Re: Financial topics
Posted: Sat Jan 24, 2009 6:58 am
I love some of this stuff. I was talking on the phone today with a gold bug friend of mine who I met on the Prudent bear board back in 2001. He can't seem to figure out how banks work, though I have told him over and over again. Should the Fed buy all the bonds and mortgages from a bank and all they have is the credit the Fed has put on their books and it not be enough to satisfy the liabilities of the bank, then how much money can they lend? None is the answer because this money don't exist outside of banks. The bank would have its depositors and the assets backing the deposits would be the same, basically the bonds and mortgages on deposit at the Fed. If the bank took one cent of that money and loaned it to another customer as banks traditionally do, it wouldn't have enough money to satisfy the depositors. It is going to take some thinking for most of you guys to follow this, because the entire world is ignorant as to how banks really work and I am not talking about the bullcrap they taught us in money and banking, which is kind of how they used to work when people actually dealt in cash. My point is that the Fed isn't buying these mortgages so banks can go out and make more mortgages. They are buying the mortgages so the banks can pay off their cash liabilities, most notably Citicorp and Bank of America, but most likely the other big NY banks as well.
Banks don't loan money, they create credit and act as surety for those that need credit. The money a bank would get for its bonds or mortgages is already loaned out, as their depositors hold that position either in fact or in some fashion, because that is what bank loans are, deposits. All the Fed credit received from these sales is already owed and it isn't this asset that constitutes money, but instead the capacity of the bank to act as surety on further loans. If the bank could act as surety on more loans, it wouldn't need to sell the assets on its books, because having cash has very little to do with modern banking. Being able to absorb its losses and balance its books with other banks is more the case as to whether a bank can lend more money than reselling its assets. In the summer of 2006, I saw that both Citi and Bank of America had in exess of $200 billion in Fed funds liabilities, I believe $400 billion in the case of Citi. This is why the backstop of the US government on the mortgages held by these 2 firms, not the credit worthiness. Both of these banks over-extended themselves and the government didnt' want us to know, the reason for the secret, take the money or else meeting with Paulson. Paulson wanted to hide the fact they were all broke by attempting to shed light that they didn't really need the money but were merely taking it to set an example for those that did.
We are watching the world economic picture fall apart and yet some people just can't seem to figure out that those of us that have seen this coming for a good decade or more might know a little more about what is going on than those that run the just think positive and the balance sheet will magically defy physics and other math and correct itself to our mutual benefits. This will be worse than 1933 because the inflation was more and there were more coins in the fusebox this time. There was at least a limit to the excess. There is so much speculation that default bets that most likely could never be paid are being made against the credit of the US in euros. My bet, from what I am now reading is that the Euro won't last many more years and that to get paid in them for any winning bet will be a pyrrhic victory at best.
There are comparisons with Japan, but this isn't Japan. In fact, I believe we would have another story with Japan had the US not blown the bubbles it has while Japan was deflating. The US has a balance of payments deficit and the rest of the world is addicted to the cashflow. It isn't going to be easy for the US to recover by flooding the world with consumption from an overburden and unemployed debtor. The entire equation is busted and can't be fixed.
I have been writing on this subject for years and ever since I heard a guy in the mid 1990's say that it was going to implode because there isn't a mathematical solution, I have been developing my ideas and reading. Much of what I have learned came from a guy named Doug Noland, who works for the Prudent Bear fund. Doug was writing on the FNMA and FHLMC mess in 2000 and clued me in on what was really creating these bubbles, money extracted from home equity. The 19 to 1 leverage in this game is unwinding faster than it can be replaced. This is not self liquidating debt.
Banks don't loan money, they create credit and act as surety for those that need credit. The money a bank would get for its bonds or mortgages is already loaned out, as their depositors hold that position either in fact or in some fashion, because that is what bank loans are, deposits. All the Fed credit received from these sales is already owed and it isn't this asset that constitutes money, but instead the capacity of the bank to act as surety on further loans. If the bank could act as surety on more loans, it wouldn't need to sell the assets on its books, because having cash has very little to do with modern banking. Being able to absorb its losses and balance its books with other banks is more the case as to whether a bank can lend more money than reselling its assets. In the summer of 2006, I saw that both Citi and Bank of America had in exess of $200 billion in Fed funds liabilities, I believe $400 billion in the case of Citi. This is why the backstop of the US government on the mortgages held by these 2 firms, not the credit worthiness. Both of these banks over-extended themselves and the government didnt' want us to know, the reason for the secret, take the money or else meeting with Paulson. Paulson wanted to hide the fact they were all broke by attempting to shed light that they didn't really need the money but were merely taking it to set an example for those that did.
We are watching the world economic picture fall apart and yet some people just can't seem to figure out that those of us that have seen this coming for a good decade or more might know a little more about what is going on than those that run the just think positive and the balance sheet will magically defy physics and other math and correct itself to our mutual benefits. This will be worse than 1933 because the inflation was more and there were more coins in the fusebox this time. There was at least a limit to the excess. There is so much speculation that default bets that most likely could never be paid are being made against the credit of the US in euros. My bet, from what I am now reading is that the Euro won't last many more years and that to get paid in them for any winning bet will be a pyrrhic victory at best.
There are comparisons with Japan, but this isn't Japan. In fact, I believe we would have another story with Japan had the US not blown the bubbles it has while Japan was deflating. The US has a balance of payments deficit and the rest of the world is addicted to the cashflow. It isn't going to be easy for the US to recover by flooding the world with consumption from an overburden and unemployed debtor. The entire equation is busted and can't be fixed.
I have been writing on this subject for years and ever since I heard a guy in the mid 1990's say that it was going to implode because there isn't a mathematical solution, I have been developing my ideas and reading. Much of what I have learned came from a guy named Doug Noland, who works for the Prudent Bear fund. Doug was writing on the FNMA and FHLMC mess in 2000 and clued me in on what was really creating these bubbles, money extracted from home equity. The 19 to 1 leverage in this game is unwinding faster than it can be replaced. This is not self liquidating debt.
