Financial topics

[John]

> I would have thought that buying banks violated the constitution
> let alone the law. Are we sure the law really matters in this sort
> of circumstance?

To my knowledge, there's no constitutional restriction against buying
banks or anything else (non-human), provided that Congress authorizes
it.

Sincerely,

John

[John]

> ??? Could you please explain what this means, and what Gordo is
> "doing"?

See the last paragraph of the following posting:

http://generationaldynamics.com/forum/v ... p=214#p214

John

[mannfm11]

This is an interesting thread John. I have some experience as a index futures trader. AT the time I was undercapitalized, but I wouldn't attempt to trade this market if I had 1000 times as much money. But, then again if I had that much money, I might move to Argentina and bury it in the back yard in gold bricks. My first point is that people are thinking how to make money here and the truth is, the worm turns so fast in a bear market that there won't be but a few make money in this game and then only those that are mentally prepared to recognize the trend in the market. As you might realize, bear markets move faster than bull markets, the gains are losses happen overnight or into the close and the moves are big and hard to get onto. The 1929-1932 market busted everyone, as they couldn't get it in their head it was going lower and lower. In fact, the 1930-1932 market, after the relief rally, broke a lot more people than the crash. There were great rallies, but they happened after the bulls had their heads handed to them and only the bears covering their shorts likely produced them. Then, I am sure plenty of bears got on the bull side, thinking they had nailed the bottom when the prior bulls got out trying to save what they had lost. There is a painful consequence of markets, it is called taking losses and getting even. The wish goes from, I am going to get rich, to if i can just get even while the masters take losses and look for the next opportunity. In these type markets, what they call profit taking is quite often loss taking.


As far as Gordo's strategy? I venture he is getting money on credit cards and buying CD's. I think he should read the fine print, as you can't get but 20% of the limit in cash and even the ones that charge zero interest only do so on purchases and they charge something like 5% for any cash drawn. It might be 3%, but I can tell you it isn't a gift. The same is true of transferred balances, which come with 2 caveats, one that it costs you 3% up front and the other is that if you use the card for purchases, your payments come out of the transfers first, meaning they charge you on the purchases. I don't know of any CD's paying enough to overcome these factoring charges.

Then, the US government getting out of debt? I think as I study this whole mess, i realize that this money doesn't have anything to do with the US government other than it is supposed to be secured by the debt of the government. They don't print this stuff and hand it out and in fact, the banks really don't want any more of it than they have to take. Exchange rates are bank games and don't have anything to do with governments, only interest differentials and the supply of different currencies. The commercial banking system of the US creates the flow of paper or electronic credit, not the government or the Federal reserve for the most part. The Fed is there to facilitate transactions between banks and to provide currency for the banks customers in exchange for collateral.

Gordo is carrying on the typical uneducated argument. If the banks had written down their assets by 40% and they were only worth 20%, meaning they would need to mark down 80%, but the government gave them 60%, nothing would change. If the government gave them 100%, of course, they would be able to mark up, but the government would then be tasked with the problem of getting 100% out of a tight system. Most likely the transaction would be a swap and not where the government would sell bonds and write checks. Banks generally use treasuries as stable assets to make up their capital base, choosing to make loans farther out on the risk scale in their loan portfolio. They need treasuries to have some thing liquid. In any case, having more capital reserves might not do anything for lending, as John says.

What people think the Fed is doing isn't what the Fed is doing. The Fed isn't putting money in the banks so the banks can loan. The Fed is replacing the lack of liquidity in the system or at least attempting to do so for liabilities already present. These injections are to replace the interbank lack of money as best possible and are limited by the amount of good assets available. The primary reason the banks needed the bailout of their assets is they were out of good assets in my opinion and most likely the Fed itself was holding assets that stood on perilous ground and needed the government to get them off their balance sheet.

I really don't believe many people realize they pushed the system as far as it could be pushed. Lets say you raise the incomes of the population so you can have more of a boom? Well, then get ready to pay 10% or 12% or even 20% for a mortgage. Do you think we are going to wipe out a surplus of housing at 10% interest? Capital rates aren't that easy.

There really aren't any transactions involving the Fed that don't involve settling liabilities between banks on transactions that have already happened in the banking system. When the Fed repos securities, it is generally to force the Fed funds rate down by using securities as collateral to issue electronic cash. It makes banks more willing to lend, but then again, the banks can buy the securities and give the Fed the cash. I think one reason that t-bills have collapsed is that banks that want to get their money back when they lend it are selling cash to the Fed for T=bills

IN any case, the games of the past are done. It appears that no one seems to know what happens when a large group of speculators deleverage? I hear it all the time on CNBC, like it is going to occur without any real selling or without a collapse in the money supply. If anything caused the start of the Great Depression, it was the sudden call of cash being used to speculate on stocks. Take a look at the amount of call money in the system right now and compare it to 2002 when the market last spent any time in this region. I have to believe a lot of people out there are hanging on by a thread, not sleeping at night, doubling down and all kinds of wild speculations on margin in stocks. Also, almost 5 million annual rate of existing home sales is not a housing recession, it is a housing boom. There is massive speculation going on in housing and those buying now are going to pay a price, as rents aren't going to support the cash flow they are going to need. I have been through this wash before.

Not many people think we deflate. Also, not many people are willing to admit there is something wrong with the economy or the stock market. Kudlow was at it again with oil prices, like if we hadn't had oil prices go up, we would be blowing and going. Truth is if we didn't have a credit bubble, oil prices would have stayed where they were in the $20 range. Another guy, an old guy on his 15th face lift blamed the Fed and the Treasury. It is like they are supposed to have their ball set on the tee and Tiger Woods drive it for them or they got screwed by something. The talent on Wall Street is most likely like construction labor, in that you only see a few real pros and you don't know who they are. The guy running the site quite often couldn't do the most basic job or make the most basic calculation, but he can tell you why the house fell down or why the doors didn't fit the way they were supposed to. How many times you can reflate a bursted bubble is something that has never been successful over and over. I think Minsky called it putting coins in the fusebox 1990 and 2000 were absolute miracles they were able to not take us into the depths of hell, especially 2000. The subprime stuff is probably the only reason why the Great Depression didn't start in 2000. John makes a valid point that without the schemes of financing that are now being dispelled, we aren't going too far.

[mannfm11]

I think I saw what Gordo was saying. The bailout don' t have anything directly to do with the market. What will turn the market isn't psychology, but how much money can show up. The banks can't sell their own assets, so who thinks they can sell theirs and rush in and buy stocks? The money supply naturally shrinks. There has been 20 years of closing ramps and overnight markups in the markets. I think they scare the typical bear so much that they rush to close their shorts before they are the last one out the door. There might be $5 trillion or more of hedge fund borrowed money in this market and the hedges have turned upside down. I forget who it was, but I am going to say Neiderhoffer, who said that once the market was figured out, it changed. Hedge funds had a way of running from one side to the other and they had some way of getting out that isn't working now. The stock buybacks aren't going on like they were, which I think was really the real source of new cash for the stock market and now the system is eating cash like a blast furnace eats coal. Also, home equity was good for $1 trillion in new cash every year for the past few. Get that out of the sale of housing now. Once home sales diminish back to normal levels, we will see even more devastating declines in cash.

[John]

That's a great analysis, and it really puts a lot of things
in focus. Thank you.

But I wonder if you could explain more about the "massive speculation"
going on in housing. This is not an angle I'm aware of.

Sincerely,

John

[Matt1989]

http://timesbusiness.typepad.com/money_ ... who-p.html

[malleni]

...
What people think the Fed is doing isn't what the Fed is doing.
The Fed isn't putting money in the banks so the banks can loan. The Fed is replacing the lack of liquidity in the system or at least attempting to do so for liabilities already present. These injections are to replace the interbank lack of money as best possible and are limited by the amount of good assets available. The primary reason the banks needed the bailout of their assets is they were out of good assets in my opinion and most likely the Fed itself was holding assets that stood on perilous ground and needed the government to get them off their balance sheet.
...
There really aren't any transactions involving the Fed that don't involve settling liabilities between banks on transactions that have already happened in the banking system. When the Fed repos securities, it is generally to force the Fed funds rate down by using securities as collateral to issue electronic cash. It makes banks more willing to lend, but then again, the banks can buy the securities and give the Fed the cash. I think one reason that t-bills have collapsed is that banks that want to get their money back when they lend it are selling cash to the Fed for T=bills
...

Sure.
I am definitely not an expert in economics, but i am sure that everything should be explained in the small scale... AND simple - of course.

It is clear that FED does not put money in the system. Fed only allowed banks to do it. I think that is called "leverage".

Lets go to little to - the past.

I try to understand it in simple example:
- Lets say that we have just ONE man in the village - who has money to lend (he is the richest man there).
With time - he lent quite much money to other there - with interest of course.
Also, he realised and persuaded other people in the village, that the best way to safe their money (this time perhaps it was gold) - is to put it in his treasury and get interest on it too, since "he has the best security in the complete village".
With time - he also suggested that people could pay each other with notes - he printed (with his guarantee)!
The explanation is also simple - security and simplicity by paying with notes, in stead to have always the small bag with gold.

The offer looks quite fer at the beginning.
As long everybody - BELIEVE - that banker has enough gold (money) in the treasury.

But with time the banker (the richest man) realized that he CAN print more notes that amount of money he has in the treasury and use it for lending with interest!
Nice cash - for little printed paper.
(He just "developed" - the leverage)

With time - the banker just overdid.
Everybody realised that something IS wrong with bankers sudden fortune.

And - one day:
All common villagers tried to get their own money from banker - at the ONE and SAME day!
Of course - he had not it.

He was probably killed (same as his family too) and his property was destroyed - BUT REAL (measured in the hard work of the villagers) money was NOT back!
The only guaranty for their money was - the bankers word.
Simple.
NO banker - NO money.

It were probably more similar event at this time, and those caused disorder in the kingdom too.
On the end - the King decided to calm the situation and of course, to gain some money too - for him personally.
Then in stead of just bankers guaranty- HE gave it, and it was "the Kingdoms guaranty" - for the "Kingdoms notes"!
He just "developed" - the "modern" money system!

The banks in the Kingdom still would to "leverage" villagers money so much they can - BUT now there were the King AND his treasury - who guaranteed for the notes which were printed WITH "Kings stamp"!
They did NOT permitted the bankers to leverage as much they wont!!!
The disobedience - would be punished!

The King (actually his advisers) - decided how maximum "the leverage" in the Kingdom can be!
He just "developed" - the FED and the Treasury!
The amount of notes permitted to flow in the Kingdom is decided by King on the periodical basis.
If he decided that more money need to be printed for some reason (perhaps he planed a war, or spent too much on courtesans) - it would be printed.
With other words - he increased "liquidity" in the Kingdom. (Actually - he inflated "the Kings notes")


So the system is more or less the similar even today except the King.
Additionally, we have more Kingdoms with different notes (and different level of "leverage") which handling between on some rules they stated - once upon a time.

Now if we from this simple example (complicated are always - bad) - i can not understand:
1. Who is in control of money printing (or data money "printing")? (I can understand that in US the FED is private owned, but still the State (the King) should have control of it)
2. Remember, ALL money in the Kingdom has "the Kings stamp" - which means that he (State) guarantee for it - the leverage on the stock same as the leverage on the credit markets should be on the in connection to the King (the State).
3. If the State (the King) had control of the leverage, and possibility to punished disobedience - why now the State (the King) bailing out the disobedient bankers??? - (Obviously - the rolls are changed with time. The King MUST to obey the bankers!)
4. If the State (King) put more "liquidity" with "the Kings stamp" in the system which is now starving - (same as old banker when ALL villagers came at just one day to pick up their own money) - the notes with "the Kings stamp" will inflate and of course loose the value in the REAL world.
5. We can just speculate that other kingdoms (states) who have a huge amount of notes with "foreign Kings stamp" in theirs treasury - would like to with ALL possible measures - to keep notes value flouting... The question is until...? (Since they have own interest too)


So, my conclusion is that State must have control of the Fed and Treasury and that they (NOT the bankers) - "put the money in the system". Admittedly, not directly but allowing bank "to leverage" the real money.

That must be case - even in situation that the Bankers are in full command over the King (the State)... (but this is definitely a deviation in the system then)

[The Grey Badger]

<G> - I strongly suggest you all read Terry Pratchett's novel "Making Money." The backstory is that scam artist Moist von Lipzig, having not only brought the Discworld's major post office back to full functioning (a job offered as an alternative to being hanged - the city boss having a cynical but accurate notion of what qualities make a good government official), has been put in charge of the treasury. At the post office, he discovered that people were using postage stamps as substitutes for currency. So ---

Come to think of it, you might want to start with "Going Postal"

Be prepared to laugh your heads off, meanwhile getting a good lesson in economics and banking.

Of course, Pratchett's humor is not for everyone, but I quite enjoy it - and I loathe slapstick and British twit humor. This is more wit. And yes, it is totally relevant to what we're discussing.

[John]

From a web site reader:

Buy of a lifetime???? Can you believe it, and '87 is the justification.

CNBC, Buffett, pundits, analysts...one after another on all the media.

Maximum ruin is very near now.

Warren Buffett appears to have lost his mind completely.

http://www.nytimes.com/2008/10/17/opini ... tt.html?em

John

[agnostic]

I find the resolution by Bernanke et al. to avoid deflation "at all costs" a lot like the policy sometimes used by US Forest Service in regard to fires in our national parks. Over the last century, the policy generally has been to suppress fires "without exception". However, some enlightened folks are debating whether this is the right policy and argue we should let "natural forest fires" burn without intervention. The reasoning follows .. bear with me. [that's a joke]

In the middle of last century, most people in the forest service had this notion: forest fires are "bad". Then, along about the 60s some people with a scientific bent realized that maybe natural forest fires weren't all bad. These naysayers argued that periodic buring of underbrush and dead vegetation was good. They said you shouldn't suppress all the fires, because on occasional big fire would keep the accumulation of burnable material from getting too high in the forest as a whole. Even in the forest service, some people thought a change in policy would be worth trying. They could see that major forest tracts (such as Yellowstone Park) were accumulating too much flammable material .. and that if a fire ever did get out of control, then it likely would end up burning 80% of the forest, instead of just 10% or 20% for a normal "big fire".

This new approach had been in effect for a decade or so, but then Yellowstone was hit in 1988 by a confluence of smaller fires that ended up being close to a worst case fire. See this article in Wikipedia
http://en.wikipedia.org/wiki/Yellowstone_fires_of_1988
Fanned on by misleading media reports, the general populace cried "no more fires". I'm not sure but I think the forest service managed to resist the media storm and still does allow a certain level of natural fires.

In the same vein, I would argue that occasional deflation is a good thing. This fixation by government leaders on avoiding deflation may put off the day of reckoning. But when that day comes, and natural forces break through the firewalls put in by the government, the resulting deflation event very well may be worst in centuries.