THE Federal Reserve Thread pt 1 (merged)

[ROCKMAN]

A great piece of work there M. Bill. A shame that the vast majority of Americans who need such understanding will never read it.

The one note that caught my eye in particular was "If we destroy our ability to create new wealth then our economy must shrink in size over time." In retrospect, it's easy to see how even bad aspects of the system (junk bonds of the 80's & the recent subprime mortgages) can spur growth. Of course, when such plays end badly and there is sudden and massive losses in equity (i.e. - current housing market) the folly of such plays becomes all to obvious. Though rarely mentioned at all is the wealth generated by the current price boom. Many who take shots at the Exxon's et al aren't aware of the great gains they perhaps have made themselves through the pension funds and other collective investors who own much of the oil industry equity. Add to that the royalty incomes of private mineral owners as well as local production taxes. The taxes paid on these revenue streams is obvious to most. Less obvious is the identity of the largest beneficiary of oil income in the US: the Federal government. In 2007 the Feds sold 585 million barrels of oil in the US. This oil is the royalty payments (most from the offshore leases). The number 2 seller was BP at 525 million barrels. Shell, Exxon, Chevron and the next two largest producers sold a combined total of less than 300 million barrels. It's a shame that no one in the government has pointed out to the Amercan people that they are getting at least a small rebate on their increased fuel cost. But then the people might expect some of the $35+ billion returned to them instead of being spent on an ever expand government.

It's easy to imagine the political reaction when real PO events become obvious to the general public. At least in the short term, one might expect political knee jerk reactions that could damage this new wealth -- the proverbial "unintended consequencies". I doubt the labor unions will be to happy to learn of the billions of dollars of lost stock equity should Fed actions drive down the market capitalization of the enegy sector.

[MrBill]

The government is quite happy to tax sustainable as well as unsustainable growth. They do not care. If you earn a million this year and are broke next year that is your trouble. They want their piece of that income earned. Aside from carrying losses forward I suppose.

Ironically, the government even taxes you on capital gains that is caused by their excessive creation of money and resulting inflation. The flipside of socializing risks and privatizing profits is the government collecting royalties from oil companies and taxing gasoline, while letting oil companies take the political heat from higher prices at the pump. A nice little side step.

[CrudeAwakening]

My understanding of P/P+I is that payments of loan principal are retired from circulation (hence money supply decreases), causing an equal decrement to both asset and liability side of the bank balance sheet , while payments of interest increase bank equity, and are respent into the economy, permitting other borrowers to acquire this money and repay the interest they themselves owe.

In other words, as long as money circulates and is not 'destroyed', a given quantity of money can technically allow the discharge of debts of many times this amount.

However, since all money is created as the principal of a loan, one person's interest repayment is another person's principal repayment. Thus we have competition among borrowers for money to repay both principal and interest. The larger the supply of money, the more gentle this competition and the easier it is for borrowers to repay, while in times of monetary contraction, the competition intensifies and loan defaults become more common.

Apologies if this is a trivial post.

[MrBill]

Trivial? Hardly. An excellent post! Thanks. It is so hard to get one's mind around the creation of money. Perfectly logical if one borrows it from the bank. Not so straight forward to understand how someone that has never taken a loan from the bank ends up with money in their pocket. How does one change mellons into moolah?

[mattduke]

Hey, thanks for WWI.

Those who have an appreciation of U.S. history know that the Federal Reserve played an important role in support of the funding of the First World War.

federalreserve.com

[TommyJefferson]

What the hell?!
- 20 million human beings killed by governments
- Italy and Germany in economic ruin and looking for a savior
- The Great Depression.

I agree. Thanks a lot Ben.
The chutzpah of this guy never ceases to amaze me.

[NoWorries]

http://www.telegraph.co.uk/money/main.j ... rbs118.xml

...Who to believe?

[Forney2008]

I am thinking as soon as the federal reserve cannot fund another bailout like Bear Stearns is when we see the waterfall. The Federal Reserve has already used like half of its reserve as banks keep using up the discount window for emergency loans. A black swan event such as a war, hurricane, etc. could expedite this process.

[mattduke]

After reading a report like that, one who does not understand money and banking might be tempted to own a lot of cash. A nice boost in the demand for cash is just what the doctor ordered for the banking system.

[mattduke]

Photo of protesters (large)

link

[3aidlillahi]

Notify me when they start bringing guns.

[roccman]

Complete and utter waste of time.

We voted in a democratic congress because they said they would end the wars...well they did not.

Karl Denninger needs to include PO in his efforts if he wants to be effective.

But hey - these folks can actually think they did something when actually all they were pissing about was the fact they are losing boats loads of money trading this bear market.

I would guess some of those that showed up are the same ones on TF that say the greenies are to blame for oil, the rest of the world is gonna get it worse and , "how come we have not bombed Iran yet? Dam ragheads !!"...

Uh huh.

[Micki]

I applaude the initiative. Hope they have the stamina to continue and invite more people to participate.
Even the vietnam war protests started of small and fringe but eventually gathered good momentum.
I for one can't understand people who suggest we all just lie down and die (Roccman, I am disappointed. What happened? You used to be cool....)

Wash DC protesters (very large)

[oliviaharis]

Fed officials, with a few vocal exceptions, have stuck to their forecast calling for inflationary pressures to moderate as the economy slumps. Wages, a key linkage in any inflation spiral, have remained stagnant.
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oliviaharis
auto auctions

[Cashmere]

Linky Link

And raised the debt ceiling for institutions.

Unbelievable.

Essentially, the Fed is going to take any old crap as collateral in exchange for Treasuries.

It's like you walk up with a load of crap, dump it, and get a handful of gold in return.

This, to me, signals the end game is under way.

There are only 2 paths after this move . . .

1. Credit markets stabilize over the next 18 months, a few institutions fail, and banks slowly work their way back into the black, repaying the borrowed treasuries and restoring the Fed's balance sheet in the process.

2. Credit markets continue to tighten, many institutions fail, and a point is reached at which a complete or near complete nationalization of the banking sector occurs, whether that nationalization is called as it properly exists or is called by some euphemism.

Odds of 1 -

1 in 1,000.

Odds of 2 -

Well I said there were two paths, so 999/1,000.

I'm personally looking for a the government of the USSA to take over banks, either through "loans", "capital injections", "bond/loan guarantees", and so on within 12 months.


The only prayer for reviving the banks is reviving the housing market, which seems, to me, impossible; there are so many people under water and so few people who would be qualified to buy at any price near where the markets are at today.

[DantesPeak]

Essentially, the Fed is going to take any old crap as collateral in exchange for Treasuries.

It's like you walk up with a load of crap, dump it, and get a handful of gold in return.

This is just an expansion of the rules which allowed the banks/brokers to dump other crap since late last year.

They started with mortgage backed securities, then a $30 billion grab bag of unknown Bear Stearns' assets that no one wanted, and now this.

Essentially you go to the Fed with a bag of garbage, and they give you some nice gold plated US government debt certificates in return. Then you can sell the US securities if you want.

They said you have to take back the garbage eventually, but so far, no one has. I wonder why? [/sarcasm]

[smallpoxgirl]

So basically the federal government is making long plays in financial stocks on behalf of us citizens. Fantastic. Smooth move Ben. Just what I wanted for Christmas. 1000 shares of worthless financial stock and a gigantic tax bill.

[jdmartin]

It's a fucking bloodbath out there. What a mess. Maybe the whole point is to try and get the worst of the bad stuff out this weekend? Where's WaMu, anyway?

[smallpoxgirl]

Where's WaMu, anyway?

Just another skeleton in the closet.

[Cashmere]

So basically the federal government is making long plays in financial stocks on behalf of us citizens. Fantastic. Smooth move Ben. Just what I wanted for Christmas. 1000 shares of worthless financial stock and a gigantic tax bill.

Technically, as I'm sure you know SPG, the Fed is a private bank.

But of course, just like the Fed can't let big banks X, Y, and Z fail, the U.S.S.A govt. can't let the Fed fail.

In the end, it's going to be about the "full faith and credit"


of


you

and

me.