Well that is one way to solve the foreclosure crisis…
Ron Paul: End the Fed, return to the gold standard.
Ron Paul Supporters: End the Fed.
OWS Morons: End the Fed, Democracy Now! (return to unilateral government control over the money supply)
The future is not pretty.
The opinion of the author is that with the present composition of the Fed, hyperinflation is unlikely. However, if the Fed becomes subservient to political interests (from legislation being pushed by Barney Frank) then the likely hood of hyperinflation will increase greatly.
My belief is that we will likely first see a deflationary episode with a massive collapse of GDP. This in turn triggers a hyperinflationary event as the Fed is ordered to print by the government (at the point of a gun if necessary) to deliver on promised entitlements and placate the masses such those we see at OWS. Of course, with such printing we’ll be cutting our own throats, but it will be the most politically expedient thing to do.
The fact we’ve gone from $200 billion deficits to $1,500 deficits being the norm within a span of three years should be a wake-up call to us all that the government will indeed push us into hyperinflation hell when the time is ripe.
The fact we’ve gone from $200 billion deficits to $1,500 deficits being the norm within a span of three years should be a wake-up call to us all that the government will indeed push us into hyperinflation hell when the time is ripe.
What really does astonish me is how many people haven’t woken up to the horror of this new norm. Either because they refuse to believe it, or in many cases shown in this blog commentary, because they think it is a good thing.
There’s a lot not to like about the way people are apparently thinking about our current financial mess.
First there are those who insist that “confidence” in the currency is what is needed to keep us out of hyperinflation. This leads to the notion that current behavior could continue if only we could replace our economic actors with people who are irrationally confident. This is incorrect. There are actual *mechanical* limits to what you can borrow before you hit the financial equivalent of Mach infinity in a nozzle. After passing that singular point, borrowing arbitrary amounts of money won’t buy you a loaf of bread regardless of the beliefs of the actors in your economy, because there simply isn’t the wealth you are looking for to chase. The marginal value of a dollar goes to zero, the information content is gone.
The second idea is that this is somehow all the fault of “bankers” or the fractional reserve banking system. (Which has it’s problems, but this problem is not it). The banks have reserve requirements (at least a partial lesson learned from the great depression). The banks can only loan out what they’ve taken in. The banks aren’t the ones demanding that they make moronic loans to people who cannot possibly pay them back. Blaming the bankers, (or, in the case of some of the more degenerate protestors, the “Jews”) distracts people from the real source of pressure to borrow absurd amounts of money.
Blaming the borrowing habits of Americans is equally absurd. Are they over-leveraged? Yes. But eventually the credit card companies and banks will cut you off if you dive headfirst into debt with no prospects of paying them back.
Who is the entity with the blank check? Who is running up debt in multiples of our GDP? That is where the driving force behind hyperinflation is. Everything else is a magician’s distraction.
The banks can only loan out what they’ve taken in.
A true statement, but that isn’t the complete picture. A bank that receives $1000 in deposit can lend out $900 and hold $100 in reserve. In turn, that $900 goes to another bank which holds $90 and lends out $810. Continue the process and the original $1000 deposit quickly turns into $9000 within the economy. This assumes 1:10 reserve ratio, but apparently clever lawyers and accounts (with some help from Washington DC) have enabled certain Wall Street banks to greatly exceed the 1:10 reserve ratio that your small town regional bank must adhere to.
The problem with the fractional reserve system is that of that $9000 created from just $1000, one or two bad loans in the chain can easily cause the scheme to collapse and create several thousands dollars of bad debt that greatly exceeds the $1000 originally put into the economy. The bad debt must be either defaulted on causing the banks to close because their reserves are immediately wiped out (deflationary) or a government bailout on the bad debt which typically comes from being printed by the Fed (inflationary).
We now seem to be facing the endgame of this system as we teeter on the brink between massive default of the debt and entitlement obligations that can’t be paid back (deflation) or firing up the printing presses and inflate the debt away (inflation). How this will actually play out is anyone’s guess, but conventional thought as reflected in this scenario seems to be that the path of least political resistance is default on the debt via inflation rather than actual default via bankruptcy.
Perhaps, but what we’re seeing now isn’t the result of banks making a few bad loans by accident operating under their own interests (which should be absorbable with a conservative enough reserve requirement).
It’s the result of millions of bad loans being made because they were ordered to do so against their best interests.
Yes the lending situation is pretty clear. Govt. screws us again. What do we do about it? Voting is supposed to be the solution, but it is not working. We continue to get idiots in both parties doing business as usual while we get hung farther and farther over the edge of the cliff. These same idiot politicians with there cronies are holding the system together just to create a bigger fall when it does come.
That fall would usually allow growth to follow, but these idiots never learn the lesson and will make the recovery period (if there is one this time) longer and more painful. The pain we’re feeling today is nothing compared to that period we will have to endure after the fall. There is no way to get out of this mess without a fall (there could be, but we aren’t going to take that path… it requires adults to be in charge and we don’t have any available.)
“Democracy is 2 wolves and a sheep voting on what to have for dinner. …”
Voting fails when the people vote to loot the public treasure for personal gain, or to otherwise enslave others.
My, what big eyes the President has…
The 2008 financial crisis was primarily caused by two things. First, loans were bundled up into financial instruments called mortgage backed securities (MBS) which, regardless of actual quality of debt, were rated as AAA by rating agencies too lazy to actually do their job and properly investigate the true quality of the securities. The MBS were then sold on the open market to a broad spectrum of investors including not just banks, but pension funds, corporate investors, etc. To compound this problem, another class of securities were created called credit default swaps (CDS) that function as kind of an insurance policy to investors so that if the MBS fail to perform, the holder of a CDS will be made whole on the investment. Companies such as AIG priced the CDS they created as if the underlying MBS were truly were AAA rated, rather than the price of the CDS reflecting he true risk.
When a certain percentage of the loans in the MBS went into default (something on the order of 5%) investors suddenly found that the risk of the MBS was much greater than they were lead to believe. Almost overnight the MBS became toxic and no one was willing to buy the securities which now had unknown risk. This wasn’t a problem for most investors who could hold onto the MBS and absorb the 5% hit. However, banks holding MBS operated under mark-to-market rules and when the market for MBS collapsed (ie. no buyers could be found) they had to write down the value of the motgage backed securities they were holding to zero and forcing them to sell other assets to meet billions in reserve requirements. This problem was greatly magnified when the security holders attempted to exercise their CDS insurance and companies such as AIG could not follow through on their obligations because the massively underpriced the CDS in relation to the actual risk of the underlying MBS which they were insuring.
TARP basically provided a mechanism for the banks to unload their now worthless MBS to the Fed (the MBS were actually not worthless as the great majority of loans were still performing, but as there was no market for them they were had to be written down to zero).
The kicker in all this is that some unscroupless investment banks such as Goldman Saches created and sold the MBS and understood the AAA rating did not reflect the underlying risk of the security. They then purchased naked CDS (owning insurance without owning the underlying asset) from AIG and demanded payment when the MBS they originally bundled failed. It was like buying insurance on your neighbor’s house and then demanding payment when you burn the house to the ground. The US government stepped in to bailout AIG to allow Goldman Saches to make a killing on the CDS they held, but never pursued prosecuting the source of the fraud perpetuated on the American tax payer who had to bailout the whole frick’n mess.
Blaming the crisis on “lazy” rating agencies is missing the original cause. In the beginning there were government policies that encouraged, and in many cases required banks to make the bad loans to begin with. Subtract those market-warping policies from the equation and you don’t get the domino effect. And the MBS’s and CDS’s would have functioned as they were intended: spreading risk and maintaining liquidity.
I didn’t mean to imply the root cause was the rating agencies, but rarther just tried to explain the overall nature of the 2008 crisis. I agree that government policies that mandated banks make bad loans were the root cause. However, it would be foolish to pretend that Wall Street didn’t greatly magnify the consequences of bad government policy. It was Wall Street that created, marketed and sold the financial innovation of MBS’s that set the stage whereby 5% of loans going bad could make the other 95% worth zero when held by investors operating under mark-to-market rules. Then piling on the outright fraud of the same companies that bundled the MBS’s then usings CDS’s to bet the MBS’s would fail and having the tax payers bail them out when the CDS’s defaulted. The “lazy” rating agencies were just one of the responsible participants in the whole ugly fiasco.
No one has their hands clean in the entire affair, except the innocent tax payers who didn’t leverage themselves to the hilt and participate in the housing bubble. They are the ones now saddled with trillions of more debt that will have to be paid off in future taxes.
You must be new around here, stranger, to think you could post a rather concise and insightful summary of the technical reasons for the financial crisis without including boilerplate language for TEA Party talking points. You’ll live, you’ll learn.
Right Paul, Gretchen Morgenson, Tea Partier to the core. I hear she vets all tea party communications from a secret location at the New York Times.
“But…but…inflation is just a myth to scare the teabaggers! *wail*”
Great summary Mpthompson.
For the last two years there’s been no COLA on social security. This year there will be a 3.6% COLA. This scares the hell out of me because I know they wanted to keep it at zero again which means they were unable to play around with the CPI enough to make it happen. The real inflation rate must be horrible indeed.
Well that is one way to solve the foreclosure crisis…
Ron Paul: End the Fed, return to the gold standard.
Ron Paul Supporters: End the Fed.
OWS Morons: End the Fed, Democracy Now! (return to unilateral government control over the money supply)
The future is not pretty.
The opinion of the author is that with the present composition of the Fed, hyperinflation is unlikely. However, if the Fed becomes subservient to political interests (from legislation being pushed by Barney Frank) then the likely hood of hyperinflation will increase greatly.
My belief is that we will likely first see a deflationary episode with a massive collapse of GDP. This in turn triggers a hyperinflationary event as the Fed is ordered to print by the government (at the point of a gun if necessary) to deliver on promised entitlements and placate the masses such those we see at OWS. Of course, with such printing we’ll be cutting our own throats, but it will be the most politically expedient thing to do.
The fact we’ve gone from $200 billion deficits to $1,500 deficits being the norm within a span of three years should be a wake-up call to us all that the government will indeed push us into hyperinflation hell when the time is ripe.
The fact we’ve gone from $200 billion deficits to $1,500 deficits being the norm within a span of three years should be a wake-up call to us all that the government will indeed push us into hyperinflation hell when the time is ripe.
What really does astonish me is how many people haven’t woken up to the horror of this new norm. Either because they refuse to believe it, or in many cases shown in this blog commentary, because they think it is a good thing.
There’s a lot not to like about the way people are apparently thinking about our current financial mess.
First there are those who insist that “confidence” in the currency is what is needed to keep us out of hyperinflation. This leads to the notion that current behavior could continue if only we could replace our economic actors with people who are irrationally confident. This is incorrect. There are actual *mechanical* limits to what you can borrow before you hit the financial equivalent of Mach infinity in a nozzle. After passing that singular point, borrowing arbitrary amounts of money won’t buy you a loaf of bread regardless of the beliefs of the actors in your economy, because there simply isn’t the wealth you are looking for to chase. The marginal value of a dollar goes to zero, the information content is gone.
The second idea is that this is somehow all the fault of “bankers” or the fractional reserve banking system. (Which has it’s problems, but this problem is not it). The banks have reserve requirements (at least a partial lesson learned from the great depression). The banks can only loan out what they’ve taken in. The banks aren’t the ones demanding that they make moronic loans to people who cannot possibly pay them back. Blaming the bankers, (or, in the case of some of the more degenerate protestors, the “Jews”) distracts people from the real source of pressure to borrow absurd amounts of money.
Blaming the borrowing habits of Americans is equally absurd. Are they over-leveraged? Yes. But eventually the credit card companies and banks will cut you off if you dive headfirst into debt with no prospects of paying them back.
Who is the entity with the blank check? Who is running up debt in multiples of our GDP? That is where the driving force behind hyperinflation is. Everything else is a magician’s distraction.
The banks can only loan out what they’ve taken in.
A true statement, but that isn’t the complete picture. A bank that receives $1000 in deposit can lend out $900 and hold $100 in reserve. In turn, that $900 goes to another bank which holds $90 and lends out $810. Continue the process and the original $1000 deposit quickly turns into $9000 within the economy. This assumes 1:10 reserve ratio, but apparently clever lawyers and accounts (with some help from Washington DC) have enabled certain Wall Street banks to greatly exceed the 1:10 reserve ratio that your small town regional bank must adhere to.
The problem with the fractional reserve system is that of that $9000 created from just $1000, one or two bad loans in the chain can easily cause the scheme to collapse and create several thousands dollars of bad debt that greatly exceeds the $1000 originally put into the economy. The bad debt must be either defaulted on causing the banks to close because their reserves are immediately wiped out (deflationary) or a government bailout on the bad debt which typically comes from being printed by the Fed (inflationary).
We now seem to be facing the endgame of this system as we teeter on the brink between massive default of the debt and entitlement obligations that can’t be paid back (deflation) or firing up the printing presses and inflate the debt away (inflation). How this will actually play out is anyone’s guess, but conventional thought as reflected in this scenario seems to be that the path of least political resistance is default on the debt via inflation rather than actual default via bankruptcy.
Perhaps, but what we’re seeing now isn’t the result of banks making a few bad loans by accident operating under their own interests (which should be absorbable with a conservative enough reserve requirement).
It’s the result of millions of bad loans being made because they were ordered to do so against their best interests.
Yes the lending situation is pretty clear. Govt. screws us again. What do we do about it? Voting is supposed to be the solution, but it is not working. We continue to get idiots in both parties doing business as usual while we get hung farther and farther over the edge of the cliff. These same idiot politicians with there cronies are holding the system together just to create a bigger fall when it does come.
That fall would usually allow growth to follow, but these idiots never learn the lesson and will make the recovery period (if there is one this time) longer and more painful. The pain we’re feeling today is nothing compared to that period we will have to endure after the fall. There is no way to get out of this mess without a fall (there could be, but we aren’t going to take that path… it requires adults to be in charge and we don’t have any available.)
“Democracy is 2 wolves and a sheep voting on what to have for dinner. …”
Voting fails when the people vote to loot the public treasure for personal gain, or to otherwise enslave others.
My, what big eyes the President has…
The 2008 financial crisis was primarily caused by two things. First, loans were bundled up into financial instruments called mortgage backed securities (MBS) which, regardless of actual quality of debt, were rated as AAA by rating agencies too lazy to actually do their job and properly investigate the true quality of the securities. The MBS were then sold on the open market to a broad spectrum of investors including not just banks, but pension funds, corporate investors, etc. To compound this problem, another class of securities were created called credit default swaps (CDS) that function as kind of an insurance policy to investors so that if the MBS fail to perform, the holder of a CDS will be made whole on the investment. Companies such as AIG priced the CDS they created as if the underlying MBS were truly were AAA rated, rather than the price of the CDS reflecting he true risk.
When a certain percentage of the loans in the MBS went into default (something on the order of 5%) investors suddenly found that the risk of the MBS was much greater than they were lead to believe. Almost overnight the MBS became toxic and no one was willing to buy the securities which now had unknown risk. This wasn’t a problem for most investors who could hold onto the MBS and absorb the 5% hit. However, banks holding MBS operated under mark-to-market rules and when the market for MBS collapsed (ie. no buyers could be found) they had to write down the value of the motgage backed securities they were holding to zero and forcing them to sell other assets to meet billions in reserve requirements. This problem was greatly magnified when the security holders attempted to exercise their CDS insurance and companies such as AIG could not follow through on their obligations because the massively underpriced the CDS in relation to the actual risk of the underlying MBS which they were insuring.
TARP basically provided a mechanism for the banks to unload their now worthless MBS to the Fed (the MBS were actually not worthless as the great majority of loans were still performing, but as there was no market for them they were had to be written down to zero).
The kicker in all this is that some unscroupless investment banks such as Goldman Saches created and sold the MBS and understood the AAA rating did not reflect the underlying risk of the security. They then purchased naked CDS (owning insurance without owning the underlying asset) from AIG and demanded payment when the MBS they originally bundled failed. It was like buying insurance on your neighbor’s house and then demanding payment when you burn the house to the ground. The US government stepped in to bailout AIG to allow Goldman Saches to make a killing on the CDS they held, but never pursued prosecuting the source of the fraud perpetuated on the American tax payer who had to bailout the whole frick’n mess.
Blaming the crisis on “lazy” rating agencies is missing the original cause. In the beginning there were government policies that encouraged, and in many cases required banks to make the bad loans to begin with. Subtract those market-warping policies from the equation and you don’t get the domino effect. And the MBS’s and CDS’s would have functioned as they were intended: spreading risk and maintaining liquidity.
I didn’t mean to imply the root cause was the rating agencies, but rarther just tried to explain the overall nature of the 2008 crisis. I agree that government policies that mandated banks make bad loans were the root cause. However, it would be foolish to pretend that Wall Street didn’t greatly magnify the consequences of bad government policy. It was Wall Street that created, marketed and sold the financial innovation of MBS’s that set the stage whereby 5% of loans going bad could make the other 95% worth zero when held by investors operating under mark-to-market rules. Then piling on the outright fraud of the same companies that bundled the MBS’s then usings CDS’s to bet the MBS’s would fail and having the tax payers bail them out when the CDS’s defaulted. The “lazy” rating agencies were just one of the responsible participants in the whole ugly fiasco.
No one has their hands clean in the entire affair, except the innocent tax payers who didn’t leverage themselves to the hilt and participate in the housing bubble. They are the ones now saddled with trillions of more debt that will have to be paid off in future taxes.
You must be new around here, stranger, to think you could post a rather concise and insightful summary of the technical reasons for the financial crisis without including boilerplate language for TEA Party talking points. You’ll live, you’ll learn.
Right Paul, Gretchen Morgenson, Tea Partier to the core. I hear she vets all tea party communications from a secret location at the New York Times.
This morning via Drudge: Inflation Pressures Intensify as Producer Prices Jump Higher
“But…but…inflation is just a myth to scare the teabaggers! *wail*”
Great summary Mpthompson.
For the last two years there’s been no COLA on social security. This year there will be a 3.6% COLA. This scares the hell out of me because I know they wanted to keep it at zero again which means they were unable to play around with the CPI enough to make it happen. The real inflation rate must be horrible indeed.