Well, now we know why Volcker is on the sidelines.

"I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed"

There are gonna be a helluva lot of "reviewing" going on quite soon and with guns. Obama administration have done nothing right with the banks and only made things much worse. They have allowed Wall Street crooks full and unconditional access to the government funds while tax revenues are collapsing. It is like they want to crash the system big time. Transparency of US markets is also gone and nobody knows what kind of crap banks still are holding way above the real market values.

Is Volker really proposing a target of 0% inflation? That seems awfully risky if wages etc. are sticky...

Volcker vs. Kohn? No contest. Volcker wins.

The extent to which O is in the pocket of the banksters is breathtaking that he would risk his entire presidency supporting their interests at the expense of everyone else. He owns this mess now.

Something about the Tax revolt. Interesting listen.

http://www.netcastdaily.com/broadcast/fsn2009-0418-3b.mp3

While I think Greenspan/Paulson had a big part in the mess we are currently in, there is something about Geithner that scares the hell out of me. I think the best word to describe him is "devious". A runner up would be "d*ickhead".

Volcker is right. Among other issues, the Treasury is using the Fed to avoid having to ask Congress to fund the PPIP. We, the taxpayers, have a right to be consulted first before these funds are appropriated. Same thing goes for the FDIC -- it should be insuring deposits, not insuring hedge fund investors in the PPIP.

The inflaton is the particle that transmits inflation.

Pavel, do you know if it has mass, charge, charm or just spin?

In yurp they have a 2% inflation target. Reason is simple: as long as your budget deficit is below 2%, inflation will keep your budget deficit 'sustainable', in the long run.

Claymation tag team:

Volcker and Elizabeth Warren vs. Kohn and Bernanke

Paul is trying to tell us that he knows the Fed needs to be shut down. Funny how big old guys a few years away from the great beyond sometimes get glimpses of the truth and don't mind sharing it.

"we have seen the fed's record over these last 90 years and it is dismal ..."

to be fair, they were doing reasonably well until bretton woods was dumped. but even the best of managers can't hope to not create the kinds of social inequality, debt-mongering, usury and hollowed-out industry we've seen in the past 36 years when under a fiat regime.

I wonder what Volcker has to state on the subject of our unsustainable aggregate debt to GDP. No one seems to confront the big elephant.

On inflation, notice how MSM focuses on total now vs. core last year.

"to be fair, they were doing reasonably well until bretton woods was dumped. "

The Panic of '21 ... The Great Depression ... I think not ...

The only features that saved the Fed from 1940 were wars ...

WWII, the Korean War, the Viet Nam War ... and the enormous expenditures and debt

those wars created ...

I said this when BB stepped up to buy $1.3T of MBS - that move in and of itself spells the end of the Fed as we know it. It will no longer be allowed to function as an independent body (as if it really was, this will surely be the end of any independence).

Buying that much MBS puts them in an intractable position. There is no way they will be able to get out of that mess. Without a solution to Fan/Fred, the spread on MBS over Treasuries would be 150bps or more than it is today, meaning 6.5% or higher mortgage rates. No way the politicians are going to allow that anytime before the next election. That would kill whatever activity there is in the housing market.

In order to maintain current rates, the Fed is going to have to buy up basically the whole market, estimated at $2.8T this year; they will probably have to buy 1.9T or so, MSR hedgers will buy some, a few funds etc.

But there is no foreign market for that junk, not without the full faith and credit behind it.

pavel.chichikov (member) wrote on Sat, 04/18/2009 - 1:38pm.

"The consequences of it are unbelievably bad in terms of public intrusion into the private sector."

The private sector, at least some of it, behaved like a two year old loose in the liquor cabinet.

---

exactly and that is why the bankstas should be allowed to choke on their own toxic securitized puke

sec oneill was right...bad intrusion into private sector

"The only reasonable thing to do is to separate government and money into two distinct things."

~~~~

LOL ... banks create money through fractional reserve banking, even we, the owners of the sovereign

right to currency and credit creation have to borrow our own money !

You have it backwards ... money and government should be synonymous ... If the money managers screw up

the tax payer takes the hit. If they use sovereign currency and credit creation well the tax payer benefits ...simple as that.

Under the current system the bankers benefit when things go well and the tax payer takes the hit when they don't ...

The Fed manages monetary policy much like a drunk drives down the road.
The drunk swerves more than the road.
This is because he always oversteers - too much left is corrected by too much right.

And so it goes with the Fed.

Too easy followed by too tight. With the normal lag times required they lose patience waiting to see the results of their actions, and they double up on the corrective action. This requires or leads to an equally severe overcorrection in the other direction.

Bubble, Crash...

Bubble, Crash...

mmckinl at 149

word!

i believe you are right about the relationship of debt to growth

additionally, i say we live with-in an economic system that is unsustainable and ensures its own death

and will take many individuals with it to their demise

"and will take many individuals with it to their demise "

it can survive for many more decades, it is just the middle class and its pretensions of ownership-through-debt that won't make it. but the truly rich will do just fine.

bgates

Colonial Script ...

Colonial scrip was not backed by gold or silver and therefore the colonies could control its purchasing power. This was similar to the "tally stick" system used by the British Empire for over 700 years. It was different from the conventional European mercantilist system of money which required governments to borrow from banks and pay interest for those loans, as gold and silver were the only regarded forms of money. Colonial scrip, were "bills of credit" created by the government, based on the credit of that government, and this meant that there was no interest to pay for the introduction of money. This went a considerable way towards defraying the expense of the Colonial governments and in maintaining prosperity. The Governments charged low interest when it loaned out this paper money to its citizens, with land as collateral, and this interest income lowered the tax burden on the people, contributing to prosperity. wiki

Bankers can only lend out what they have taken in as deposits (or borrowed). There is no thin air involved.

They are limited in this process to a maximum lending ratio of 10 times their equity capital. It is a limit on their leverage ratio. Not some magic money creation formula.

If you think banks can make money from thin air you should start a bank to get in on the magic.

http://www.treasurydirect.gov/NP/BPDLogin?application=np

Wasn't this 10T just a few months ago?

If you think banks can make money from thin air you should start a bank to get in on the magic.
----------------------------------------
Jesse's Café Américain Forms Bank Holding Company
http://jessescrossroadscafe.blogspot.com/2009/04/chevron-warns-after-hou...

Zephyr wrote on Sat, 04/18/2009 - 2:18pm.
Bankers can only lend out what they have taken in as deposits (or borrowed). There is no thin air involved.

~~~~

This is wrong ... Steve Keen, the Australian economist has proven that banks front run their deposits.

This is what killed the goose that laid the golden egg, the commercial paper market and trashed

the banks working model .

Rob dawg,

Banks are allowed to borrow nine dollars (as deposits) and combine it with $1 of their own equity capital and lend out the sum of ten dollars. All ten dollars comes from someone who already had it and made it available to the bank. No magic involved. But you do have to get depositors to put (lend) money in the bank. No deposits, no money to lend (except your own capital).

The only magic is in the minds of people who do not understand the banking business.

"I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed," Volcker said.

I think he's missing the point. He's attacking the response to the problem without addressing the problem, which is already well on its way to being resolved.

The problem was the policy of encouraging home ownership regardless of home price or the ability of borrowers to repay their mortgages. The response may go beyond the Federal Reserve's mandate (or that of Treasury, Congress and the President), but that's what happens in any crisis: The government exercises extraordinary powers to deal with the emergency, then things return to normal (however we define it) as the crisis abates.

Sebastian

2% +/- 10% is more like it. The world has developed immunity to the Fed's brand of medicine. We may as well simply ditch the Fed; it has no useful powers left and has a very destructive dooH niboR delusion.

Banks are allowed to borrow nine dollars (as deposits) and combine it with $1 of their own equity capital and lend out the sum of ten dollars. All ten dollars comes from someone who already had it and made it available to the bank.

~~~~

How do Commercial Banks exist with no depositors ?

In fact they borrow the money to deposit .... borrow short loan long ...

o.jeff

No it cannot. The check would bounce.

In your example the bank only has $1,000. It can lend $1,000 and no more. It has no more to lend. Only after it collects money from depositors will it have more money to lend. Even after collecting deposits it is limited by regulation to lend only ten times its capital.

So if your $1,000 bank got deposits of $50,000 it would not be allowed to lend the entire $50,000 back out.

The 10 to 1 rule is a RESTRICTION on lending . Not a magic formula for money creation.

Volcker is wrong on this one. If you have a stable price growth of around 2%, bonds, equity and even savings accounts will provide offsetting interest rates. Unless you are hording cash, a constant rate of inflation won't hurt you. Now that the fed offers interest on reserves, even banks have protection against interest rates. If you look at something like Taylor's rule, having a higher targeted inflation rate will allow more flexibility in using monetary policy to moderate business cycles since nominal interest is bounded by zero and real interest is bounded by -(inflation rate). Price stickiness has also been raised as a reason to keep inflation high. Deflation can cause balance sheet problems and higher default rates because debt is nominal and assets are real. Since there will always be some price uncertainty, avoiding deflation is a reasonable policy.

Volcker's negative is minor and he misses all the benefits of the current system. Of course zero inflation will always benefit the oldest in the population who have more nominal assets and fixed incomes. Inflation helps us young guys with more debt and real assets than nominal assets.

"I don't get it," Volcker said ... By setting 2% as an inflation objective, the Fed is "telling people in a generation they're going to be losing half their purchasing power," Volcker said.

And while we're at it, Paul, if I may call you that, when you left the Fed CPI inflation was around 4.3% and it's averaged about 3% since. So what are you giving Kohn such a hard time about because he thinks 2% inflation is okay? Writing a book? Attempting to make a comeback?

Sebastian

"It takes a lot of money and a license from the banking cartel ... "

If the magic money creation were true, then the hedge funds would all be banks instead of hedge funds. Creating $10 from $1 is far better than anything any investor can normally do. But it is a myth.

Paul,

The ponzi works only if treasuries remain in 'demand'. Let us see how high the pyramid can grow.

@Zephyr, please see Wikipedia for fractional reserve banking systems.

And please tell me you don't work within the banking system.

I think you can wind up with both, namely wage deflation and price inflation.

"...Steve Keen, the Australian economist has proven that banks front run their deposits."

Sure. And you and I can kite checks. Banks can kite checks too. I believe it is illegal, but it is certainly possible to do. A bank could write a check to you as a loan, knowing that it does not have the money to cash the check, but will recieve the money from somewhere else before your check clears back through the clearinghouse system for payment.

zephyr,

I thought that the banks were relying heavily on borrowed deposits from the government. I remember the chart floating around sites like CR about 6 months ago. Doesn't that mean that the bank does not really have the $1 to loan out $10? Is the government loaning out part of the deposit while it is also loaning out the other $9 to lend?

When the government creates money/debt and gives it to the Fed to swap for banks' dubious assets is that creating money out of the air?

"Not a magic formula for money creation."

Hilarious, the panties really get in a twist here at the 'thin air' allegation.

FRNs are nothing but thin air in the first place!

It really is funny - like a three-year-old's passionate belief in the existence of Santa...

Suffering through an even worse economy than the 30s hasn't been fun, and I'm sure the next 15 years of it will be fairly miserable for most of my friends and family - but seeing the average person realize just how imaginary every aspect of our economic system is makes the medicine go down a bit more easily. Who knows, maybe even the knucklehead creationists that inhabit the bottom 60% of our national incomes that have been so totally left behind in the past 25 years are even wising up to the fact that our entire currency system has no more or less relationship to reality than a monopoly game.

But do we really need to do the 5th grade math exercise in regards to the inherently fraudulent nature of fractional reserve 'banking'? Just spend five seconds thinking about what made those houses in the Central Valley worth a half million bucks, or those Fort Myers casitas worth 300K.

When Volcker left the financial system was not on life support. We actually had a positive savings rate back then, and there was no toxic garbage choking the world markets.

Also Sebastian, you are much too coy. It wsa not "the policy" (what, are we supposed to infer it was a govt policy and not big fat corporate scammin?) of encouraging homeownership to unqualified borrowers. The securities industry created a market for bad loans because they could gamble on them many times over. The ratings agencies OK'd the gambling because they got their big fat fees. Then loans got cheaper, prices got higher and unqualified borrowers had to be tapped to keep the game going.

You see, Sebastian, turns out the "policy" of those sociopathic freaks at Enron was actually standard operating procedure in the entire world's investment banking community. And baby burned.

Seb,

Go borrow some more money if you can. Heck, go buy some bank stock on margin. Maybe you can make a few bucks, because in your the NC banking eCONomy, you'll like need some passive income.

Kindest possible regards,

Paul

Comrade Coinz,

Money supply is a measure of money in the economy. It is an estimate and includes many data problems including double counting and undercounting. The data is not perfect. Much like the measure of inflation or unemployment, it is an estimate that is used as a barometer. Increasing credit will increase the observed measurement of the money aggregates. But that is not the same as banks "printing" or creating money. Banks are money changers. Every dollar going out the door had to previously come in the door.

Ever wonder why your ancestors in the 1920s lived in squalor, poverty, misery and more uncertainty than you today.

I think it is because of the cumulative effect of technology breakthroughs making people, farming, and production in every area greater. That, and the working population has increased.

Just like the ancestors of the people who lived in the 1920s lived in squalor, poverty and misery compared to their progeny.

@Zephyr,

You really don't get that a bank loan adds new money to the system? The depositor has their money and the person receiving the loan has their new money. When the person who received the loan deposits their "loaned" money into another bank, or even the same bank, what happens to the original depositor's money? It is still there. Bank loans create new money, no?

Tricky and magical!

w wrote on Sat, 04/18/2009 - 3:09pm.
Actually, Lucifer I would say it had less to do with banking and more to do with a world run on cheap fossil fuels that replaced hard labor.

~~~~

Great point ...

better tech helped as well ... that's what people don't understand ... tech runs on energy, it doesn't create it ...

Money from thin air:

Bgates said: "FRNs are nothing but thin air in the first place!"

Indeed, the Federal can create money from thin air. Private banks cannot. And believing that banks can create money from thin air is like believing in Santa…

Mmckinl said: "The majors were levered over 20 to 1 some 30 to 1 ... "

The non-bank financial companies were allowed to be leverage like (after the deregulation of 1999). The banks were not allowed such leverage. But loan losses reduce the equity and force the ratio up.

mmckinl said: "Wrong, hedge funds get to leverage higher without the messy deposits ..."

Lots of people can be very leveraged. All of the house flippers who went under were highly (over 100%) leveraged. More leveraged than the banks or hedge funds. But that is not the same as creating money. They may have foolishly thought it was. But they were wrong. Perhaps they were hoping for Santa to bring them some free money from thin air.

W said: "When the government creates money/debt and gives it to the Fed to swap for banks' dubious assets is that creating money out of the air?"

Yes. But it is not the bank that crearted the money. They are probably benefiting from a better than deserved price for the assets sold. But that is a different topic.

Lucifer (member) wrote on Sat, 04/18/2009 - 3:28pm.
The willingness to consume drove all of that..
//Fossil fuels ... energy, fertilizer and pesticides ...//

~~~~

LOL

When has man ever lacked the desire to consume ?

But it is still only one dollar. But it is seen multiple times. It will always remain only one dollar. Even if it was a gold coin, it could be lent out multiple times. It would still be only one coin, no matter how many times it came in and out of the bank as loans and deposits. No money created.

~~~~

But the banks take that gold coin and issue ten notes for every coin !

"The depositor has their money and the person receiving the loan has their new money. When the person who received the loan deposits their "loaned" money into another bank, or even the same bank, what happens to the original depositor's money? It is still there. Bank loans create new money, no?"

NO! The money is NOT still there. The borrower has it.

That is why runs on the bank are so devastating. Because while the bank may be sound the money is NOT at the bank. It is in the loans made all over town. And that money was spent wherever. Some of it may get deposited again, but it will go right back out as new loans. The money is circulating. Credit and loans increase the velocity of money. But the "coin" does not multiply, it just keeps changing hands. This creates the illusion that there are more "coins" than there are.

Lucifer (member) wrote on Sat, 04/18/2009 - 3:43pm.

Show me the figures ...

Lucifer (member) wrote on Sat, 04/18/2009 - 3:46pm.
It is not the desire but the belief that they can, a system to help them to and the belief that they are worthy enough to.
"When has man ever lacked the desire to consume ?"

~~~~

Not on the basic level of food, clothing and shelter ... this is do or die ...

Fossil fuels coupled with technology allowed this to be done with fewer people at lower cost ...

Zephyr wrote on Sat, 04/18/2009 - 3:48pm.
"But the banks take that gold coin and issue ten notes for every coin ! "
No they don't. They lend that one coin and recieve a note (promising to repay one coin) from the borrower.

~~~~

Does the word "fractional" as in "fractional reserve banking" mean anything to you ?

It means deposits and capital are leveraged my dear fellow ...

The banker uses notes at a 10 to 1 ratio to deposits.

One of things I have learned over the years is that most 'scientific knowledge' is bullshit speculation.

~~~~

Well, there we part company ...

Some scientific knowledge is indeed hypothesis and some is fact by way of physical expression ...

But I guess this is where we are after 8 years of Bush and 30 years of Reaganism ...

Banks lending creates velocity. And velocity has a significant impact. That is why tracking credit expansion is so meaningful. Counting credit as money is a shorcut in the analysis. For most purposes it has the nearly same effect. So combining steps will often not impair the analysis.

The flip side is that merely creating money might have no impact. For example if the Fed printed $10 trillion and distributed it to americans, the spending spree would certainly cause significant and rapid inflation.

However, if that money were printed but then locked up in a vault without telling anyone there would be no impact.

The key is circulation - how much, and at what velocity.

Lucifer (member) wrote on Sat, 04/18/2009 - 3:55pm.
What is most of the economy based on.. hint- It is not the essentials. Watch the south park episode "margaritaville"
//Not on the basic level of food, clothing and shelter ... this is do or die ...//

~~~~

It is the subjugation of these necessities that allows the economy to pursue other forms of consumption.

Once these necessities become more and more expensive they will compromise other forms of consumption.

Is Volker really proposing a target of 0% inflation? That seems awfully risky if wages etc. are sticky...

Workers would still be able to get wage increases based on productivity gains. What's the point of wage gains that just "keep up" with inflation anyway?

Inflation is just a stealth tax by the government.

IF uranium (or any other metal) could be profitably extracted from seawater, someone, somewhere would be doing it. It costs a bunch to extract water from seawater!

mmckinl, I admire your patience.

"But that doesn't tell you how it was created .... "

See the Federal Reserve on that one. They use the newly created money to buy financial assets in the market. Thus, it finds its way into the system. They also "lend" it to the government who spends it...

Lucifer (member) wrote on Sat, 04/18/2009 - 4:12pm.
Why should they become expensive..

~~~~

Because energy WILL become more expensive ... everything runs on energy ...

The low fruit of commodities has been picked ... the easy oil fields, the rich coal mines, copper mines etc.

The world is a finite place, that you cannot dispute ...

In the final analysis one must get more energy from a project than it takes energy to build, maintain and transport

this captured energy ... otherwise you lose energy !

Oil is so efficient because there is a lot of stored energy that can be liberated. Nothing else on earth comes close to the energy efficiency we get from oil.

If we could figure out safe fusion, it would liberate us from oil. Or highly efficient solar. I don't see any other sustainable alternatives.

mmckinl,

Why is that secular leftist belief any more true than those right wingers who believe in the rapture. Are you not basing your beliefs on mental projections, prophets and holy books.

Japan plans emergency share purchases

"Japan's ruling Liberal Democratic Party on Friday unveiled details of its proposed Y50,000bn scheme to allow the government to buy shares from the market if share prices fall to an extent that is seen as an economic emergency.

LDP lawmakers said the proposals would be submitted to parliament on April 27, the same day a supplementary budget to fund a record Y15,400bn ($155bn) stimulus package is put ­forward. "

That is $500 billion explicitly to prop up the stock market. Japan is the new Pakistan, where share prices only go up?

bgates said 'FRNs are nothing but thin air in the first place'. They are government debt with interest. Is that 'thin air'? It doesn't have to be paid back?

bgates the namecaller...come out.

Is believing in Obama a 'religion' Lucifer?

Disagree. The hedge fund starts with a buck, borrows $9, invests $10. Makes 5% on the 10, which looks like 50% on the $1.
Banks starts with $1 - lends $10, makes 5% on the 10 - which looks like 50% on the $1.
I fail to see the difference, except that the hedg fund had to borrow from somebody, whereas the bank lent (invested) the $10 without anything else other than the $1 coming in.

$9 for bank was from depositors and $1 from bank owners. No money got created.

Depends on drilling tech ...

They are already going down 6 miles on top of a moving ocean for oil.

Yes, but I think the earth's crust is on average 70 miles. And the pressures and difficulties grow non-linearly as you get deeper. Still, who knows in 50 years.

Apparently there has been a veritable flood of inside sellers recently...

http://online.barrons.com/public/page/9_0210-instrans.html

Perhaps of interest in this debate(from my blog):

In Range Resources Happy about Its 2004 Venture into Marcellus Shale, an industry publication describes a company's discovery of massive natural gas resources in essentially the same area that the the US oil industry got its start back in the 19th century. It is basically central Pennsylvania. The size of the discovery is described as "65 million acres that dwarfs the Barnett Shale expanse of 3 million acres."

The company "hopes to roughly triple its production in the gas shale to 80 million to 100 million cubic feet a day by year's end. After making some initial mistakes, Range has "recorded terrific well results," with the last 10 horizontal wells brought online in 2008, making an average initial production of 7.3 million cubic feet per day."

Large scale switching of homes in the Northeast from heating using oil to natural gas could put a significant dent in US oil consumption.

Volcker makes some very good points - he is questioning even a 2% inflation target.

This is a good sign because it indicates that Volcker is concerned about the value of the US dollar.

My argument is that we should strive for Absolute Price Stability - for there to be no net inflation or deflation over the long term. If currency can retain its value, it will serve its purpose well, which is:

a) as a measurement of the relative worth of goods and services

b) as a unit of exchange, and

c) as a commodity that can be bought and sold

If the value of currency keeps changing (because of inflation or deflation), then the market is unable to value goods and services properly (a. above).

thin air = 'full faith and credit'.

not land - like continentals and the old Philly currency regime. not european gold, like before '73. certainly not gold on the counter, like 1790-1932.

in fact, 'air' gives too much credit - oxygen has some value in your local hospital when processed and stored.

My position is thus:

Banks do not create more money, they only create the illusion of more money.

uno mundo,

Believing in anything uncritically is a religion.

Comrade Coinz! wrote on Sat, 04/18/2009 - 5:05pm.
My position is thus:
Banks do not create more money, they only create the illusion of more money.

~~~~

Spends like money ... !

The problem with worshiping science is that you are really worshipping scientists. The end result is the Catholic Church v 2.0

Do central banks create the 'illusion' of Treasury debt?

The Devil wrote on Sat, 04/18/2009 - 5:17pm.
The problem with worshiping science is that you are really worshipping scientists. The end result is the Catholic Church v 2.0

~~~~

Science is a tool to understanding the physical universe ...

Has nothing to do with the spiritual ...

Some can handle that, others, not so much ...

mmckinl,

I think that your views on the integrity of scientists are based on fiction rather than personal and professional experiences or you are lying.

Has anyone a link to a video about their exchange ?

The central banks have had plenty of time to make the economy work...time to try something new. There's no more excuses. Problem is rebuilding from a Crash. But why do it with the apparatus that failed again and again?

"Problem is rebuilding from a Crash. "

Just the most obvious problem. We won't recover, thanks to demographics and entitlements until the median Baby Boomer kicks it. That was baked into the cake even before the credit bubble/crash, with some serious help from the GOP/AARP donut bill.

Carousel, anyone?

uno mundo wrote on Sat, 04/18/2009 - 5:46pm.
mmckiml,
So is the last line in the sand to Armageddon or Obamageddon or Bushgeddon the bondholders or the govts themselves?

~~~~

It's all politics at this point ... but the bankers and bond holders are winning ...

It will be a Pyrrhic Victory as the economy crashes not long there after ...

Fried,

Religions, even the secular ones, enslave and impoverish the sheeple.

This 'quant' unwinding is supposed to mean a big precipitous drop in the stock market?

The 'big event' will come in relation to the growing public awareness of the size, scope, and persistence of the systemic scam.

My guess .. One or more larger states cannot make payroll, inspite of herculean efforts.

uno mundo

The real test will be what Obama does after Marshall Law is declared ...

It won't be declared everywhere all at once and there will be time for Obama to

help the situation, but little time and he has to put the United States of America before

Wall Street and the entire FIRE sector ...

With the advisors he has now, I'm not hopeful ...

Jon (member) wrote on Sat, 04/18/2009 - 6:18pm.
I'm surprised nobody has mentioned this yet: there is a bill in the House that is intended to audit the Federal Reserve System. It is HR 1207 ...

This is the most important post I have ever seen on CR in the last half year !!
A call for concrete and relevant action !

Jon , I only can encourage you to push persistently and more frequently on this blog for your commendable cause !
Best wishes and my kudos to the honorable sponsor of this bill !!

Volker is yoda.

Right, you are.

Hi,

Sorry about the OT: I was replying to the question of Why@ ZIRP.

One more thing about the Inflaton and I won't mention it here anymore: I was obviously wrong about the net flavor of the Inflaton (the super-symmetric-neutron would have net super-symmetric-flavor). I am not a theorist.

I loved the short Geithner interview in the Republic Standard. The first question was hilarious:

Rhet: "Do you think your fellow tax dodgers are pleased or terrified to have you in charge - terrified that you might pay for your sins through tougher enforcement of the tax code or pleased that the fox is now guarding the hen house, as they say."

Timmy: "Well, you know, Congress has gone over all of that, my past - and in all detail and has found what, you know, I maintained that I made an honest mistake."

You guys are going in circles.

The position Zephyr stands for goes like this:

Joe deposits $10 in Bank A. Bank A can loan out $9 of that as loans; say it lends it to Sam.

Do we count that as 'making money out of thin air' or not?

In a very narrow sense the answer is no: Sam has the "real" $9 that got lent out, neither Joe nor Bank A has that $9 anymore.

So what does Joe have? He has a piece of paper that says he has $10 in Bank A.

To make this more modern, we'll say that he can log into his Bank A online banking and see that his savings account has a balance of $10.

A simpleton might think: "it says there's $10 in my bank account, ergo there's actually $10 right there".

But Zephyr et al will say: "no, dummy, what that actually means is you have a claim for $10 you could choose to exercise; it's a CLAIM, not MONEY."

Narrowly speaking, this is entirely true: the depositor only has CLAIMS on money, and this is what makes bank runs possible (since their MONEY isn't there it's impossible to satisfy all claims at any one time).

As a practical matter, bank deposits are 'money' ( I mean christ you can pay your taxes with them, you can pay for anything (above a minimum) with a wire transfer to the correct account ); for them to not be 'money' there'd have to be things you can't buy with them but could buy with cash (aside from cocaine or some chinese food).

Thus the loan above creates 'money' (which out of courtesy to Zephyr I'll keep in scare quotes; no cash is being created), as the borrower's actions will eventually lead the 'money' to find its way to a bank in the form of deposits, leading to (at that point) $19 of 'money' (claims against banks), and if this process is iterated you wind up with something approach 10x (assuming 10% reserve, blah blah).

The real dubious step in the 'money' creation process is in the loan-origination process.

Let's walk through a bank-free mortgage.

Zephyr's selling his house and mmckinl agrees to buy it.

mmckinl writes up an agreement to pay Zephyr an initial downpayment and a series of installments over a period of thirty years, and they agree which portions of those payments count towards 'ownership' of the house and which are compensation to Zephyr for the inconvenience of not getting all the money upfront; this division into ownership-versus-cream is important if mmckinl fails to make good on the arrangement.

At this point many people would be happy: mmckinl gets the house now -- instead of in 30 -- and Zephyr gets a lump sum (of real, no-shit cash money) plus a stream of payments (of real, no-shit cash money) over the next thirty years.

But Zephyr's a smart man -- he knows that a legally-binding contract with mmckinl isn't money (or even 'money'); if he wants his money (or 'money') now then he is shit out of luck, b/c aside from the lump sum the money trickles in very, very slowly.

So, Zephyr could take this contract from mmckinl and see if anyone's willing to buy it; maybe there's someone out there with a big pile of real, no-shit cash built up, and maybe old man moneybags -- as we'll call him -- would actually prefer a series of payments over time (instead of just backstroking in his pile of real, no-shit cash money), provided the payments add up to sufficiently more than the outlay to buy the contract.

Zephyr sells the contract to old man moneybags and wham! Zephyr's gotten cash now, mmckinl has gotten cash now, and old man moneybags has found a way to 'put his cash to work', as they say; no funny-'money', no 'money creation', and no 'counterfeiting' needed.

What the modern-day bank loan process does is to cut out the middleman: when mmckinl wants to borrow money (in exchange for some sequence of payments), the bank just says "ok, here's the money" without actually having to bother finding someone with actual money they're willing to lend (really!). The ability to get away with this legally requires a special charter, of course, and for it to work the banks work very hard to make sure there's very little practical difference between 'money' (in the form of claims against banks) and real, no-shit cash money.

The way the practical difference between 'money' and real, no-shit cash money is minimized is through very deft multiplexing of the limited supply of cash money, and a lot of effort to hide the provenance of 'money' as much as possible (eg: Zephyr knows that the 'money' mmckinl paid him for his house originated from mmckinl taking out a mortgage for that purpose, but there's 0 risk of that 'money' disappearing specifically from Zephyr's accounts @ the bank should mmckinl default; in the end-user experience the origins of each bit of 'money' are lost or hidden, with the risk diffused to the broader system).

If you wanted to really shake things up in some future nation you'd have a nationalized 'despoit-taking' infrastructure with some government-issued credit currency issued per fiat as both tax-abatement credits and legal tender for all debts public and private.

These would work like a full-reserve desposits+transfers system, basically: just a bunch of mainframes in a bunker somewhere keeping track of how many credits are in what accounts (identified by #, a la the swiss), with cost-free ways of transferring credits to between accounts.

This'd be your basic monetary system, running at a loss (paid for out of taxes) but of straightforward semantics: if such-and-such account has such-and-such credits, that's how many credits there are (not how many credits are claimed).

If someone wanted to open up a bank on top of this there'd be nothing stopping them (or from eg setting up a gold currency if that's your pleasure), but the mechanics would be pretty obvious:

- 'depositors' would hard-transfer real credits into (one of) such a 'bank''s account #

- in exchange they'd get some 'notes' from the bank saying they had such-and-such on deposit @ the bank

- but, to spend those notes you'd have to find someone that took the notes; the confusion the between 'money' and money that the present system depends on would be impossible

Good luck getting that built in the real world, though...