Nothing Good Will Come of Bankers Being in Control 41 comments
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[excerpted from Bill Cara's Daily Report]
The final hour of trading in New York Tuesday was a clear sign that traders are tense. The unprecedented $USD rally is causing international trade in goods and services as well as securities and commodity markets to freeze.
The problem is lack of confidence by traders who know the system is broke and that governments have been trapped into banker bailout decisions rather than actions to address the problem source. Tuesday, for instance, the People’s Bank of China started on its own trillion dollar banking bailout with $140 billion slated for the Agriculture Bank. Countries like Argentina moved to take control of the people’s pensions from the private sector before these funds have been squandered and the people revolt against government.
In a nutshell, the banking system has collapsed under the weight of its own stupidities during the past decade. Fearful of the bankers’ actions in squeezing undermargined accounts, independent traders are selling global holdings and moving to the best safe-haven they know, which is the $USD and the repayment of loans. The Japanese equity market is collapsing as the Carry Trade winds down. Money there is flowing out of equities into Yen and the repayment of loans.
Tuesday alone the $USD (1.56% to 84.37) and the Yen (+1.23% to 99.68) trounced all other currencies. The Euro ($XEU -2.01% to 130.77), Pound ($XBP -2.53% to 167.30) and Cdn Loonie ($CDW -1.55% to 82.57) all plunged. To relieve the stress, the Federal Reserve Bank will likely have to cut its rate by 50 basis points Wednesday rather than wait until next week.
The core of the problem is that the bankers who caused these problems and the regulators who permitted them to build to the point of collapse are the same people who are advising the international finance ministers. The latter have caved in and are stripping the peoples’ treasuries in order to prop up the failed banking system. The intelligent move would be for governments to freeze currencies and work together to construct a whole new structure for global finance and regulation.
Sadly, the bankers are in control. As a consequence, nothing good will come of the present situation. Trading and commerce as we know it will stop. Governments have to realize that no amount of money is going to stave a crisis because it is power that the bankers are demanding. The people are in the process of throwing their hands in the air and giving up. Rally one day, crushing losses the next – it’s all too much.
The $USD cannot continue to rally here or else the parts of the global financial system that are working will shut down. Traders will stop taking risk, and will repay their loans. The underground economy will take over and governments will seize up under the loss of tax receipts. Labor strikes and violence will ensue.
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This article has 41 comments:
slated for some type of worldwide recession of larger magnitude than
most realize. Our US stockbrokerage and banking system has been socialized and I suppose our Auto Industry (what little of it is left domestically) will be socialized also. I think your next job is going to be working on a govenment works project...good luck.
Hogwash, the populist attempt to stiff banks with all the losses from their own insane bubble bets are being properly resisted by authorities, who can see no one will be better off destroying the financial system.
What this is, is a capital strike.
The end of the world traders and the Bric traders and the commodity bulls and the times-they-are-a-chang... populists wanted to slam America and the developed world, and pretend that it was bankrupt and they didn't need it. Well guess what? You need it. You pushed until it broke and the breaking killed you, not the system.
Dollars are going to fly, and debt claims in dollars are going to be the best bet there is, until capital is repaid every dime stolen through bubbles blown and insane pricing and outright default. Governments can pay, or it can be wrung from the recalcitrant by sending them straight to hell - as Argentina is discovering. But capital *will* be paid, the full cost of its services.
All the loan losses are going to be paid by *borrowers*, not bankers. Bankers are middlemen, economic law sets prices, not them. You stiff them for $2 trillion in loan losses, you will pay them $4 trillion extra over the next 5 years to make them whole, refinance the system, and restore some of the confidence your deadbeat reckless betting shredded. But you *will* pay. Nobody else is going to, for you.
Uh, nope. Bankers create money out of nothing and lend it out for interest. This is called fractional reserve lending. Bankers once were just middlemen between lenders and borrowers but they discovered they could "loan" more than their deposits. This is an inflationary cheat.
For more info:
mises.org/Books/myster...
by Murray N. Rothbard
OK Jason, don't let reality get in the way of your beliefs.
Consider for instance, a standard $500,000 no recourse loan made by Bank A on a $515,000 home (a typical 3% down) back in 2006 that has gone unpaid for the past 6 months. The owners have walked away, forfeiting their $15,000 downpayment to escape the $3500/month PITI payment in favor of $1200/month for rent. (They will recover their $15,000 downpayment in less than year of savings on rent.)
Bank A forecloses and finds that nobody outbids their statutory $500,000 lien (surprise!!). They take possession and discover that the house can only be sold for $300,000 in the current market and that the typical time on the market is 11 months.
Exactly how does the bank get the former borrower to pay? They won't. They have no recourse except to take the house. That was the deal the bank entered, freely and without coercion, as stated in the 'standard' mortgage contract.
The party who will pay in this instance is the bank. They will lose $200,000 (maybe more if the market softens further), plus foreclosure costs, plus maintanence costs, plus marketing costs, plus brokerage fees, plus insurance costs, until they can finally unload the house to a new buyer.
On top of that they will probably have to extend a loan to the new buyer at generous terms just to 'make the sale'.
At the end of 2007 industry experts were predicting 1.4 million such foreclosures. That figure was probably on the low side.
Repeat the above scenario a couple million times and you are right where things stand today. The banks are hosed to the estimated amount of $450 billion in 2008 alone because they were too loose in their lending standards (at the urging of the gub'mint, granted) for many years prior.
That doesn't include any consideration of losses at the big investment banks where derivitives were utilized in addition to just the loaning on real estate.
"Populist" movement my foot. The banks played fast and loose with the rules and they got caught with their hand in the cookie jar. Now that they are on the hook for paying up, they whine to the gub'mint to 'save' them at taxpayer expense.
Banks will continue to take it on the chin until the housing glut is re-priced to the point where real estate sells off. There is a long way to go yet.
Whose balance sheet it was a wastin',
The Treasury in size,
Did recapitalize,
So the bank after borrowers could hasten.
make no mistake: the prupose is not to save the banks as such - the purpose is to make them lend again to the real economy. if bailout packages cannot achieve that goal, then other measures must be taken. and when push comes to shove it means to throw out the John Thains and Dimons and Kovacevics and all the other crooks and force the banks to do their actual business. the goal is noot to restore profitability at banks. the instant goal must be to keep the economy going.
The question is, going where?
The proper goal is to get the economy back on a sound footing so it can grow sensibly. Heroic measures to keep things 'going' toward destructive ends will only serve to make the problem worse.
Should the gub'mint just pay builders to construct more houses to avoid unemployment and increase consumer spending, even if it adds to the glut in housing? How big a glut of housing is "too much"? When does the program stop? How much more money would be wasted building things that aren't needed or wanted?
How about having the government pay Ford and GM to make cars that no one wants or can afford. Same questions. How big a glut in SUVs is too much? How long will those SUVs sit in a dealer's lot before the dealer goes under and the car is auctioned off for pennies on the dollar? Wouldn't that indicate that all the money and resources used to make those SUVs were wasted?
The government doesn't know!! It's just trying to "keep things going" without any idea whether the direction we're headed is good or bad.
Every time they pass out more money they are allowing it to be spent on things that aren't needed, which only props up businesses that create stuff people don't want. Austrian economists call it mal-investment. Spending money on business to produce more stuff than otherwise would be demanded.
To do so is to waste our resources and increase the problem in the long run.
Free market pricing helps the market to allocate resources to their most desired uses. Businesses that produce non-desired goods shrink to levels that support the demand for their products at the prices which generate sufficient profits to keep those businesses open.
Gub'mint intervention distorts the signals that direct investments to those uses, keeps "too many" businesses open, and wastes the investment and resources consumed.
I think you're right on. The "real" economy produces and trades for all the goods and services that everyone needs and wants to buy. "Prices" set by free markets allocate resources to their most valued uses, and prices have to be flexible to accomodate shifting supply and demand situations.
The trouble is that minimum prices are set by business' cost structure and profit needs but businesses do not "make money" that is needed to pay their prices. Making money is a separate process performed by banking, which it does by making "loans". New bank lending adds to the money supply; repayment of loans decreases the money supply.
In banking parlance, repayment of loans has the effect of reducing "deposits", because most money exists as numbers in bank accounts (i.e. "deposits") and the money is transferred between banks via checks written by people and firms on their bank account balances. Fractional reserve laws (or 'conventions' that are enforced by banking supervisory authorities, where there is no hard law) link the volume of new loans to the volume of deposits a bank has attracted.
So under this system large scale loan repayment like we see now as everyone simultaneously tries to get out of debt has the effect of reducing the amount of new lending banks are permitted to do.
If the conventional 'fractional reserve ratio' is 20, then banks can lend 20 times whatever new deposits they attract. But banks create a deposit every time they make a new loan and deposit the loan amount in your bank account, so it's a self-accelerating process when people are confident in the future and are borrowing and spending money.
Spending money "activates" economic activity but monetary transactions are not in themselves "economic": what is 'real' about moving numbers around between bank account balances? Money is the economic nervous system which transfers price information around the real economy.
Then in times like now when people are uncertain about the future the process is self-decelerating because every repayment of a loan destroys a deposit which reduces by 20 times the amount of loans a bank can make.
I think it is clear that this system exacerbates economic trends by multiplying any initial change in borrower sentiment by 20 times either up or down. So we get accelerating inflation on the way up and accelerating deflation on the way down.
Our economy cannot work without a functioning nervous system. It seems as if somebody slipped a bag of crystal meth and a couple hits of acid into the money system because it's writhing around like a whacked out junkie.
Who can figure out how to fix this?
Problem solved.
Remove the ability of banks to leverage the money supply. Make people compete to get the loans of whatever actual savings are available. That will raise interest rates (more borrowers for small amount of savings will bid interest rates higher) and force businesses with lower profit margins to not borrow. They don't generate enough free cash to service the loan at higher interest rates.
The most profitable businesses (ie. the ones with the most consumer demand) will be able to afford to pay higher interest rates in order to get use of the limited savings.
Presto. Savings are automatically deployed to the businesses with the most sought after products. Others go without until more savings are generated. Businesses with the most valued products expand, those with less desired products can't expand without an increase in savings.
Growth is stable until public tastes change and/or other products become more "valued".
"The most profitable businesses (ie. the ones with the most consumer demand) will be able to afford to pay higher interest rates in order to get use of the limited savings."
How does this allow for the introduction of new business/technology to continue to fuel the future growth of our economy?
Start-ups/inventors won't be able to afford the funding even if they found the cure for cancer.
Besides what Smarty said, Murray N. Rothbard has a solution at the end of his The Mystery of Banking available as a free download at:
mises.org/Books/myster...
Another solution is free banking with competing currencies and 100% reserves. This allows indefinite expansion of the money supply but ONLY as new resources as added to the economy. The money would expand as resources are added to back a currency and shrink as the resource backing the currency was consumed.
disclosure: I read lew.rockwell.com
My two bits: Even a fixed money supply is capable of financing investment since each unit of money grows more valuable over time due to the natural tendency of prices to fall due to progress.
FDR - where are you now that we need you?
> jack
Loans aren't the only way to expand businesses. Startups could sell part of the business to others in order to raise money. That's what venture capitalists do now.
If you find the 'one pill cure for cancer' and can't arrange to borrow money to set up shop, you can sell 49% to moonbat for 100 oz of gold, open up, and make $1 Billion in profits the first year. You get to keep $510 Million and moonbat gets the other $480 Million (after he spends $9 Million on gold, firearms, ammo, soap, rice, beans, booze, and cigarettes and sends me my $1 Million investment advisory fee).
That might seem like you're paying a whole lot more than borrowing at 8% would be, but it's really not. If you borrow and your business fails, you still have to pay back the loan. If you fail after selling to moonbat you don't owe anything. Since moonbat is risking the loss of his entire investment, he will expect a much larger return than 8% on his money.
In order to get anything out of your business idea you might have to agree to share the profits with a funding source that has access to accumulated savings and is willing to risk them.
In a free market there's always a way to get a profitable (ie. demand supplying) business running provided there are savings available to support the effort.
Technology improvements will shift the profitability dynamic between business firms or products by lowering the costs of production. This will allow the improving business to offer the good at a lower cost to the public (while increasing profit margins) and gaining market share thereby increasing total profit.
If this is the case, the business can estimate how much more money it will have available for loan payments and how high an interest rate it can afford for a loan to make the improvements. If the productivity increase is large enough, the business may be able to afford to out-bid others for the available savings to fund the improvements.
www.lewrockwell.com/no...
It appears to me that even though Greenspan understood the theory, he got caught up in the details of implementing government policy in order to 'get ahead'. Apparently he never got to the point where he just stopped and said "What are we DOING?" because he believed he could get 'close enough' via pulling monetary levers.
Looks like political expediency trumped youthful ideals over the long run.
I also discovered that Greenspan was on the board of Goldman before becoming FED Chairman. Interesting, no?
That is the appeal of Ron Paul, ideas at least as good as Greenspan's and the proven character to implement them.
That's why I planned to write him in for President in 2004. My plan failed when I discovered (in the voting booth) that there wasn't a spot on the ballot for a write-in. I'm sure that my vote for the wishy-washy libertarian party candidate must have impacted the election results in unforeseen ways.
The 2008 primary showed that the system is rotten to the core and unlikely to be fixed any time soon, at least not pleasantly.
What will be more interesting is how many seats in the House or Senate are filled by Ron Paul disciples. Will the root sprout branches and leaves?
You should put mises.org in as your website. You keep referring everyone to Rothbard's books.
I figure if I can get anyone interested enough to start following lewrockwell.com it's worth putting it out there. Can't hurt.
'Bout the economy getting much worse,
Mr. Greenspan he clothed,
With the blame, so he loathed,
Instead of resorting to curse.
"Love the sinner, hate the sin." etc. Luckily, I can loath them while loving them.
I've been meaning to tell you: Your "I do not buy illiquid stocks" has been very popular with those I've shared it with. I, of course,
attributed it to you.
To plagiarize, what a silly lie!
Does it help one bit
if one hath not wit?
I've read the first few chapters of the Mystery of Banking and like what I see. I had always thought "hard currency" like gold and silver placed artificial restraints on the money supply and thus economic growth. But when money itself is a commodity that is traded for other real wealth, the relative value of money (i.e. the "price" of money) will adjust to the level of economic activity. As von Mises said, there is no "optimum" level of money supply, as the price/value of money will adjust to ANY level of money supply.
And you make another crucial point that Rothbard lays out: due to productivity improvements the value in terms of buying power of hard currencies that remain at quite fixed "money supply" levels means that savings appreciate in value over time. This would solve our "pension dilemna" where today's pension contributions are inflated to near worthlessness in 40 years and only by 'investing' in stocks, say, whose numerical price continuously rises can the pension funds hope to retain any value. Hard currency may be the "silver bullet"--pardon the pun--to kill the inflationary vampire.
Welcome to the "Dark Side", as Smarty would say :)
Incalculable good would result if we got back to honest money.
I'm wondering about hard money: if prices are generally declining as economic productivity rises, how will businesses earn profits? To make monetary profit a business has to take more money out of the economy than the total of input costs that it puts into the economy in the form of payrolls, materials purchases, etc. In our current system monetary profits are made possible by ever-increasing new loans to people other than the business who is trying to recover its costs plus some profit, in money. A new loan to Peter provides the new money that makes it possible for Paul to make a profit. Paul distributed $1000 of money into the system as his costs, but has to collect $1100 of money/prices out of the system to make a profit.
This is the insight of CH Douglas, author of the "social credit" theory of money: the total of monetary incomes paid out by a business must be less than the total of monetary prices collected by that business for selling its output. Otherwise the business "loses money" and fails. Every other productive person or business is in the same boat. Everyone needs to take more money out of the system than they put in, in order to make a profit and stay in business.
It seems that in a state of fixed money supply, the amount of money available for profit steadily diminishes to zero as businesses collect that profit-money out of the economy; especially if it happens that every business in the system chooses to hold their profit out of the system as "retained earnings" which = business "savings".
I think you have it backwards, derryl. Prices decline because businesses need less or cheaper materials or less labor or less skilled labor to produce the same quality or higher product. This allows them to charge less for their products while maintaining the same profit margin, or more likely, increase it as more people are able to afford the product.
I do not argue for ANY monetary standard even gold or silver. As Rothbard says the marketplace chose gold and silver where it was available. Let it choose again. That way, if someone cornered the gold or silver supply, another money could be used.
replace : "or more likely, increase it as more people are able to afford the product."
with
"and likely increase their total profit as more people are able to afford the product."
Oh, I see. Just like keeping some parts of our bodies in the "dark".
Good George Reisman article on Lew Rockwell today. Maybe, I'm being redundant. His articles always seem good to me.
Keep in mind that the business expense called "Labor" is the paycheck that we all bring home and spend. If the business can lower prices by increasing productivity, that same labor expense will be able to buy more products in the entire economy and support more businesses.
Alternatively, the worker-bees can buy the same products they always buy for less and save what is left over to invest in businesses of their own or others. This pool of savings is what allows businesses to purchase new equipment for productivity improvements (think of the difference between using a chain saw and an axe for how many trees a worker can cut down in a day).
In general then: Savings are used by businesses to improve productivity, leading to lower prices and an improving standard of living for the employee, (without needeing a raise from current wages) which leads to more savings. Wash, rinse, repeat.
moonbat's positive feedback loop works to everyone's benefit if the value of money is stable.
What the FED does is to 'boost' that natural pool of savings with "print & lend" policies. At first it works great because there is a lot of extra 'savings' for businesses to borrow. Eventually though general prices begin to go up becasue the value of the paycheck starts falling.
Now labor's wages MUST increase for the standard of living to stay constant, which increases the labor costs for business and lowers profits. The positive feedback above unwinds as marginally profitable businesses go under from increasing input costs (due to lower money value) while their debt remains behind as a claim on the business capital which must be liquidated at less then 100% value.