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To: Think4Yourself who wrote (85999)	8/18/2007 11:29:03 AM
From: silenceddissenter	Respond to of 306849

Ineligible Commercial Paper (from cp to tp) wanniski.com This is what disturbs me about the casual arguments persisting to this day that the Fed screwed up. A lender of last resort should not be expected to lend assets against ineligible commercial paper, by which we mean paper that is not worth the paper it is written on. Yes, Andrew Mellon in January of 1931 said there was $3.2 billion of eligible paper that could be identified, but Timberlake is unfair in blaming the loan committees for reclassifying it as ineligible a year later, a year in which the Dow Jones Industrial Average fell by 50% and put a lot of assets under water. And yes, the banks had $4.5 billion in U.S. government securities in early 1931, according to Mellon, but we are not told what happened to them. A few paragraphs later, we are reminded that only a month after the RFC act became law, on February 27, 1932, the Glass-Steagall Act passed: 'This act allowed the Fed banks to ‘compete' with the new RFC by relaxing the type of collateral security required for member bank discounts at Fed banks. It also permitted Fed banks to use government securities as collateral for the issue of Federal Reserve notes, thereby establishing a formal basis for monetization of the government's recurring fiscal deficits, a large fraction of which resulted from the federal government's outlays for the RFC.' Well, now. First we are told the Fed fiendishly reclassified eligible paper as being ineligible. Then we are advised it was not until February of 1932, after the RFC became law, that the Fed could monetize government securities. Worse yet, Timberlake complains about the RFC being set up to bail out banks and businesses, when the Fed had been set up for 20 years to do just that... and the RFC could not leverage its dollars by creating 'base materials,' meaning cash and bank reserves. Whoa! Obviously the Fed had no intention of creating base money, because it would have only undermined the banking system with a horrendous inflation. Even the small 'easing' in early 1932 caused not only a gold outflow, but also a run-down of equity prices. In the one period of 'expansionary monetary policy' that both Milton Friedman and Timberlake celebrate in the early 1930s, from April to August of 1932, the Dow Jones Industrial Average declined from 170 to 41!! Timberlake inexplicably seems not to understand that it is precisely because the RFC must raise its bailout money from the taxpayers, instead of having the Fed wave its magic wand, that this course was taken. There is nothing wrong with borrowing resources from one set of producers to help another, in a period of economic distress. That's quite different from having the central bank print money and shovel it into the banks, which is the equivalent of shoveling it out of airplanes and hoping the people who find it will buy unsold inventories of goods. snip We have learned an awful lot since 1963 about what happens when gold is ignored and the scientific principles of monetarism are applied. Had the government done what Friedman says it should have done in the early 1930s, the Great Deflation would have been the Great Stagflation. The monetary inflation would have run up effective tax rates faster than Roosevelt did and the world economy would have been even uglier. Even World War II might have turned out differently, as the fascist powers would never have made the monetary mistakes that the monetarists think we should have made. The sad part is that with all we have learned about the perils of a floating dollar since President Nixon took us off gold in 1971, the U.S. government, the Congress and the Federal Reserve still seems content to drift from inflation to deflation to inflation to deflation, on and on, instead of admitting the error and getting the dollar once again defined as a specific, credible weight of gold. Instead, Fed Chairman Alan Greenspan broadcasts the view that we would have a stronger dollar if we would balance the budget or eliminate the trade deficit, i.e., problems outside his control. What he and his Fed colleagues have under their direct control is the ability to sell bonds from their bottomless portfolio in order to take surplus dollars out of the system. It is not complicated, SSU students. It is as easy as pie.