Tuesday, September 30, 2008
Depression?
I have to say the events unfolding today are absolutely incredible. In every way, recent reactions to the situation in the housing market show how deeply this country was affected by the Depression.
Similar to today, the Depression began with a crisis among financial institutions. But unlike today, the financial institutions impacted are not dealing with runs on their banks by depositors. Since the Depression we created the FDIC, which eliminates that risk: Depositors will get their savings back regardless. So the problem is essentially created by the falling asset value banks have on their books; mortgages.
The Federal Reserve is a very special institution because they have the power to create money. Currently, the Fed pegs an overnight interest rate (called the Federal Funds rate) that banks charge each other to borrow money. The Fed determines what that interest rate will be – witness all the headlines of when they decide to change it – and will essentially print up any money it takes to maintain that interest rate. It does this by purchasing things.
To create money the Fed purchases Treasury securities. To acquire these assets the Fed must create a liability to purchase them with. For you or me it would be debt, drawing down cash, or some other way of financing it. But when the Fed purchases something it creates the liability called money, greenbacks, dollars; those paper things we all have in our wallet.
When this system was on the gold standard, it was a claim against its gold reserves, so the Fed had to have gold to print it up. Since the abolition of the gold standard (which had its own issues) during the Nixon administration, purchases by the Fed are backed by nothing. The liabilities the Fed creates are uncollateralized US Dollars deposited in the banks it buys stuff from. Technically, the liabilities it is capable of creating are without bound without a gold standard (or a silver, eggs, etc., standard).
With this bailout, the Fed – which is a part of the Treasury – has decided to replace this process with purchasing other kinds of assets. Not the kind that have to be paid back by the taxpayers like Treasury debt but, basically, the bum private sector assets that bog down Wall Street. Why is this a problem? It’s because these assets, by design, have no value and make the Federal Government, for the first time in history, an invsetor in private assets; not just any type, but the most toxic.
Economically, the actions by the Federal Reserve are tantamount to printing up the money to subsidize banks’ overly risky behavior by propping up the asset values of worthless debt. Someone has to pay for this. And that is a tax that economist call the “inflation tax,” levied through a rise in the price level. So those Americans holding cash – usually the poor –have less and less purchasing power, and are the ones shouldering it. As wages and prices struggle to adjust in the next 9 months or so to deal with this the increased money supply, we will find this tax levied on the American people without a debate in the House or Senate, or ANY part of our checks and balances
And this is why, to be honest, our lawmakers are struggling with this. It pits our fundamental values as a democracy against a short-term credit fix. I applaud that the House struggles with this. They have a bit for foresight than that of the Federal Reserve or presidential candidates.
I doubt Mrs. Palin has a clue what I am talking about.
Similar to today, the Depression began with a crisis among financial institutions. But unlike today, the financial institutions impacted are not dealing with runs on their banks by depositors. Since the Depression we created the FDIC, which eliminates that risk: Depositors will get their savings back regardless. So the problem is essentially created by the falling asset value banks have on their books; mortgages.
The Federal Reserve is a very special institution because they have the power to create money. Currently, the Fed pegs an overnight interest rate (called the Federal Funds rate) that banks charge each other to borrow money. The Fed determines what that interest rate will be – witness all the headlines of when they decide to change it – and will essentially print up any money it takes to maintain that interest rate. It does this by purchasing things.
To create money the Fed purchases Treasury securities. To acquire these assets the Fed must create a liability to purchase them with. For you or me it would be debt, drawing down cash, or some other way of financing it. But when the Fed purchases something it creates the liability called money, greenbacks, dollars; those paper things we all have in our wallet.
When this system was on the gold standard, it was a claim against its gold reserves, so the Fed had to have gold to print it up. Since the abolition of the gold standard (which had its own issues) during the Nixon administration, purchases by the Fed are backed by nothing. The liabilities the Fed creates are uncollateralized US Dollars deposited in the banks it buys stuff from. Technically, the liabilities it is capable of creating are without bound without a gold standard (or a silver, eggs, etc., standard).
With this bailout, the Fed – which is a part of the Treasury – has decided to replace this process with purchasing other kinds of assets. Not the kind that have to be paid back by the taxpayers like Treasury debt but, basically, the bum private sector assets that bog down Wall Street. Why is this a problem? It’s because these assets, by design, have no value and make the Federal Government, for the first time in history, an invsetor in private assets; not just any type, but the most toxic.
Economically, the actions by the Federal Reserve are tantamount to printing up the money to subsidize banks’ overly risky behavior by propping up the asset values of worthless debt. Someone has to pay for this. And that is a tax that economist call the “inflation tax,” levied through a rise in the price level. So those Americans holding cash – usually the poor –have less and less purchasing power, and are the ones shouldering it. As wages and prices struggle to adjust in the next 9 months or so to deal with this the increased money supply, we will find this tax levied on the American people without a debate in the House or Senate, or ANY part of our checks and balances
And this is why, to be honest, our lawmakers are struggling with this. It pits our fundamental values as a democracy against a short-term credit fix. I applaud that the House struggles with this. They have a bit for foresight than that of the Federal Reserve or presidential candidates.
I doubt Mrs. Palin has a clue what I am talking about.
# posted by otas : 9:31 PM
