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Our monetary system is insane

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2 minutes ago, hornhorn said:

Did you read the paper? The amount you're parroting is the cumulative facility(as in repo facility, auction facility, SWAPS, etc.) to make the money move, not the actual bailout. To have an expanding economy, Federal reserves of all countries have to back central banks with cumulative facilities. 

Actual bailout loans still stand at $245.2 billion which were paid back, with interest.

Ensuring money flow to the financial institutions is the major part of the "bailout." I understand you want to limit the scope to one bailout mechanism. But the response was much greater than the appetizer you focus on. There main courses were the meat of the financial rescue for the few Too Big to Fail Institutions.

And to the greater point, the ability to use trillions to bail out the TBTF institutions - without ensuing massive inflation - demonstrates we, as a nation, can spend trillions to help out those who do not qualify for TBTF status. That is the issue, no?

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1 minute ago, washparkhorn said:

Ensuring money flow to the financial institutions is the major part of the "bailout." I understand you want to limit the scope to one bailout mechanism. But the response was much greater than the appetizer you focus on. There main courses were the meat of the financial rescue for the few Too Big to Fail Institutions.

And to the greater point, the ability to use trillions to bail out the TBTF institutions - without ensuing massive inflation - demonstrates we, as a nation, can spend trillions to help out those who do not qualify for TBTF status. That is the issue, no?

That money flow was occurring even before the collapse and has been occurring since. You seem to under appreciate the word trillion. $29 trillion is a huge number, its larger than the US GDP. If that was the size of the bailout the top 100 wealthiest people in the world would all be bankers the poorest of them at a net worth of $250 billion. Two and a half times wealthier than Bezos today. That isn't the case.

We as a human race have figured out that a static dollar serves no purpose which is why it needs to be repurposed while sitting idly in a bank account somewhere. You're looking at it as a conspiracy against the poor. It isn't.

 

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if i lend you $5, and the next day you pay me back, and then i lend you $5, and then the next day you pay me back, and then i lend you $5, and then the next day you pay me back ... how much money did i lend you?

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17 minutes ago, elfenix said:

if i lend you $5, and the next day you pay me back, and then i lend you $5, and then the next day you pay me back, and then i lend you $5, and then the next day you pay me back ... how much money did i lend you?

Four...?

 

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12 minutes ago, elfenix said:

if i lend you $5, and the next day you pay me back, and then i lend you $5, and then the next day you pay me back, and then i lend you $5, and then the next day you pay me back ... how much money did i lend you?

If you lend me $1,000 and allow me to lend $10,000 based on your $1,000 loan, you allow me keep the interest on the $10,000 loans,  and you will, in fact, pay me to park the money on the money you lend me, aren't you giving me much more than a $1,000 loan? And then if you guarantee to bail me out if the some of those $10,000 loans you allow me to make on the $1000 you loan me, well then, I am going to make a lot of money from your little $1,000 daily loan. And I will have no risk, will I? And without risk, I am more likely to make risky decisions with all of the liquidity you provide me, no? But as long as you guarantee I am too big to fail, why would I not try to maximize my profits?

Privatize the profit and socialize the risk - the American Financial System since 2008. 

 

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Posted (edited)
12 minutes ago, washparkhorn said:

If you lend me $1,000 and allow me to lend $10,000 based on your $1,000 loan, you allow me keep the interest on the $10,000 loans,  and you will, in fact, pay me to park the money on the money you lend me, aren't you giving me much more than a $1,000 loan? And then if you guarantee to bail me out if the some of those $10,000 loans you allow me to make on the $1000 you loan me, well then, I am going to make a lot of money from your little $1,000 daily loan. And I will have no risk, will I? And without risk, I am more likely to make risky decisions with all of the liquidity you provide me, no? But as long as you guarantee I am too big to fail, why would I not try to maximize my profits?

Privatize the profit and socialize the risk - the American Financial System since 2008. 

 

Tell that to Lehman Brothers 

Edited by Incredulity

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Posted (edited)
On 1/9/2019 at 11:44 AM, Fudge Nuggets said:

People have been saying that since the US got off the gold standard.

Bernorange is a gold fanatic.  He hates "fiat money."  That's all you need to know.  

Bernorange, as you read this Bernanke is laughing at you.

Edited by Bullneck

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If you lend me $1,000 and allow me to lend $10,000 based on your $1,000 loan, you allow me keep the interest on the $10,000 loans,  and you will, in fact, pay me to park the money on the money you lend me, aren't you giving me much more than a $1,000 loan? And then if you guarantee to bail me out if the some of those $10,000 loans you allow me to make on the $1000 you loan me, well then, I am going to make a lot of money from your little $1,000 daily loan. And I will have no risk, will I? And without risk, I am more likely to make risky decisions with all of the liquidity you provide me, no? But as long as you guarantee I am too big to fail, why would I not try to maximize my profits?
Privatize the profit and socialize the risk - the American Financial System since 2008. 
 
The historical evidence is that the banking system is far more stable with the fed in place than without, so I don't think your complaint about moral hazard has much grounding. It's also moving the goalposts from your previous blurb.

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Posted (edited)
4 hours ago, elfenix said:

The historical evidence is that the banking system is far more stable with the fed in place than without, so I don't think your complaint about moral hazard has much grounding. It's also moving the goalposts from your previous blurb.

I don't doubt that the Fed has performed well for those who benefit from their direct aid. And indirectly, there is a case that the direct Fed interventions have trickled down to benefit some. But the bottom line is the Fed interventions were massive and we did not see the inflation one would expect from such loose monetary policy. 

I am not sure I was moving the goal posts to moral hazard as much as I am pointing out  - if we can directly aid the most wealthy with Fed type interventions, would it be moral to aid those who are less wealthy or who have no wealth at all with similar interventions? It may be more moral. 

If that is moral - then the question of moral hazard is ripe. What moral hazard do we face as a nation from aiding the less wealthy in this nation using the same interventions the Fed used to save the most wealthy? Two different sets of people and institutions, of course, so the banking industry may not be a relevant perspective for that discussion. And one does not have to tear down the wealthy to aid the less wealthy. Raising the less wealthy's boats benefits all, does it not? They would inject the money back into the system already dominated by a relatively few wealthy individuals. Win-Win.

But there is moral hazard - depending on the intervention - for both the individuals benefitting from the hand-up and from the institutions who will administer such funding. I am less worried about the individuals because their debt burden is so high right now. They will be paying off financial institutions (which could be its own problem). 

I do worry about the institutions that would administer the interventions. An extremely efficient bureaucracy is needed or preferably none at all other to add digits to repository accounts. There is moral hazard with the amount of money at issue for institutions. Their control must be well-defined and limited.

Is demand-pull inflation a risk at this juncture and, if not, how much room do we have until it is a risk is still the basic question. Is MMT correct, as proven by the 2008 interventions to save and reinflate the financial sector?

Edited by washparkhorn

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4 hours ago, Bullneck said:

Bernorange is a gold fanatic.  He hates "fiat money."  That's all you need to know.  

Bernorange, as you read this Bernanke is laughing at you.

Bern is an honest proponent of a worldview shared by many for good reasons. One always has to start at the issue of hazards associated with fiat money.

It is appearing to be the case that for the United States, our fiat money behaves very differently from Zimbabwe or from Greece or just about any other currency out there. Is that temporary? Sure - given enough time, everything is temporary. We are just coming to understand how fiat money works for the US - and it is blowing up traditional economic beliefs, at the present. 

Bern is absolutely right that a catastrophic shock to the system will destroy it. And gold/silver might provide a safe haven for some with enough of it. I am just not sure with our military that will ever be the case in the US. We will quickly reestablish the new dollar as the world's currency because of our might and remarkable geography and people (I hope). So my bag of silver coins I was going to use may never be needed. But it's a good feeling to have them. 

Bern's view and opinions are important to this topic especially - as are everyone else's. Bern keeps us grounded in the fundamentals of storing wealth. 

Bernanke is the luckies SOB walking. He doubted MMT and then used it to save his buddies - and it did not trigger massive inflation. He thought it would - so he put on the austerity brakes before the job was done. Only Little Timmy Geithner is luckier. 

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It's kind of amazing how many people earnestly believed we would see massive inflation right after something like $16 trillion essentially evaporated.

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Central banks have lost control of global liquidity. The dollarised international financial system has become treacherously unstable and vulnerable to a sudden reversal in capital flows.

Yet the International Monetary Fund is a diminished force and no longer has the firepower to act as the world's lender of last resort in an emergency. That is the stark conclusion of a G20 task-force of leading currency experts.

A surge in offshore dollar lending -- increasingly through opaque security markets -- has exploded to $18 trillion and has overwhelmed the safety buffers of the existing financial architecture. The concern is that a continued surge in the value of the US dollar -- potentially triggered by the coronavirus epidemic, or any other black swan catalyst -- could bring this to a head.

"The risk of an unexpected and unplanned reversal of abundant global liquidity hangs over the world economy. Strong contagion across markets could make the endogenous dynamics of global liquidity very dangerous," the panel warned in an advisory report for G20 ministers, the Financial Stability Board and the IMF.

A decade of ultra-low interest rates and quantitative easing has flooded the globe with highly unstable forms of funding denominated in dollars, with no guarantor standing behind them. Glaring currency and maturity mismatches have accumulated.

This structure is prone to an abrupt "dollar crunch" should borrowers in China, east Asia, emerging markets, or even parts of Europe suddenly start scrambling for scarce US currency to repay bonds and loans in a crisis.

The report from the Robert Triffin International forum said the purely "private component of global liquidity" (defined as foreign currency credit to non-banks) has mushroomed to $12 trillion. This now dwarfs the shrunken $3 trillion pool of "official" liquidity, such as IMF resources, central bank swap lines, and even the eurozone bailout fund (ESM).

This private liquidity is highly geared to spasms of risk appetite and over-confidence, and even more geared to panic when trouble starts. It can snap back violently and set off potentially unstoppable chain reactions in a heartbeat. The liquidity is "destroyed" by forced deleveraging. Staircase up, escalator down.

"As the 2008 experience shows, the supply of private liquidity cannot be relied upon in periods of stress," according to the document by Bernard Snoy, Andre Icard, and Philip Turner, former top officials at the World Bank and the Bank for International Settlements.

They warned that there is no clear backstop if anything goes wrong. This is the Achilles' heel in the structure of globalised modern finance, the torment of regulators at their Swiss sanctum sanctorum in Basel.

The IMF cannot plausibly come to the rescue in a major upset. Its resources have dwindled to just 1 percent of global external liabilities, down from 4 percent in the 1980s, overtaken by the mushrooming scale of cross-border finance. "The IMF is not in a position to function as an international lender of last resort. The global financial safety net is too small," they said.
...

https://www.telegraph.co.uk/business/2020/02/09/global-task-force-sounds-alarm-dangerous-dollar-crunch/

h/t (no paywall):  http://gata.org/node/19826

Imagine how big the current stock market bubble will get if the Fed really opens the spigot.

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... This looks like a truly historic juncture, of the kind that comes along only every few decades, as the international financial order shifts.

After the war, the developed world was governed by the Bretton Woods accords, which tied all currencies to the dollar, which was in turn pegged to gold. It was a looser form of a gold standard, and survived until 1971. That was when Richard Nixon ended the gold peg, realizing that it had become too great a burden for the U.S., and stood in the way of the expansionary fiscal policy he was hoping to adopt ahead of his re-election campaign.

The result was a huge shock to the world order. With the gold peg gone, the financial system adopted a new anchor, which was oil. In a book published 10 years ago, I tried describing the system that replaced Bretton Woods as an Oil Standard. Effectively, producers tried to defend themselves against the declining buying power of the dollar by hiking prices, so as to keep the price of oil in gold terms effectively constant. The oil/gold ratio measures how much gold you would need to pay to buy a certain amount of oil. As the chart shows, it ended the 1970s almost exactly where it had started, despite the massive increase in dollar terms.
...
The Oil Standard era ended in the early 1980s. Markets — and everyone else — had lost faith in the ability of central banks to control inflation. Paul Volcker arrived at the Fed, raised rates more than anyone thought he would dare, provoked a recession, and convinced everyone that central banks could control inflation after all. In conjunction with the Reagan/Thatcher approach to economic management, and then the collapse of the Soviet Union and the resurgence of China, that ushered in a quarter-century of triumphalism for a new model anchored by broadly trusted central banks.

That foundered in the financial crisis of 2007-09.  Now we have reached a new juncture, where the fear is that central banks cannot control deflation. For the post-crisis decade, the U.S. has managed to stay distinct, thanks in part to the privilege of the world’s reserve currency, and in part to the superior success of its corporate sector. It has done this even as Japan and Western Europe have sunk into negative interest rates, while the emerging markets have stagnated. The twin shocks of the epidemic and the oil price now appear to have wounded confidence that the U.S. can stand alone.

It certainly looks as though the world has at last arrived at a point that it appeared to have reached a decade ago. Some new financial order, to replace Bretton Woods and the system that Volcker built to replace it, is now needed. A decade of monetary expansion has delayed the issue. It is hard to see how it can be delayed much further. It would be wise to brace for disruption to match what was experienced at the end of the 1970s and the beginning of the 1980s.
...

https://www.bloomberg.com/opinion/articles/2020-03-09/crash-in-oil-prices-bond-yields-marks-shift-in-global-order

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1 hour ago, Rusty Shackelford said:

What are your thoughts on the dollar milkshake theory?

I had to look it up after reading your post (I guess I live under a rock?), so none.  The dollar is rallying hard today - back up over a hundred this morning.  Time will tell whether it's a "reverse tsunami" or if we find some equilibrium..

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54 minutes ago, bernorange said:

I had to look it up after reading your post (I guess I live under a rock?), so none.  The dollar is rallying hard today - back up over a hundred this morning.  Time will tell whether it's a "reverse tsunami" or if we find some equilibrium..

https://www.zerohedge.com/markets/what-12-trillion-dollar-margin-call-looks

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1 hour ago, Rusty Shackelford said:

Just FYI - zerohedge has a very low percentage of fact-based and evidence-supported reporting.

https://mediabiasfactcheck.com/zero-hedge/

It's registered in Bulgaria under a pseudonym and its creator/founder described their stance and messaging as “Russia=good. Obama=idiot. Bashar al-Assad=benevolent leader. John Kerry= dunce. Vladimir Putin=greatest leader in the history of statecraft.”

They're not a great source to post if you want to be taken seriously.

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Yes I know, I ignore 99% of the bullshit they repost, but do you have anything to say about the article I posted?  Re-posting is what they do, but in this case it's Bloomberg and JP morgan.

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The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus. Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. It may be.

In just these past few weeks, the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook. That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

  • CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.
  • PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.
  • TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.
  • SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.
  • MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position. What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

This scheme essentially merges the Fed and Treasury into one organization. So, meet your new Fed chairman, Donald J. Trump.
...

https://www.bloomberg.com/opinion/articles/2020-03-27/federal-reserve-s-financial-cure-risks-being-worse-than-disease

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