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Monetary System Still Undergoing Stress Test - Cheat Sheets Supplied

"collapsed in response to Paul Volcker’s austerity" I'm suspicious of anyone calling Paul Volker austire. He's an idiot. I challenge anyone to dispute it.

"Stephen “There-is-no-exit” Roach" I said it first.

Misunderstanding the Great Recession

Excellent discussion. You hit a home run.

Bernanke:

" A substantial body of research demonstrates that investments in education and training pay high rates of return to individuals and to society as a whole. Importantly, workforce skills can be improved not only through K-12 education, college, and graduate work but also through a variety of expeditious, market-based channels such as on-the-job training, coursework at community colleges and vocational schools, extension courses, and online training. An eclectic, market-responsive approach to increasing workforce skills is the most likely to be successful"

"From a macroeconomic standpoint, education is important because it is so directly linked to productivity, which, in turn, is the critical determinant of the overall standard of living"

"If we are to successfully navigate such challenges as the retirement of the baby-boom generation, advancing technology, and increasing globalization, we must work diligently to maintain the quality of our educational system where it is strong and strive to improve it where it is not"

Fed Losing Control of Mortgage Rates

Absolutely right. Contrary to Keynes, the money supply can never be managed by any attempt to control the cost of credit.

The solution is to get the money creating depository institutions out of the savings business. This will increase the supply of loan-funds and decreases the cost of loan-funds. This also would make the commercial banks more profitable. I.e., the non-banks are the customers of the commercial banks and they are not in competition with the commercial banks as anybody who has applied double entry booking to the banking system should know.

The Reign of Uncertainty in Financial Markets

As any monetarist knows it is impossible to control properly the money supply through the manipulation of interest rates - including the FFR. We can expect more of the same - only worse.

I.e., the only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves. Furthermore, the reserve assets that all money creating institutions are required to hold should be of a type the monetary authority can constantly monitor and control. In our commercial banking sytem, only the Federal Reserve Bank inter-bank demand deposits qualify.
This is obviously all too much to hope for and we can reasonably expect continued mismanagement of our money, and more and higher rates of inflation.

Bill Gross: Talk of Rate Hikes is 'Comical'

The answer is the same as in 1966 where REG Q ceilings for the commercial banks were lowered, but not for the financial intermediaries (S&Ls).

The savings-investment process is an abstract reality that conceptually is unfathomable to the unthinking (Just as Einstein’s early papers were).

People are just arrogant and thus ignorant. Just remember what Louis Stone said in the Wall Street Journal (whom the movie Wall Street was dedicated).

The SEC's Envious of a Powerful Fed

I am inclined to the opinion that these decision-making processes (supervision and regulation) should lie entirely with the Board of Governors, and that the Board should be reconstituted to include the Secretary of the Treasury, the Comptroller of the Currency, the Chairman of the Federal Home Loan Bank Board, the Director of the Federal Deposit Insurance Corporation, the Director of the Office of Thrift Supervision, and the Chairman of the Securities and Exchange Commission.

Ten Notes on the Financial System and Our Quasi-Government

Poole was a conservative at the "Maverick" Federal Reserve Bank of St. Louis. But I am disturbed with people who spend their entire careers at something, & never end up grasping how things work: Dr. William Poole: "The depreciation of the dollar is something that is not explicable. And the way I like to phrase this – I like to put my academic hat back on. If you look at academic studies of forecasts of the exchange rates across the major currencies, you find that the forecasts are simply not worth a damn."

If the world's largest economy ($14b+) has a contraction in its gdp, imports will fall, & export driven countries will suffer, exacerbating the negative (reversal) in the flow of funds, and any currency crisis. Forecasting results (some using 1 & some using 2 different time series:

Mexico crisis 2/17/1982 (not identified) - Peso was pegged

Listed below, currency crisis that were predictable & preventable

(1) Black Monday Oct 19 1987 (same day)

(2) Mexico Peso crisis Dec 1994 (2 months early) Peso was pegged

(3) U.S. dollar fall in Mar. 1995 (same month)

(4) Asian financial crisis July 1997 (one month late)

(5) Russian financial crisis 1998 (same month)

Poole made some brash statements he couldn't defend.

Ten Notes on the Financial System and Our Quasi-Government

Re - the red tide: Hope for repayment?

Between 1933 and 1935, the RFC purchased more than $1 billion in preferred stock in individual banks. To gauge the significant size of this agency's activity, in 1935 the total book value of equity capital (including the RFC investment) for all commercial banks was $3.6 billion. New RFC bank investment effectively ended by late 1935, and banks gradually repurchased the government's stock out of their earnings when the banks subsequently returned to profitability.

Fixing the Mortgage Mess: Operation Twist, Take Two

Also commercial bank (depository instutions with transaction accounts) profits will jump. The proof is incontrovertiable.

Fixing the Mortgage Mess: Operation Twist, Take Two

Gross is dead wrong. There may be some benefit to shortening the maturity lengths of new Treasury Debt or even changing the SOMA portfolio.

However, the correct economic solution was that taken in 1966. The Fed lowered REG Q ceilings (for commercial banks only). The "thrifts" never used to have interest rate ceilings until the commercial banks started "buying" their liquidity as opposed to "storing" their liquidity (as they talked our legislators into).

What does this do? It lowers all interest rates but primarily long-term rates. It increases the supply of loan-funds - not the supply of money. The supply of money stays exactly the same. And the largest benefit is that by transferring savings (savings lost to investment or to any other type of expenditure when bottled up in CBs) into real investment, real-gdp will expand not contract.

Should the US Government Buy Distressed Bonds?

Just nationalize the money and credit creating depository institutions. You will find this solves the non-bank (intermediaries) problem.

Ben Bernanke’s Initiation: Flashback to 1987

Black Monday Oct 19 1987.

“Will this happen again? The short answer is that no one knows.”

This is of course - absolute tripe.

On Sept. 4 the Fed raised (1) the discount rate 1/2 percent to 6, and (2) the federal funds rate 1/2 percent to 7.25 (up from 5.875 percent in Jan). On Sept. 30 fed funds spiked at 8.38; fell to 7.30 by Oct. 7; then rose to a peak of 7.61 Oct 19 (Black Monday).

At the same time, (Sept. & Oct 87), the decline in the proxy for real-gdp (its rate of change) plummeted (a record since its inception in 1918). The quantity of legal reserves bottomed in the bi-weekly period ending 10/21/87. This was the trigger.

At the time, the 30 year conventional mortgage yielded 11.26 percent, up from 8.49 percent in Jan. 87, and moody's 30 year AAA corporate bonds yielded 11.06 percent on 10/19/87, up from 9.37 in Jan. 87.

The preceding tight monetary policy and the sharp reduction in legal reserves, had forced all interest rates up in the short run (when inflation and real-gdp were subsiding).

And the banks scrambled for reserves at the end of their maintenance period - to support their loans-deposits (contemporaneous reserve requirements were in effect exacerbating the shortfall and response time). Apparently a significant number of banks, or large banks with large reserve deficiencies, tried to settle their obligations at the last moment.

Black Monday's trigger was obscured because the decline in monetary flows (MVt) overlapped Qtr3 & Qtr4 GDP (quarterly reports are used by the Bureau of Economic Analysis to measure gross domestic product – not monthly - which is another problem).

The Fed quickly reversed their policy when the markets panicked, i.e., they brought the volume legal reserves back into alignment.

The United States has the largest national economy in the world, with a GDP for 2006 of 13.21 trillion dollars. Fed 27, 2007 didn't start in China, it started here. That's why the Shanghai market dropped 6.5% May 30 2007 without affecting other world markets.

Interest rates have already peaked in July along with nominal gdp. Real-gdp & inflation both bottom in Oct. this year 2007. It should be a period of market weakness. Even so, 4qtr economic activity sharply rebounds.

There will absolutely not be a repeat of 87. Monetary Flows (MVt) are inviolate & sacrosanct.