Ok, so long as we're not calling it "crazy". Because until we're going to have the debate, I don't like being painted as a kook. You got this right? It's the second time it has come up between you and I in the last couple weeks. I try to think a lot more of you than this. Well, it was bad policy to begin with. It's like the people who want to congratulate Bush for cutting the deficit, he exacerbated in the first place. There will be other consequences, for sure. Every action has a reaction. It is a strong move, but understand, that it comes at a cost. The people with bad CDOs and who extended credit unwisely, are getting a pass for their business mistakes. Instead of taking the losses that are a normal part of risk based investment, they are now playing a game where their losses are capped, significantly cheating the people who make sound decisions and play the game without artifical safety nets. Every time there is outside interference in the market, even an artificial correction to an artifical problem, moral hazard is involved. There are no free lunches. Someone always gets stuck with the bill.
The Federal Reserve and Treasury are lying about inflation to save their asses. They are cutting interest rates and scheming in an attempt to keep the housing bubble inflated. State and federal budget officials are anticipating sharp decreases in tax revenue next year also and have an interest in keeping the bubble inflated. In the area that I live $200,000 homes are now marked up to between $450,000 to $550,000 over the last five years. The historic value of homes is a PE of 10 years rent. So these homes are realyy worth around $300,000. Once the bubble pops and values return to normal most of the subprime loans will go into negative equity and the people will start walking away from the loans.
Bush is just trying to sustain the system until he gets out of office and hands the mess off to the next POTUS. In a way, I worry it could be the candidate that I like because people will pay lip service to the liberal spending of the Bush administration, but whoever the current POTUS is, will wear the devil's horns daily.
That's how the system works. When the new President takes office he blames it on the last guy and by the time he is running for office 4 years later the public has forgotten. Anyway the President is only one man. You change Presidents and you have the same Congress, Federal Beauracy and the same Fed. The American public overall is looking for a hand out and they are going to vote for anyone that will give it to them. Evenually someone will have to pay the bill.
And that's an interesting point, because I hear people say my guy will dismantle government, but he actually doesn't have that kind of power. The people are going to have to get a lot smarter about their money, and how it is spent by government before anything changes. Right now, the deficit is like the Iraq death totals. Most people know what they are, but they don't "connect" with it.
The Fed most likely will cut interest rates next week and the dollar will break the $1.50 mark for the Euro which means higher priced oil and more inflation. Will the Fed turning on the money pumps there wouldn't be any recession untl after the 2008 election. The Fed is political and will not want to have any heat turned on them in an election year.
Guys: In terms of the housing foreclosure mess, the large volume of bad debt, there is noone in govt to blame. The entire thing happened in an entirely private world with no govt oversight or control. so many elements of the financial world move along unregulated. But I'm still impressed by a quick response to try and stem the tide of rising bad debt and mitigate against astronomical losses by financial institutions. Boy oh boy, if it had possible to do something like this in the latter part of the 1980's woulda saved me and a lot of other people a lot of money.....and for the big country out there would have staved off a serious serious credit crunch recession. Frankly, there is a lot to be said for the way in which the treasury dept, the fed and industry leaders are reacting.
If the plan works it will safe the finacial industry some big bucks on forclosures. But the plan doesn't solve the "over-valuation" issue caused by loose credit, specualtors and loose appraisals. A lot of the suprime loans are going into negative equity and the mess is only going to get bigger.
That all depends upon whether you believe the FED is a government agency. They are the ones who lowered overnight rates to 1%, and created all of the excess liquidity in the system which led to mal investment. Yes, the creditors and debtors share some blame, but the FED helped facilitate the problem by creating the atmosphere.
Ditto; however, one thing that is important to discern is that Greenspan did not intend this to happen. No one can accurately predict how much the market responds to changes or lack thereof, especially in the long run. In retrospect, it seems obvious, but a lot of things are that way. With that said, allow me to allude to Winston Churchill: Federal Reserve is the worst system for providing economic stabilization except for all those others that have been tried.
I still maintain the gold standard pre-1913 was a better system. I'm actually interested in what a certain person has been talking about lately. Hard money in the form of rare metals, trading as a parallel currency. This means no sales taxes or capital gains taxes on the transfer of metals. One does not even have to close the FED to do this. Just a simple change of the tax code. Let fiat money trade against hard money. Have the market decide which currency has more value.
Will they compete in the same manner as they did before? I suppose not since you are an advocate of full-reserve banking. In that case, fiat money will win by default due to the advantage that they have in terms of required reserve ratio. Therefore, they would have to compete on the same ground. How does Ron Paul plan to establish this ground? He's idea may actually turn out very interesting.
I'd like to add a caveat. Full reserve is ideal, but historically, adjustments were made transparently, when the rate of bills of credit to reserve gold were changed. Right now, the FED does not release M3, and also does not release timely and detailed reports on it's activities. If everyone knew the government was devaluing the currency, then it would be a lot harder to do. Which is why I advocate full reserve as an ideal. It limits the ability of government to grow unproductively and to deficit spend. It would obviously require a legal framework to accommodate metal notes matching the reserves on hand, but it does not have to be administered exclusively by the government. That is what hard money is about. It has intrinsic value. You could perform some service for me, and I could pay you in gold at an agreed rate. If you require fiat currency, you could sell the gold for that, or find another gold barter opportunity to spend your new income. The limitation on this in the current system, is the stranglehold that the government has on the sale of metals in the form of coins. Only Congress can coin currency, and yet they coin it with a different face value than what they sell it for (market rate). By removing capital gains taxes and sales taxes, the coins could trade at the value of the commodity, not at the face value. After all, you can't tax money. If that was the case, LOL, I could claim a loss each year for my devaluing savings. I think so too. He was one of the two men behind the formation of the US Gold Commission. He's written a few books on the subject.
Actually, it does! The Federal Reserve branch of NY is responsible for the open market transactions, and they report their repo activities everyday. Pretty timely, eh? For example, here's today's activity that they released: Of course, you already know about the audited annual reports, but they're probably not timely enough for you. Primary dealers also release weekly, quarterly, and YTD transaction reports. These are more detailed than the daily reports. Here's a link to it. I just gave you some powerful information. Use it wisely and don't abuse it. Hmm, you may be confusing what fractional-reserve banking means. Can you expand on this a little? Well, I think that the concept of "cash" will become a thing of the past anyway. You can still have a gold standard with virtual money.
Thanks. I'm not quite sure how to read that. Does it show the reserve in, and the credit out? Now that, is a promise I may not be able to keep. I'm specifically speaking to increasing the credit in the system through fractional reserve banking. With full reserve, the only way to increase credit in the system, would be to devalue the currency against the reserve. IE. $1 = 1 ounce of gold. after adjustment, $2 = 1 ounces of gold. This has been done in the past, notably around the time of the Civil War IIRC. Yes, but you cannot have virtual gold. That would be a fiat system. One must be able to exchange their notes, receipts or bills of credit for the physical hard good. Can we still conduct business digitally? Sure. But the banks would have to be watched very closely. This might be a good job for Helicopter Bernanke.
There is only so much gold and silver to go around and if you require banks to have gold and silver on had before they lend money, well the economy would have to shrink greatly to operate in an environment where the gold and silver on hard equals the required need to the economy.
It’s not so much as saving the lenders as it is the home borrowers who can’t afford the new adjusted rates which would force them to have their homes foreclosed which would push down the value of existing homes. The reason banks don’t go bankrupt any more is because most are very well diversified. If a bank is giving a 7% interest rate to increase capital on hand to lend, it has to charge at least 10 or 12% to make a profit. If it lends money to people at 12% the companies who borrow money at 12% need at least a 15% return on investment to just break even, so a lot of good investment ideas that may pay off 10% or 8% will never get funded because they can’t justify the high interest rates which would put our economy in reverse.
This is incorrect. The rate could be fixed to today's rates, and with inflation/deflation in prices, the government could change the ratio to adjust the value of the currency already circulating. Although ideally, they do this under only the most dire of situations. Intervention in the market by government is never productive and rarely safe. But it would be done clearly and transparently. Today $800 = 1 ounce gold, after adjustment, $900 = 1 ounce of gold. You have to understand how the Pre-FED gold standard worked, before you can make the argument that it would not work. America grew and became very prosperous under the gold standard. What did not grow quickly was the government. Which is exactly as the founders intended.
Follow the money. Clearly define who is going to be hurt, and who is going to profit. False. The government and law protects the banks from failing. Their diversity is only a product of all of the new credit they get to invest when new money is created in the system. They get to introduce it, and they constantly have an increasing stream of capital for lending. That is how they get diverse, not through any sound decision making or extraordinary investment tactics. You are overlooking that banks earn fees, they transfer balances overnight to earn interest, they provide brokerage and portfolio services, insurance etc. Yes, high interest rates limit bad investment, but that is not a bad thing. A lot of people confuse investment with speculation. They are two very different things. Stock value has nothing to do with the value of the company. It's completely speculative.
Guerilla: What is your educational or working background on the macro economy. You spew out a lot of proclamations about the macro economy with assurance. I wouldn't trust a sould on that, especially with dramatic claims unless they were well versed in education, research, and work on such issues. On the other side, credit is a necessary function of a market economy to flourish. If the economy is to flourish with huge growth from investment in things that work out, that investment invariably requires credit or serious investment from various sources. Will the investment(s) work out? Cripes in a market economy noone knows with any level of assurance. Nobody can profitably predict the future. Nobody. That is the vast unknown element within the economy. The great automobile disaster of the Edsel was one teeny example. Ford motor company required significant funds to develop and design the car and then launch production. All of that was funded before a single car ever was sold. Huge investment. The car was a market disaster. The marketplace hated its look. Bingo, a great example of investment failure. Certainly, that large company did some level of market research beforehand, but like everything else they were unable to predict the future. It didn't work and the investment in it had to be written off as losses. It either produced a loss or was written off against other gains of the company. On a different basis huge investment was made into the internet boom of the earliest 2000's. Most of that was the result of an enormous growth in liquidity within the US economy gained during periods of economic strength during the 1990's following the previous recession of the late 1980's early 1990's. The internet companies didn't make money. The investors got no or minimal returns on their investments and pulled further investment. Splat!!! lots of people who were hired in the late 1990's and early 2000's lost jobs because all that investment didn't turn up results and the private money spigots were turned off. Bad investments. Some efforts to make money off the internet worked. Google pioneered and mastered making money off of advertising. Ebay and Amazon sold directly on the web with two different models. Subsequently other efforts are being made to follow those models, and or blaze new ones that might work. A significant number of investments worth xxx millions into various efforts to tackle local web efforts have failed and closed. At this point in time no entities have mastered a singular model or a series of models that are successfully aggregating and significantly capturing massive amounts of advertising capital that went into traditional media sources like newspapers and local tv and radio. That money is being removed from the traditional sources and being put into the web, but no entities have dramatically captured those funds yet, except for PPC. Its not stopping investment but returns aren't yet dramatic, besides PPC. A different example occurred and busted similarly in the early 2000's with the telecom industry. The industry grew and boomed in the late 1990's primarily due to deregulation, the break up of AT&T, huge diverse growth in products and services. By the late 1990's most of the effective innovation had run its course. The winners during the mid 1990's kept selling the hell out of their growth potential but it no longer was there. Demand was met, effective new innovation had stalled and the latter investment during the more liquid, cash richer 1990's pretty much didn't result in returns. Splat. The early 2000's saw all that growth of the latter 1990's collapse. It was a result of overselling something whose growth had petered. You can argue so many ways as to one form of economic resources slowing credit availability, etc. but the financial and business efforts are going to strive and push for freedom to find new investment opportunities to grow, expand, etc. Some will work. Some won't. These are primarily the effects of a little hindered economic cycle. You can argue about all sorts of monetary/credit tightening entities within the government, but after all is said a market economy is primarily driven by demand/supply and innovation/productivity. This economy is dramatically affected by changed events over the last few years that present new challenges. The value of the American dollar has dropped significantly. The US is the primary debtor nation in the world and holds the primary world currency. That level of debt both within the government, held by foreign entities, spread throughout the nation on individual and corporate bases is historically large and dramatic. Current govt policies have no direction toward eliminating those issues. Those create problems. The mortgage based crisis can be characterized in simple terms like some potential credit problems of the past. Home building exploded. (A typical boom bust scenario). It was accompanied by development of new unregulated and dramatically more risky debt. The debt was repackaged, resold, and distributed in a wide capacity. The repackaging and reselling of debt in new complex instruments spread the availability of the lenders of mortgages to issue new mortgages. That expanded credit. The newly packaged investments of complex instruments has been far far riskier than the buyers and holders of these instruments ever imagined. Loosening of traditional credit checks on mortgages, and the repackaging of these assembled securitized and diverse loans frankly are overly complex and difficult to assess. A huge and diverse amount of entities hold these loans that are dramatically worse than the investors imagined. The investments are suffering from foreclosures and loss of return because of the weakness in the creditworthiness of the mortgages, and the resultant spread of weak returns. Please explain how a different govt financial structure would restrict this process. It wouldn't happen at the level of determination of amt of credit in the economy or a basis of valuing dollars against a certain level of gold held in reserves. The availability of credit needed to be stemmed at the first level, where adjustable rate mortgages, with virtually no money down were being processed for people without credit worthiness from a traditional evaluation. Then the loans became marketable to an enormous universe of investors through new investment products that frankly made it impossible to understand the risk/ reward valuation. Frankly, on top of that it appears that financial insurance firms that rated these instruments failed in their role. Financial sales entities have been doing this for decades. I can recall looking at a new REIT investment primarily representing properties with which I was dramatically cognizant of, because I was a commercial real estate in that strong market, and being totally flustered by their financial reports. I had previously been trained and worked in investment analysis. I couldn't make crap out of their reports and never invested in the REIT. Over years it did fair, but never dramatically outperformed others and ultimately sold at rates that never met expectations to outside investors. (the inside original holders of the real estate who converted it into an REIT did fine). Subsequently I met with a REIT financial expert who specialized in those instruments. He told me that of every single public REIT, that one had the singularly most deceptive, hardest to discern public reporting. Please explain how the underlying actions of an economy fueled by private enterprise with credit primarily expanded by new innovation is going to be fundamentally changed by a different underlying financial structure at the govt level and without addressing how business operates. Also explain your financial/economic background on these issues. Finally, no one can accurately consistently predict recessions and/or booms. If they could they would be MIDAS with the golden touch. Even when recessions occur in the eyes of some they are debated by others. Likewise with boom periods. My greatest familiarity and experience with the predictability of an upcoming recession is based on past first hand experience in the commercial real estate markets that collapsed in the late 1980's and created a nationwide credit crunch as financial institutions suffered such large losses that they were restricted in making all and any kinds of loans. As to the upcoming predictions of a recession, the single thing I see that is somewhat optimistic is the effort announced by the president to extend the low interest rates to adjustable rate mortgages written over a recent period. The major benefit will be to reduce the volume of anticipated foreclosures and the resultant impact on financial institutions that are now taking a terrible beating. This may maintain enough credit availability to maintain significant levels of the economy. I keep going back to one thing I referenced earlier. Currently and recently these CDO's which represent aggregated mortgages sold at 27 cents on the dollar of the value. When investment vehicles that have a dramatic hundreds of billions of dollars of value start selling at 27 cents on the dollar that is a dramatic sign that investors have had the sh!t knocked out of them. The widespread marketing of these items has reached every facet of the investment world. Traditional security oriented and low risk investors like Florida state govt pension funds have taken hits. It is truly a problem. There are other ways to attack the problems and try and avoid a recession. The Bush administration effort is attacking it one facet that should have positive results. I hope it works. But what I can't for the life of me understand is whether the US dollar is backed by gold, aluminum, rubber bands, underwritten and supported by shieks from the middle east, or any valued on its current basis; how that structure might impact how financial institutions would work and how that might have prevented the massive creation of uncreditworthy mortgages.