There is a major flaw in the argument you give and Murray Rothbard has an argument against it in his Amer. great Dep.
Chromatic dispersion uses rothbards AGD as one of his major sources!! That whole webpage is ate up with references from AGD.
The depression defaults reduced the monetary base by about 50%.
bankdersysrisk.blogspot.com
Issue #2
“Also, in 1929, not just commodities, even food prices and essentials fell a lot ( greater than 50%) in price. I believe the reason is that: All though huge amount of reserves were maintained by the FED, the banks were not FULLY loaned. In murray rothbard's AGD, you will see that, the excessive reserves about 30Billion or some 30% (I dont know which one) was held as reserves!! In other words, all though reserves were high, money supply into the financial/real economy was curtailed by more than 30%!! That is why there was deflation in food and essential items!! This is exactly what Keynes called as "Liquidity trap". i.e there was tonnes of liquidity in reserve - but NO ONE borrowing!!!! This is what causes deflation!!!! “
Answer #2
I have always indicated that there might be some initial deflation in absolute monetary terms and I have stated this many times. It should be as no surprise that after a bubble prices fall in some areas, and some prices fall more than others. Even in our Depression we started inflating only after 3 years of mild deflation after many years of high inflation. Therefore the banks do in fact loan money out again.
The Story of Agricultural Goods, the WFC, and the RFC
Food prices in the Depression fell due to collecting a huge amount of agriculture goods through subsidizing farming not to deliver to market, then the enviable dumping of product. Murray Rothbard goes into this into great extend in his book called “America’s Great Depression” in his section of “The New Deal Farm Program”. Goods and services otherwise were really not effected much at all. Housing fell some, but never went down to its pre asset bubble values.
credit was created!! There was noone willing to take credit and noone willing to offer credit.
Hoover couldn't control where the money went - so he started a war on hoarders.
This is the liquidity trap Keynes talks about. Inspite of this monetary boost, banks failed!! This is exactly what happened in Japan as well. Only recently, there was positive credit offtake in Japan inspite of loose policy!!! That is the power of deflation - the liquidity trap - Chromatic failed to discuss.
He did not fail to discuss it - you didn't read the whole page! I have put the section where he discusses it above - here is some more of it:
The story of food prices during the depression start with the War Finance Corporation (WFC) and a man by the name of Meyer who ran the WFC starting in 1918 at the end of the WW1. In the aftermath of the war WFC with capital of $500 million and the ability to borrow $3 billion was set on the task to subsidize and bail out companies in distress. WFC was used after the war to provide $1 billion in credit to finance American exports. WFC provided $150 million to finance the exports of various commodities and food goods including cotton and tobacco.
In 1919 Hoover’s European food relief program transported surplus US food to Europe and increased food prices
After the depression of 1921 Meyer who had left the WFC in 1920 started to lobby for the restoration of the WFC in order to subsidize agricultural exports. Meyer returned in 1921 with a directive to lend $1 billion to farmers’ cooperatives, exporters, and foreign importers. By 1923 WFC had loaned out $172 million to farm co-ops and $182 to rural banks. This money was used to increase food prices. In 1927 Meyer left the WFC and was now in charge of the Federal Farm Loan Board (FFLB), an institution he helped form.
In 1929 the Federal Farm Board (FFB) was given $500 million for the purpose of making loans and to establish stabilization corporations to control farm surpluses and increase farm prices. The first act was to increase wheat prices by giving loans to the coops to withhold wheat from the market, however prices continued to decline.
After the crash the FFB was able to hold wheat prices up for a time, but in response the farmer grew more wheat in order to get a bigger subsidy by growing wheat that would be held off the market. In the 1930’s saw the fall in wheat prices further as wheat in supply was increasing at a rapid rate. The surpluses continued to grow and prices continued to fall. Other countries began to increase production of wheat and this further drove prices down. Finally the FFB dumped its surplus wheat on the world and prices collapsed.
This story is basically the same for most of agricultural products in the Depression.
In 1931 Hoover tried to reform the old WFC in order to bail out distressed businesses, this became the Reconstruction Finance Corporation (RFC) and was formed in 1932 with Meyer as its head. RFC started with $500 million in capital and could issue $1.5 billion in securities.
So the farming and WFC philosophies were the basic financial structures used during the depression.
Back to the Answer
An interesting note is that if you were able to kept employed, due to Hoover’s directive to keep wages high, the working population actually gained in buying power as general goods and services only fell about 10%.
The banking system. I totally agree in a depression that banks tighten lending as banking defaults occurs, however, the game has changed since the 1930’s. The US, and the rest of the world for the most part has had a policy of bailing out troubles and distressed banks most of the time, and for the US this means every single time since the 1930’s.
The effect of the banks receiving this bail out money and not lending does in fact lead to an increase in the percentage of reserves. No question about this as this is well documented. The story does not end there however.
As I stated before in all countries that go through hyperinflation the banks die as the loans they made are either not paid, then bailed out, then the money coming in through existing good loans is so deflated in purchasing power that the bank cannot even pay the electric bill with the money and the banks go bankrupt again. So as inflation continues the banking reserves collected are depleted, lost to inflation.
This of course just one step on the road to hyperinflation. Banks must continue to lend or they will die through inflation. If they refuse, unlike the depression, the government can now dictate that they lend.
Now the next situation is borrowers. I would expect lending to fall initially, and then increase as home prices versus income become attractive. Businesses are really in a jam as they constantly need to borrow in order to survive. Not many large businesses can survive long without the ability to borrow. Not only that but many businesses will fail if they can not pay employees or buy materials with debt. This kind of debt is used to push money owed in the future to the present to accomplish goals. I do not mean debt used for sole purpose of expansion.
How about the US in the Depression?
Hoover did try and did hyperinflate the currency by having the Federal Reserve create $1.1 billion US dollars through monetizing the debt and borrowing, then pushed this money into the banks. Hoover, frustrated that banks were taking this money and using it to increase reserve instead of lending the money out stopped creating money in this way
I believe in 1934 the banks started creating money through lending in the US again at a great enough level in order to grow the money supply.
Here is the kicker, a government never has to use commercial banks to loan money or even loan money at all to expand the money supply. All they must do is create money. This certainly leads to hyperinflation. This money is then used on various social programs and such.
Why didn’t the US go into hyperinflation during and after the depression. The US government never embraced creating money to print its way out of the depression after Hoover gave it up. The banks started loans out money again and the money supply increased again through fractional reserve banking. The US was also in much better shape than the rest of the world as the US entered WW1 much later than Europe, this gave the US a stronger starting point than the European countries devastated by WW1. The European powers all went through massive inflation. The US at this time was still the biggest creditor nation at the start of the Depression.
Therefore an increase in bank reserves does not in any way prevent inflation. The US did certainly inflate the money supply after the 1934.
It would be more accurate to say that in the Depression that America experienced some mild deflation as the banking system started to disintegrate from lack of faith in it, then started to re-inflate as the banking system recovered.
Now, why did banks go under if there was no decrease in the monetary base? If nobody is taking loan and giving interest money so that banks can pay its employees - banks have to necessarily shut right (it should be worse if people are defaulting!!)? what if banks give loans to business that are not viable (in the name of propping up the economy)?
SPEND SPEND SPEND - build it they will come! Government will spend to keep the motor humming until private sector can take up the slack - maybe it will take a few years like in the depression - the trick is can the gubbment keep social anarchy to a minimum while things readjust? I think so - I don't see a lot of oprah types burning the flag and demanding 100's of thousands finance dilbert managers hung in the streets.
Obviously, everyone, including the CEO of the bank will take the loan and default!!
He answers this in issue 3!
Issue #3
“In other words, banks will not loan new money to any one (because people are defaulting). Why does this matter to banks? Today, banks are making huge profits in these loans. So they are reporting lot of earnings per share and hence the ceo and the top guys are getting lot of money. Once defaulting happens, the profits reported by banks will take a huge dive!! So will the CEO and the top guys bonus/salary!! Now, the CEO and others being selfish, they will start cleaning up their balancesheet - in other words "liquidity trap"!!! So what has happened now is that, banks have pulled their future profits into their current year - so they will show loss or no profit in the future!!! If FED is willing to take the bad loans from the banks - you are not understanding one important aspect: The bank ceo - just one guy - will take a TRILLION dollar loan to buy some hedge fund etc - and then declare that loan as bad loan and pass it to FED. Do you think, Congress will allow ONE guy to take a TRILLION dollar loan that easily just to protect the economy? How about other CEOs? Even if you assume the general populace is ignorant - do you think the CEOs will be content with JUST 1 TRILLION? Why wont they go all the way to 100 TRILLION?? Why are you saying this is exactly what is happening today? (when you say, today real estate agents are doing it currently!!). It is not happening today. It will happen ONLY if FED is willing to take the bad loans. This will not happen for the simple reason, CEOs of banks, the knowledgeable people will take 100 TRILLION dollars loan and pass it to fed as bad loan!!! Are you defending this is what FED will allow to happen? Ofcourse, you might argue, fed will put a cap for 300K per person - Then the CEO will create 0.25 TRILLION fake bad loans equivalent to 299K and then pass it to FED!!!! Are you defending that FED will still take the bad loan - and create ZERO RISK for taking loan?”
Answer #3
One of the most misunderstood parts about the Federal Reserve is that it was formed between the political alliance between two very power groups. One lead by J.P. Morgan and the other lead by J.D. Rockefeller. The Federal Reserve started out as a private bank with special ability to create a national currency. A banking cartel was formed in the form of a central bank. Regulation has brought it closer to Washington DC, but is still not a public agency. More like a GSE. Its private bank past is why the Federal Reserve used to be headquartered in New York City and this is why the New York Fed is still the most important of all the Fed branches.
Why is this fact so important to answering your question about loading the balance sheets, using derivatives to hide losses, and white collar crime in general?
The banks make the rules. The largest banks are here for one reason alone, to stay in business and power. If you make the currency, set the rules, then as a large bank you have no real need to steal the money outright because you can just adjust the rules in their own favor. This defeats the need to steal. You already have the buying power the dollar provides. At this point in the game you are trying to manage it.
The largest banks jealously guard their buying power. It is very hard to steal from these banks as they will go after you if you do. Most of the time they will never do business with you again and they can and will go after you. The largest banks either control the smaller banks or have a huge amount of influence in them so the system polices itself.
Why bother stealing when you can just adjust the rules. Selfish greed keeps the banks in line.
Thus when viewed under this light it is easy to see why Thomas Jefferson made his past comments that I posted earlier.
This is not to say that stealing doesn’t happen on a grand scale in the US. It does and is very well documented. During the S&L scandal for example the stealing was biblical, and then most of it was covered up by the bailout. William K. Black wrote a book called “The Best Way to Rob a Bank is to Own One”.
Does stealing happen in smaller banks, investment firms, and business?
Yes, Often.
Mr. Black was the Deputy Director of the Federal Savings and Loan Insurance Company among other jobs in the service of banking and banking crime and is a noted expert in the Saving and Loan Scandal which he was heavily involved in. His book goes into detail on how banks steal money, cook the books, and get away with it. The main focus of the book is the 1980’s S&L scandal. Very good book. I highly recommend reading it.
The Federal Reserve just doesn’t bail out any loan, only in a crisis or to hide the weaknesses from the public. They have silently forced many, and I mean many banks, investment funds, and hedge funds to merge with each other upon taking losses that jeopardize to bankrupt them. This is very well documented.
Many CEO’s steal and loot their companies. Many get away with it, but only in an emergency does the government start buying loans wholesale. You can steal a little money, but steal too much and the banks will want their money back.
So why does the government bail out banks, companies, and citizens?
Remember, almost the entire world is on fractional reserve banking. Therefore it doesn’t take that many losses to jeopardize the whole system and start cascading defaults. At this point the government has two choices, let the monetary system fail, or inflate. It is a shame they always choose to inflate, but is the politically easiest thing for them to do.
It is also interesting to note that the power of the largest banks, financially and politically has not suffered. They are very influential in American elections to this day.
Will the fed bail out these loans, remember, the Federal Reserve is the one who asked that these crazy loans be carried out to re-inflate the world banking system after the 1998 banking crisis.
Martin Mayer writes in The Fed “It turned out to be a weekend of pure terror”. “Lumping together the five nations devastated by the Asian financial crisis, the Deutsche Bank researchers concluded that “While it is difficult to argue that governments are insolvent … under most scenarios, the ability of the government to service its debt in the short run is questionable.” Turning attention to Russia, the German bank’s expert argue that “there is a very high risk that Russia will not be able or willing to repay its foreign debt.” – ever.”“One of the last speakers at the Group of Thirty conference was William McDonough, president of the Federal Reserve Bank of New York… Everyone here, he said, is a banker or a bank supervisor. If you’re a banker, go out and lend – you don’t have to dot every I and cross every T. If you’re a bank supervisor, don’t criticize your banks for making loans even if they’re loans you might not have approved just a little while ago. Get the money out; the word needs the money.”Then later that week at the Chicago Board of Trade Martin Mayer writes “And then the roar stopped, the men stopped waving their arms in the pit, and they all just stood, arms at their sides. At 11:45 in the morning, the price of the T-bond futures contract had dropped $3,000, which was the maximum move in a single day. The market has closed “lock limit down” for the first time since Saddam Hussein invaded Kuwait.”“We returned to the Federal Reserve Bank of Chicago, and in the anteroom ran into Michael Moscow, president of the bank, a tolerant economist who does one thing at a time. We told him what we had seen across the street, and he nodded soberly. “Yes,” he said. “There are no bids for anything. There is no money.”
So my answer is yes, they will bail them out. They already have started as you can clearly see.
We are now living with aftermath of the last major crisis in 1998, which of course was the result of the crisis before that. Many view this as just a continuation of the Depression from the 1930’s. Remember, 1913 was the start of a national paper currency in the United States and of course this coincides with the birth of the Federal Reserve
This is what I tried explaining to Chromatic and he was not able to address that part of "helicopter money". As a matter of fact, the "helicopter money" concept was introduced by Keynes as "jar of money left open at street corners" in 1930s!!.
He addresses it in point 3 - I have posted link after link where fannie freddie and others still trying to take the loans and repackage and sell - the party is still rolling.
So, you have financial institutions that SHOULD make money by lending. If the lending falls, they have to close many of the branch offices (as they can not support the staff with reduced business).
To a point you are right - mergers are going on - layoffs - but only to a point - the gubbment can keep the banks open if the social chaos would be too great - they will give the staff FREE money basically - maybe even for years until things rebound.
If govt decides to give the employees of bank freshly printed money - then the population is going to say, give it for me also!!
ANd they do - somewhat!
And most likely the CEO of the bank is going to take all the money that will be loaned and supported by Fed!! That is why banks fail!!! Not because depositors take their money out!!!
No if you steal TOO MUCH they put you in jail - they are the ENGINEERS and will support you while you go along with thier plan - but you get TOO CRAZY and they put the lock down on you. Now I just posted in Mexico this did not work so good - the bank guy stole 55 million from the mine workers and they all got really pissed - so what happen - gubbment shot and killed a few of them right?
In 1929, all the 50% increase in monetary base was consumed by govt!! Govt built dams etc and made it expensive for business to survive (PPI was high). No private business consumed any part of that 50% monetary base increase!! That is why there was deflation in credit. Ofcourse govt spending made sure CPI does not fall...making it hard for non-govt job holders to survive...
The voters is what mattered - that is all that ever matters ultimately no? Are you Jay? |
