yes, i saw this...and to be sure, i also find it ridiculous in the extreme. to say that the 'moral hazard' introduced by this is somehow reprehensible if one represents practically the biggest source of moral hazard the world has ever seen oneself is downright bizarre.
as i've said before, the way the Fed acts, it essentially sends the message that recklessness is o.k., and prudent financial behavior (i.e. building up real savings) will be punished. i wouldn't be surprised if we DID see bank failures down the road, and guess who will be responsible? i also think the FDIC will prove hopelessly underfunded and unable to fulfill its function should there ever be a serious bank run. bank runs can't happen in modern times, i can hear people think. think again...we just had one in Austria, on a small regional bank (big in its region however). not a general bank run like the one that happened in Russia in '98, but it was nice to see that human nature makes us as prone to panicking as ever.
one thing is clear: there is a HUGE credit bubble, a hopelessly overleveraged financial system. it takes ever bigger injections of fiat money to keep it going, and it HAS to keep expanding exponentially, otherwise it will implode. it's a giant pyramid scheme...i simply don't see how this can be resolved peacefully...at some point confidence in this scheme is bound to wane, and by now i believe the Fed is scared like hell over it.
that's the real reason why they are doing THIS:
stls.frb.org
to quote some statistics from a recent Noland article:
<<During the past three years (1998 through 2000), total net U.S. non-federal (including financial) credit market borrowings increased $6.1 trillion, or $2.05 trillion annually. This compares to $8.6 trillion, or an average of less than $1.1 trillion annually during the previous eight years (1990-97). Since 1998, non-federal borrowings (excluding financial sector) averaged $1.2 trillion per year, compared to $456 billion annually over the previous eight years. Corporations (non-financial) borrowed a stunning $1.35 trillion over three years ($449 billion annually), compared to $886 billion ($111 billion annually) during the preceding eight years. Three-year financial sector borrowings surged almost $3 trillion, or almost $1 trillion annually. This compares to about $3 trillion, or $377 billion annually, between 1990 and 1997. Total mortgage borrowings increased $1.7 trillion between 1998 and year-2000 ($576 billion annually), compared to $1.7 trillion ($214 billion annually) over the preceding eight years. During the eight years ended 1997, broad money supply (M3) increased $1.343 trillion, or an average annual increase of $168 billion. During the next three years, broad money has surged a staggering $1.736 trillion, or at an annualized rate of $579 billion. So far this year, broad money has increased a staggering $299 billion. Money supply is on pace (almost 13% annualized growth) for an unprecedented expansion this year of more than $900 billion. The net year-2000 increase in household sector borrowings of $573 billion was up 70% from 1997, while net corporate (non-financial) borrowings last year of $447 billion were 68% above 1997 borrowings.>>
prudentbear.com
(the entire article is well worth the read).
this is absolutely mind-boggling stuff. one has to be extraordinarily dense not to see that this can only lead to a catastrophe down the road.
here's a funny post i copied from kitco, on the nature of the fractional reserve banking system :
<<Date: Mon May 14 2001 09:28
rjjj670 () ID#268118:
Copyright © 2000 rjjj670/Kitco Inc. All rights reserved
Excuse the bandwidth, but this needs to get said. I apologize beforehand to the many people on this site who already know this and have better things to do with their time. But I feel there are many first time viewers of this discussion group who are being misled. In compensation, I promise not to post again for the rest of the day.
Much has been said recently regarding the money creation properties of check writing. Check writing entails no money creation. When someone writes you a check and you deposit it in your account, your bank is crediting your account and placing a hold on the amount. You do not have access to this money until the check "clears" the system. This occurs when the Federal Reserve debits the member institution's account against which the check was written and credits the member institution's account into which the check was deposited. Once your bank's account with the Federal Reserve is credited, your bank removes the hold it placed on your account and the money becomes available for your use. At no point in time do multiple people have simultaneous use of the money. People who attempt to work their way around these rules are involved in a scheme called "check kiting". People go to prison for kiting checks. Don't look for any sympathy from the banking system; you’re messing with their bread and butter.
Money creation has to do with what the banking system does with deposits. When you deposit $1000 in your account, part of it gets put into the bank's reserves and the rest ( ideally, from the banks POV ) gets lent out. How much of the deposit must be put into reserves is up to the Federal Reserve. For the sake of discussion, let's assume the Federal Reserve is currently requiring 10%. From the POV of the banking system, here's the situation:
loans: $ 900
deposits: $1,000
reserves: $ 100
Note: The deposit amount does not exist in the sense that most people think of it as "money in the vault". It gets converted into a combination of loans and reserves.
So, the $900 makes it out into the economy. It spends some time getting passed from buyer to seller, just like a hot potato. How many buyers and sellers is variable and unimportant. What is important is eventually a seller gets the $900 and decides to put it in the bank, there being nothing he desires to purchase at the current time.
His bank puts $90 in reserves and lends out $810. From the POV of the banking system, here's the situation:
loans: $1,710
deposits: $1,900
reserves: $ 190
How many times can this process be repeated? Believe it or not, it's for the banks to decide! As an example, after 74 iterations, here's the situation ( don't take my word for it; verify it with the spreadsheet of choice ) :
all amounts rounded to the nearest dollar
loans: $8,996
deposits: $9,995
reserves: $1,000
Now we get to see what money creation is all about! Based on an original $1,000 deposit, $8,996 in loans have been created. And there's nothing to say the process has to end here!
Let's imagine, now, that the original depositor withdraws his $1,000. The only money the banking system has is $1,000 in reserves which they can't touch per Federal Reserve requirements. What's the bank to do? Several options present themselves, none appealing:
1 Give the withdrawer $1,000 from reserves and hope it can be replaced before the end of the current reporting period ( the Federal Reserve requires banks to report every two weeks, I believe ) . If it can't, well, maybe the Federal Reserve won't notice.
2 Give the withdrawer $1,000 from reserves and replenish reserves by borrowing from another member institution at the then existing FUNDS rate. This route costs the bank money.
3 Hope someone deposits approximately $1,111 ( $111 for reserves and $1,000 for the witdrawer ) . Of course, hoping is not a recommended banking practice.
4 Liquidate an existing loan to free up $1,000. Terminating outstanding loans is vey disagreeable to borrowers and requires many hoops to be jumped through ( foreclosure, court, legal fees, etc ) and the withdrawer might be unwilling to stand in line that long. Besides, this might be construed as money destruction.
5 Borrow from the Federal Reserve at the then existing DISCOUNT rate. Taking this route could lead to the humiliation of having the Federal Reserve conduct an audit at your institution.
As can be seen, there is no easy solution. The above example is, of course, predicated on the banking system leveraging itself up to the allowable maximum ( 10% in our example ) . Some might argue this is unfair; that by demonstrating a little discipline and limiting themselves to 20% they would avoid the above conundrum. My response is if bankers and politicians possessed the required discipline, they wouldn't have had to take the US off the gold standard as Nixon did when he closed the gold window in the 70's.
From the depositors POV, the question is will you be able to withdraw your money when you need it. You will if bankers have taken a disciplined approach, which they haven't. A recent editorial on gold-eagle says the banking systems current reserve amounts to approximately .9% of deposits. My example above shows what happens when the ratio is 10:1. The .9% figure represents a 110:1 leverage. Are you feeling lucky?
Another bone of contention is the interest. Let's say you deposit $1,000 in a bank savings account and earn 5% or $50 per year. In the meantime, the bank has parlayed your money into $8,896 worth of loans earning, let's say, 7.5% or $667 per year. In other words you end up receiving 50/667= 7.5% of the earnings your money is generating and the bank keeps 92.5%. You may consider this to be a just division but I do not.
Since December, we have all witnessed an ever increasing number of layoffs. Will these people be able to support their standard of living while receiving unemployment compensation or will they start raiding savings? Will they find another job before unemployment runs out or will they be forced to raid savings? If this is to be the first wave of withdrawals, will there be any money available for you when it's your turn? Is this what's making the FOMC so nervous that they've lowered the Funds rate 1/2% four times so far this year? What happens when they lower again this week? Even if they don't lower, what do people think who have been expecting it?
I'd rather be a goldbug. >> |
