target asset markets. It does mean, however, that they need to break their one-dimensional fixation on CPI-based inflation and also give careful consideration to the extremes of asset values. This is not that difficult a task. When housing markets go to excess, when subprime borrowers join the fray, or when corporate credit becomes freely available at ridiculously low "spreads," central banks should run tighter monetary policies than a narrow inflation target would dictate. The current financial crisis is a wake-up call for modern-day central banking. The world can't afford to lurch from one bubble to another. The cost of neglect is an ever-mounting systemic risk that could pose a grave threat to an increasingly integrated global economy. It could also spur the imprudent intervention of politicians, undermining the all-important political independence of central banks. The art and science of central banking is in desperate need of a major overhaul--before it's too late.
So the highly respected economics professors such as Dr. Dominick Salvatore and Dr. Greg Mankiw that wrote my econ textbooks are part of a conspiracy to promote the interests of the evil banking cabal? AWESOME This is just tinfoil bull****, and quite honestly I expect better from you, rhester. The Fed is composed of the board of governors (Bernanke and his subordinates) who are appointed by the president and are in fact a government agency, and the regional banks whose stock is held by private banks, but whose policy is managed by the above board. Are you seriously telling us that inflation is only caused by federal manipulation of the money supply, while urging us to "study real economics?" Seriously? Do the quantity and quality theories of money, where economic expectations, money supply (not necessarily government-influenced) and the velocity of money affect inflation, not ring a bell? I know that Mises-school economists believe that the government and the fed are the root of all evil, but over in the realm of mainstream economics, there are various well-recognized factors that cause inflation, most of which are not due to government intervention. If you received your economic education from the Alex Jones show, please don't lecture and talk down to those who actually received a proper university education in economics.
I believe the great depression and the collapse of the banking industry after the roaring 20s was the greatest bubble that this country has ever faced. As for Volcker, that's just spin right there. Volcker was in the worst possible predicament. He came in during a period of stagflation. Of course inflation was his number one enemy. He didn't have much of a choice. In fact props to him for recognizing that in order to break stagflation, you had to tackle inflation first, but he definitely wasn't on some sort of crusade to tackle inflation otherwise. On Greenspan - look he bailed out the industry, but that wasn't his only justification for his use of lower interest rates. There was a general paradigm shift at the time. In fact your mythical inflation warrior would have been a disaster in the 90s. GDP growth was so high at the time that every economist but Greenspan wanted higher rates and Greenspan made what I consider a genius move in keeping rates low because of record productivity growth unseen by America since the introduction of electricity. Inflation hasn't been an issue in this country for years and still isn't. In fact, in 2004, we were worried about DEFLATION and the collapse of the dollar in the opposite direction. As for taking into account asset prices, of course they take that into account. Read the minutes of the Fed, they cite the Japanese real estate bubble all the time as an example of what the bank should NEVER do. And finally as for all those things going wrong right now, most of that has to be pinned on our ****ty fiscal policy, not monetary policy. Not to mention Europe isn't helping us at all right now. See logically, our weaker dollar should make our stuff cheaper to buy. Our number one consumer across the pond, Europe, should be buying up our stuff. Well, unfortunately those clowns are in a state of perpetual non-growth (despite what the ECB might forecast) so guess what? They still aren't buying our stuff even with our weaker dollar. World growth is occuring in poorer countries that still don't come close to equating to the European markets. And then there's our lousy budget deficits. Which obviously don't help at all since we're basically borrowing our way to hell right now in order to finance our spending. And here's the kicker there too. So people with money who generally would invest in their home countries, keep buying up our debt because well, that's more profitable since we just keep issuing more debt and raising the yields on our bonds. Thus creating a crowding out effect in countries all over the world. The World Bank issued a pretty big report a few years back on this as to why our deficit is basically curtailing growth rates everywhere. The same growth rates that we need to happen so they actually buy our crap. Wow this post is too long, i'll stop
My problem is the Fed pits financial institutions against the US government and of the common citizens. For example with this recent rate cut, with clearly inflation not under control and a dollar near record lows, the Fed is playing with fire cutting rates by that much. In order to bail out over leveraged speculators and ill informed ARM mortgage holders and lenders, the Fed has cut rates again which in my opinion is not the prudent thing on the grander scheme of things.
Perhaps in terms of percentage of the economy. But as a matter of real dollars, this one is trillions of dollars and extended to other country's banks. It would have even caused a bank in England to fail without a bailout. Come on, now that is spin. He did have a choice. He could have easily chosen to keep rates steady or lowered rates. He could have folded just like Greenspan and Bernanke. If his choice was so obvious then why all the criticism during his time? Why didn't the Fed Chairman before him raise rates? "Volcker's Fed also elicited the strongest political attacks and most wide-spread protests in the history of the Federal Reserve (unlike any protests experienced since 1922) due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street and blockading the Eccles Building.[1]" There was no real paradigm shift. Actors during bubble times always say "this time it's different" and it never is. Is this paradigm shift gone now or did it only last 5 years? What has this genius move given us? It caused the internet and housing bubbles back-to-back. And we are saddled with a record trade deficit, a weakening dollar, and consumers in debt like never in the history of the world. But they totally ignored real estate here at home. Fiscal policy is ****ty, no argument there. But fiscal policy does not cause bubbles. It does not cause people to overborrow because of ridiculously low interest rates. It does not cause inflation to start rearing it's ugly head, which it may very well be doing (gold and oil reaching levels not seen in many years). Well the rest of the world seems to be recovering now. China and India have explosive growth rates. Europe is actually moving ahead of us in growth. Brazil is doing well.
Here is a good article on Volcker. http://findarticles.com/p/articles/mi_qa3678/is_200501/ai_n9467621 "During the 1960s and early 1970s, various Fed chairmen made rumblings about fighting inflation, but they always backed down when the complaints about the resulting higher cost of credit grew loud. Fed Chairman William McChesney Martin, for example, was no match for President lyndon Johnson, who depended on cheap credit to finance the Vietnam War and his Great Society. Because the markets observed the Fed's lack of fortitude, they had no expectations that the Fed would conquer inflation. It is extremely costly to bring inflation down if inflation expectations don't come down. Not until dicker showed that the Fed could take the heat did the markets believe that the Fed was serious this time."
How is Paul more sane than Mike Huckabee or even Mitt Romney, especially Romney. Would you really be worried if Romney was elected, compared to someone like Tancredo or Brownback ?
What conspiracy, there is no conspiracy. 1. The Fed Open Market Committee approves the purchase of U.S. Bonds on the open market. 2. The bonds are purchased by the New York Fed Bank from whomever is offering them for sale on the open market. 3. The Fed pays for the bonds with electronic credits to the seller’s bank, which in turn credits the seller’s bank account. These credits are based on nothing tangible. The Fed just creates them. 4. The banks use these deposits as reserves. Most banks may loan out ten times (10x) the amount of their reserves to new borrowers, all at interest. 5. The Fed consistently holds about 10% of the total US Treasury bonds. It buys those with accounts or Fed notes the Fed simply created. 6. The Fed and member banks can then purchase Treasury Bonds giving the government debt to fund the country. 7. Not all loans require 10% reserves, some require much less, the member banks create the rest of the money supply, generally about 90-98%. 8.Federal Reserve Notes and equivalent Federal Reserve Deposits are deposited in local banks or to their credit at one of the 12 Fed banks. These funds serve as the base of bank loans, which require a 10% reserve. For example, if $1,000,000 of Federal Reserve notes or Fed deposits are entered on the books with the Fed to the credit of a bank (usually the bank of the person or company which just sold the Fed a Treasury bond/bill or note), that bank may loan all of that money out (at interest), except for 10% which is kept as its reserve. Thus $900,000 in this example may be loaned out by that bank. The borrower of the $900,000 will not, of course, keep the money under the mattress, rather, it is deposited either in the same bank or in others. This $900,000 in new deposits may then be loaned out at interest by these banks, except for the 10% reserve. Thus $810,000 is loaned out a second time ($90,000 of the $900,000 being retained as reserves). 9. Ect. ect. until the debt has increased the money supply by several leverages of the original reserve. 10. That's alot of profit for the Fed and member banks. And it creates alot of debt and controls the money supply. No, the 7 member board is appointed to 14 yr terms-- approval by Congress is required, but they are not a governmet entity they are not accountable to the Congress or the President at all. They represent the 12 Fed banks and those banks all have their own board that runs each bank. The 12 Fed banks are private banks, period. They are only governmental in the sense that they control the lending rates and can purchase government bonds for nothing. There is no change to the money supply except as a function of bonds or other debt instruments . The government does not generate income. They take in about 900 billion in taxes and spend about 1.3 trillion creating new debt or an increase to the money supply. The Fed finances this debt. Every loan increases the money supply because it is basically leveraged against reserves; so the banking system just creates money out of thin air through leveraged lending. I am telling you that in reality when the Fed increases debt to the government through the purchase of bonds and the member banks leverage that debt about 10 X that this is the only thing that increases the supply of fiat money. And that if you doubled the supply you would definately have hyperinflation. It would take brilliant economists to miss the obvious- the DEBT, who holds the debt? guess- private banks Did it occur to you that the economy is running on debt? You can't run your house the way our government is run. Selling bonds and treasuries to spend like you have an unlimited credit line that you will never have to pay back. Surrender, I know for a fact that Dr. Dominick Salvatore and Dr. Greg Mankiw are much smarter than me. I know I am not an economist. I know that I don't understand the smoke and mirrors. But the basics aren't hard. It is 1+1=2 The paper money has no intrinsic value, the Fed holds the government debt and the debt determines the supply of money. That's how it is booked and whether it is good or bad depends on how far we go into debt. At some point something has to give. Here is the debt published by the government from 1993 (as far back as they give you) to end of 2006- 12/29/1993 $4,487,921,628,155.12 12/29/2006 $8,680,224,380,086.18 They give our current debt at 09/19/2007 $9,006,548,424,014.87 link I have never heard Alex Jones, nor read anything off his website. The best book I have read on the economy is The Creature from Jekyll Island by written by G Edward Griffin http://www.amazon.com/Creature-Jekyll-Island-Federal-Reserve/dp/0912986212 The funny thing is I am sure you know more about this than me and I actually first started looking in to this from conversations I had with Dr. Ron Paul 16 yrs ago when he was my wife's gynocologist. If you read that book and think I'm a fringe lunatic then I will believe you. I can't think of anything I would like to be more wrong about than this one issue. (for the sake of my children at least) Anyways, who cares if we have a central bank and we have 9 trillion in debt not including anything leveraged by derivitives. If we all have flat screen tvs made in China and a starbucks within two blocks of us we are pretty blessed people.
I have been reading alot lately trying to understand how derivitives are leveraging debt further than it has ever gone. Here is one explanation that someone might explain to me (though it is one of the most simple explanations I have read): TOTAL DEBT- "Well, What Do You Want It To Be?" Today I will follow a debt trail, from loan origination all the way to its ultimate existence as part of a credit derivative product. I will use a sup-prime mortgage loan as an example, but any debt obligation will do. Keep the question of the title in mind, it will make sense in the end. Let's start two years ago with Ron and Ronda White, a couple in their early 30's with a combined income of $60.000 who have their eyes set on a $300.000 house to call home. They have saved only $5.000 to put down, which barely covers the closing costs. Their mortgage broker talks them into a $250.000 first mortgage ARM with an initial 2-year teaser rate of 2% rising to prime+1% thereafter and a $50.000 second, 30-year fixed at a whopping 10.5%. Despite the obvious problems apparent right from the start, such loans were made to hundreds of thousands of people. But no matter... The two loans were immediately sold to investment bank XYZ who pooled them with other loans (creating Residential Mortgage Backed Security, or RMBS) and placed them inside a CDO. Using recent default data, the financial engineer employed by XYZ took 90% of the White's outstanding mortgage amount and placed it in CDO Tranch A, the supposedly safest portion rated AAA and paying 0.10% more than other AAA straight corporate bonds. The rest was apportioned 7% to Tranch B rated BBB, paying 1.5% more than equivalent bonds and the remaining 3% to Tranche C, also known as the "equity" tranche, which was unrated and paying 10% above Treasury bonds. In case of default, Tranche C gets hit first until it is exhausted, then Tranche B and, finally, Tranche A. This is a "cascade" or "waterfall" pattern, common to all such collateralized products. Notice how 100% of a loan package that could be described as CCC has been turned into 90% AAA, 7% BBB and 3% NR. In plain terms, the "engineer" is betting that no more than ~3% of the total principal and interest will be lost, including recoveries from selling foreclosed real estate. Call this the First Derivative - depending on conditions, the market prices of the CDO Tranches will vary significantly more than straight corporate or government bonds. Those CDO Tranches are then sold as follows, typically: Tranche A to a pension fund attracted by the slight yield premium on a AAA bond. Tranche B to a fixed income mutual fund. Tranche C to a hedge fund attracted by the high yield - or is retained by XYZ. So far this has been a plain vanilla process, the only question mark being how high or low the "engineer" places the assumptions for defaults and recoveries. The next step in debt "derivativization" is the issuance and trading of Credit Default Swaps on the first two Tranches of the CDO. It can be done by XYZ, another bank, a hedge fund or all of them - there is no limit. These swaps guarantee payment in case of default events by the CDO, itself a conduit for Mr. and Mrs. Smith's mortgages. These CDS's require an up front payment and subsequent semi-annual ones, usually for up to five years. One can think of them as tradeable insurance policies. Naturally, Tranche A carries a much smaller insurance premium than Tranche B, given the respective AAA and BBB ratings. Call this the Second Derivative - the prices of CDS's will certainly vary more than the prices of the underlying Tranches and much more than straight bonds. These CDS's generate income to the seller, who assumes the risk of making the buyer whole if the CDO Tranches experiences payment shortages. Who sells this insurance? CDS on Tranche A may generate 0.15% annually and is typically sold by a bank or a pension fund attracted by the income generated by insuring a AAA credit. CDS on Tranche B may generate 1.30% annually, commonly sold by hedge funds. Who buys the stuff? It would seem pointless for the CDO owner to buy protection for the bonds he already owns, but it does happen for portfolio hedging purposes or even as a way to "trade" the underlying CDO's without actually selling or buying the actual bonds. But there are more buyers than just hedgers, as we shall see below. Another investment bank, it could even be XYZ itself, buys a bunch of such CDS's and creates another CDO, also with tranches, ratings, etc. Remember, all you need for a CDO is a stream of regular payments to slice and dice into tranches. We have now reached the Third Derivative stage: the potential volatility of such a product can be orders of magnitude greater than a simple bond. This is a CDO made up of CDS on another CDO made up of RMBS's - the alphabet soup is thickening fast. The credit leverage, i.e. what happens to the price of this type of product for a given rise in loan defaults in the, by now very distant, mortgage is very, very high. Should an "investor" actually provide cash to purchase the above Third Derivative CDO we have what is known as a "funded" CDO. But this is becoming increasingly uncommon, because there is yet another derivation that can be performed on Mr. and Mrs. White's nortgage. Another investment bank (or the original XYZ) can construct an "unfunded" CDO from the CDS's in step three, an instrument that just pays out or demands payment from its owners on a quarterly basis, depending on the shrinking or widening of the CDS spreads. This "synthetic" CDO owns nothing - not even the CDS; it just uses them to mark to market the said CDS spreads and to thus calculate the quarterly payments. We are up to the Fourth Derivative. Sorry, but I have run out of superlatives to describe the leverage, volatility and credit risk sensitivity of these constructs. And yet, les apprentices sorciers who cook them up think it "innovative financial engineering". Like any fourth derivation, the price of such instruments is completely unrecognizable versus the original mortgage. Thus the title of today's post, explained best by an anecdote: Bank XYZ is looking for a dealer for its derivatives desk. Candidate A walks in the door and the desk manager asks, "What is 2 and 2?" --- "Four, sir" answers the job candidate. "Next", says the manager. Candidate B is asked the same question: "Depends on if you mean 2 plus 2, or 2 minus 2", answers B ..."Next"... Candidate C comes in and before he answers the question he looks at the manager and asks: "I just want to be absolutely sure - the job is for the credit derivatives desk, right?" "Certainly", answers the desk manager. "In that case, 2 and 2 is whatever YOU want it to be", says C. "Hired, when can you start?" P.S. Now, let's say that Mr. and Mrs. White default on their loan and, along with them, another 6% of the mortgages default, too - way above what the "engineer" had assumed. What will happen to the prices of the above RMBS, CDO, CDS, Synthetic CDO's? Aren't we lucky we have trader C to tell us - or aren't we? P.P.S. If it was not made clear, unlimited CDS's can be written on a particular debt obligation, including the CDO in step one. Say a "first derivative" CDO has $100 million outstanding. The CDS's issued against, however, may amount to many times that - as I said, there is no limit. Therefore, there is no limit to the third or fourth derivative CDO's that may be issued, themselves backed by those multiple CDS's. This situation can easily create a viral contagion negative effect, as one "sick" original CDO can infect many others through the CDS market. Ouch. link If anyone could explain derivitives simpler I would appreciate it.
Huckabee's already said he doesn't "believe" in evolution. At least Paul is a man of some science. I've had enough of this administration manipulating science to fit their positions, thank you. Regarding Romney, at least Paul's consistently crazy and I don't doubt that he would try to represent all of America, even if it was in a really bad way. Romney will say anything to anyone, and even bad mouths the state he served as Governor because it plays well with the GOP primary electorate. Neither Romney nor Rudy would serve the entire country... merely the people that got them into office. Again, that's something I'm a bit tired of lately. I guess I have to agree Romney would be better then Tancredo or Brownback, but if that's your (really low) bar, it goes a long way to proving my point.
Exactly... Which means he is not crazily clinging to a particular ideology like the current president. He's driven by personal gain, sort of like Hillary Clinton. Neither of them would be scary, insane presidents because they wouldn't want to upset the electorate and ruin their popularity with radical policies. There is no bar. I'm not voting for Romney. I'm just saying Ron Paul is definitely not the most sane Republican running for President.
Absolutely. This thing is tiny in comparison to previous financial disasters. Consider that this "crisis" involved a panic in the market which dropped it by a whopping 10% - and nearly fully recovered in less than 2 months. The great market crash of 2001 or so - we recovered in 6 years back to those levels. The crash of 1928 took *25* years to get back to that level. In *one day*, the market went down over 12%. The Dow Jones lost 90% of it's value over a few years. There's no doubt this is a crisis in modern times. But the relative stability of the world means that these kinds of events are far more mild than ever before. The horrible recession of 2001 lasted 6 months - the full year didn't even have negative GDP growth. The one in 1990 was 9 months, I believe. That's about as mild as you can get. There will always be bubbles and the like - that's part of the nature of capitalist markets - but comparative to the past, this is nothing.
Not quite. They approve the purchase or sale of bonds with specific securities traders that they have pre-negotiated agreements with. They operate outside of the traditional bond market. As I said, its all pre-negotiated. They don't work with the open market. Not true at all. In fact, the Fed gets a budget from the Treasury department and is one of the few (if only) areas of government that generally ends up with unused money at the end of the fiscal cycle which they donate back to the treasury. The treasury department is the one that is creating the money. The fed is the one introducing it into the market by buying bonds, or taking away money from the money supply by selling bonds. As for the electronic part, that's just technology. The whole fed is operated electronically now which doesn't really mean much. They credit accounts but there is physical money in the Fed's possession to back that up. Yes they do. That's sort of the point of buying bonds. You're introducing money into the banking system. However, you do realize that the only thing they can do with this money is loan out to OTHER banks. Hence the federal funds rate is the rate at which banks borrow from each other. Those security dealers which sell bonds to the fed can only loan out to other banks. There is a trickle down effect however. Once it becomes cheaper to borrow money from other banks, it thus becomes cheaper to subsequently loan out that money to the public. Those treasury bonds are a legally created possession. The Fed isn't legally allowed to sell them. The point of that was that the Fed could gain interest on those bonds and then use that interest to engage in open market operations. The Fed has tons of legal restrictions that prevent it from actually operating like a standard bank. Not really. I've never heard this before and how in the world do member banks "create money." The Treasury Department creates it and the Fed spends it on Repo agreements. Also, that sentence doesn't even make sense. Loans don't require 10% reserves. Banks are required to keep 10% of all reserves that they have on hand in cash. That's a pretty fixed rule from what I've read. Yes that's how these types of loans are supposed to work out. The effectiveness of the federal funds rate depends on it. Otherwise the Fed would be worthless. The debt didn't "increase" anything. There was only $1,000,000 introduced into the system and that's it. After that, the debt can cycle through multiple times but physically there's only $1,000,000. Thus the money supply isn't growing exponentially. Also, you seem to indicate that this process works exclusively through member banks. That just isn't true. Member banks engage in repo agreements with security traders who then loan out the money. The money multiplier effect works through private banks, not the fed member banks. No its not. The Fed gets no money from that process. The Fed has 3 main powers. First it can alter the Reserve Requirement which has been at 10% for decades. Second, it can engage in open market operations to alter the federal funds rate by engaging in repurchasing agreements with specific security traders. That's how they "raise" and "lower" the federal funds rate. Third, they can alter the discount rate which is the only way the fed can actually "profit." The discount rate is almost impossible to use as it generally has a higher interest rate than commercial banks (along with the legal nonsense that goes with borrowing from it). It's supposed to be the method of last resort to borrow from the fed and the numbers show it. The amount of borrowing from the discount window is slim to none because the accreditation process is horrible. Also, this is distinct from what you indicated is the way the fed makes money which is through the money multiplier effect and compounding interest from the creation of debt. That isn't true at all. Of course they're not truly federal. They were meant to be quasi-public for a reason. The independence of monetary policy from political influence is paramount. It's the same reason why Bush 41 didn't get his way when he whined constantly to greenspan that he should lower rates which he refused to do. But the appointed board of governors along with bank presidents actually make decisions in regards to Fed powers (open market ops, discount rate, RR, etc..) so fed decision making is directly accountable to congress and the president. Also, the Fed doesn't create money, they get it from a government entity, the treasury. And if the Fed needed more money for open market operations (which has never happened) they would have to go through the congressional budget process which provides a level of financial accountability. yeah that's sort of the point. Member banks aren't leveraging anything though as I pointed out earlier. And as for hyperinflation, that's not really true. Yes money seems less valuable today then say the days when a candy bar was 10 cents but that's a meaningless comparison. Also, there is a risk of inflation but that's checked by the fact that the fed can do the reverse in which they sell bonds to security traders, removing money from the money supply. Look obviously we agree that government spending is out of control. But the Fed isn't really the one financing it as much as China, Japan, and Europe are buying up our debt. You seem to want to paint this picture of an evil government conspiracy to spend and hide the debt (which I'll admit is slightly true because during 2003 Bush kept pushing the Fed to monetize the debt - but this process isn't nearly as grand as you make it sound) Individual investors in America (not the fed or china or japan) make up the majority of holders of American treasury bonds. No I really think you're painting a picture because you want to see the picture like that. It's really a lot less sinister than you make it out to be. Fine it has no intrinsic value but the Fed DOES NOT determine the supply of money to nearly the extent of the US treasury which prints the damn money or Congress which can order more money be printed. The Fed has many more constraints than you point out.
"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks." - Lord Acton
Thanks I will answer point by point over the weekend. But let me just mention that ONLY the Fed can have money printed, not Congress (at least that is what the Fed says on their website ). I am getting busy, but I will answer thanks for the points.
