So, cure today Keyser read the blog of someone whose writings had explained a lot about the course of events during the economic debacle of the last two years or so. Some of you out there are almost certainly readers of this blogger. Well, see Keyser had an experience today that suggests that even the cleverest bloggers may not be as clever as they thing.
This blogger is a follower of Austrian style economics, and argues repeatedly that contrary to what many believe, we’re in a deflationary period. So the bloggers quotes an email in which a reader of the blog says that at first he thought all the quantitative easing going in the Fed would cause inflation, but now he’s convinced. So far so good. Then the emailer asks to very specific and related questions. Basically, he wanted to know why it would be a bad idea for the Federal government to go on racking up huge deficits if it turned out that it could do so without incurring any costs in the form of inflation, and what would be bad about the Federal government bailing out the states and cities if the Feds had a bottomless pit of borrowed money at their disposal.
The blogger responded with a bunch of generalities about how the bail-outs are a bad precedent (moral hazard and all that) and how the upshot is that the Goldman Sachs types are getting their chestnuts dragged out of the fire at the expense of the “little guy.” That’s all well and good, but it doesn’t answer the question.
So, being curious about such matters, Keyser had the temerity to send an email to said blogger, pointing out (politely) that he hadn’t actually answered the question. Keyser said he was pretty sure that he knew the answer, but he wanted to hear the blogger’s take on it. (And just to give the answer, it surely must be that in the short to medium turn, the US government is able to borrow huge sums because a) it’s a good risk because everyone thinks it’s a good risk, and b) Bernie Bernanke is handing out vast sums at the Fed, which the banks are turning around and using to buy up Federal securities. This sort of game is fun while it lasts, but sooner or later people catch on, and then it stops being fun. Just ask the Greeks. As the blogger says, it works until it doesn’t.)
Anyway, blogger wrote back rather brusquely to say that yes, he did answer the question. No, dude, sorry, but you didn’t. And if you think you did, then you’re not as bright as you seem to think. It’s funny, but this guy is one of those guys who goes on at times about how worthless a degree in the humanities is. Given the obtuse response from blogger, Keyser dropped the matter, but he was tempted to respond to point out that the blogger may think a humanities degree useless, but if he’d answered a question that way on an exam in Keyser’s worthless humanities course in daemonology, he’d have gotten himself a big fat F (unless, of course, he’d learned enough to enlist the support of Satan, but in that case, he’d definitely have deserved an A).
Keyser found the whole thing very disconcerting. The blogger had seemed quite convincing in his overall interpretation of events. Maybe he’s an idiot savant. All clever about matters economic, but otherwise a total ‘tard.
[Note: The names have been changed to protect the guilty.]
It’s not getting too much play, check but since Fannie Mae and Freddie Mac have their hands (but not their pockets!) pretty much full financing 90% of the mortgages in the US these days, cialis the FHA is stepping in to help out. Basically, the Keynesian (read Bernankian/Geithnerian) solution to the bursting in 2007 of the housing bubble that was caused ultimately by lax lending of excess money created by the Fed’s artificially low interest rates is to do whatever they can to reinflate the bubble. The low interest rates that caused the bubble are part of the Keynesian fallacy that interest rates are always too high in the free market, so it’s the government/central bank’s role to push down interest rates. Supposedly, this will end the old boom/bust business cycle by putting the economy on a permanent boom binger. It’s sort of like curing the problem of a hangover by being constantly blitzed.
You’d think that if the government’s avowed policy is to expand home ownership, they’d want low house prices, so more people could afford them on their own, but that runs against the side effects of Keynesian. While the government can create excess credit in the banking system, it can’t control what exactly that lent money is spent on, and lax lending (which is what inevitably happens when there’s too much money sloshing on the books of banks around looking for a home) inevitably fuels a rise in assets valuations through speculation.
Anyway, the US government (including the Fed, which is an unaccountable and irresponsible branch of the government, however it’s position is legally concealed) is trying to cook up ways to restore the previous high levels of house prices, to bail out the banks (whose failure would cost the government money) and to “help out” all those improvident people who took out big mortgages in the gravy pre-2007 days and now have mortgages underwater (that is, the value of the house now less than that of the mortgage).
At first they tried this with the sorts of things the FHA is meant to do, namely assist less wealthy people in getting mortgages (whether this is a good idea is beside the point). But when you think about it, that’s a pretty inefficient way to go about reinflating an assets bubble. Is you want to push up the stock market, do you subsidize penny stocks or the firms on the S&P 500? Likewise, it stands to “reason” that if you want to push up housing prices on average, it’s a lot easier to push up the value of seven digit units on, say, Manhattan than a bunch of broken down trailer homes in Paducah KY, no?
So – presto bailo! – we get this:
The Federal Housing Administration agreed in March to insure mortgages for apartments at the 98-unit Gramercy Park development, known as Tempo. That enables buyers to make a down payment of as little as 3.5 percent in a building where apartments are listed at $820,000 to $3 million.
“It’s a government seal of approval,” said Gollinger, a director at the Developments Group of New York-based brokerage Prudential Douglas Elliman Real Estate. “We need as many sales tools as we can have these days, and it’s one more tool.”
The FHA, created in 1934 to make homeownership attainable for low- to moderate-income Americans, is now providing a lifeline to new Manhattan luxury condominiums after sales stalled. Buildings featuring pet spas, concierges and rooftop lounges are applying for agency backing to unlock bank financing for purchasers. The FHA guarantees that if a homebuyer defaults on his mortgage, the agency will pay it.
At least nine Manhattan condo developments south of 96th Street have sought approval for FHA backing since the agency loosened its financing rules in December, according to a database of applications maintained by the U.S. Department of Housing and Urban Development. The change allows the FHA to insure loans in new projects where only 30 percent of units are in contract, down from at least 50 percent. About 1,900 apartments in New York’s most expensive neighborhoods would be covered by the applications.
The agency also offers insurance to half of all mortgages in a single building after previously setting a limit at 30 percent, according to the new standards, which expire in December. The entire property must be approved for a buyer to get backing. Most of those that applied in Manhattan are buildings converted to condos or built since 2007.
The FHA is filling a void left after mortgage-finance agency Fannie Mae tightened its condo lending standards last year. The Washington-based company won’t back loans made in new buildings where fewer than 51 percent of the units are in contract, sometimes setting a requirement as high as 70 percent.
“It’s not an accident that the FHA is offering this — not private lenders,” said Christopher Mayer, senior vice dean at Columbia Business School’s Paul Milstein Center for Real Estate in New York. “An unfilled condominium complex is not the kind of thing that a bank looking to rebuild its balance sheet on real estate is looking to do.”
In New York City, the priciest urban U.S. housing market, the FHA insures loans of as much as $729,750, and permits buyers to borrow up to 96.5 percent of the price.
Of course, with loans that size, the FHA isn’t going to be directly subsidizing the really expensive stuff (the article says that the average price in Manhattan is $1.4 million), but propping up the low end helps out the high end, and in any case, $730k would probably buy you a lot of homes back in that trailer park in Paducah.
So, they’re giving loans with only 3.5% down instead (instead of the traditional 20%) to people buying really expensive (in absolute terms) condos in Manhattan and Brooklyn and guaranteeing the principal of the loans in case of default, so the lender is at no risk of loss. So, let’s think back to the distant – say less than ten years ago – the had somewhat similar policy. Now what was that called? Hmm. Oh, yes, subprime lending!
And how did that one turn out?
And this time around, instead of the implicit and assumed government guarantee behind Fannie and Freddie, we have the explicit guarantee of an agency of the US Federal government.
What idiot came up with this idea? Oh, yes. That bastard Keynes.
The more you read about today’s economic problems, capsule the more apparent it becomes that economists have no idea what they’re talking about. Just read that idiot Krugman. “The $1.5 trillion spent so far to stimulate our way out of the doldrums just wasn’t good enough. Solution: spending more money we don’t have. What could go wrong!” And of course one of the causes of today’s problems is the craziness of neo-monetarist foolishness flogged by guys like Greenspan. The notion was that markets solve everything by themselves, viagra sale so all you have to do is keep the money supply constant and bob’s your uncle. Prosperity for everyone! Of course, ambulance the problem is that the banking sector isn’t a free market, the banks were able to game the regulators and regulations, and Greenspan was watching the wrong indication of money supply. Whatever the details, the broad criticism of that school (so-called Chicago economics) is that it relied on abstract theorizing about how the economy functioned and had no understanding of what people actually do. That is, their perception of reality was generated by their theories, rather than the other way around.
This by way of introduction to a short post on the outraged produced in your humble Pannonian by this morning’s reading. It’s a rainy day here in Iglooville, and since Keyser at a piece of cake last night, he decided to burn 1000 calories on the stationary bike in atonement. What better means of diverting himself during this exercise than reading State Banking in Early America by Howard Bodenhorn. The B-meister turns out to be an “Associate Professor in the Department of Economics and Business at Lafayette College in Easton, Pennsylvania. He has also taught atSt. Lawrence University in Canton, New York” (as the dust jacket informs us). It’s a bad sign if your institution is so obscure that the reader has to be informed where exactly it’s located. Still, the book is put out by Oxford University Press, so one might hope that it’s academically respectable.
Sadly, that’s probably true, given how ridiculous just the first few pages of analysis is. We start with an analysis of the bribery needed to get a charter for your bank in the early nineteenth century. Back then, all companies need a specific charter from the local state legislature, which at best involved partisan politics and at worst necessitated a large amount of bribery (either direct via funneling cash or favors to legislators or indirect by guaranteeing some sort of monetary compensation to the state treasury). This bribery was worthwhile because the restriction of banking to holders of charters allowed them to charge what the economists refer to as “rent.” Just as someone who monopolizes a piece of property by owning can exact money from anyone else who wants to use it via charging “rent,” in the broader economic sense anyone who has a legal monopoly on something can exact a surplus charge from anyone who wants to use it (just ask the Arabs about the “rent” they get from their position of the places where ancient organic material would pile up and get converted over the millennia into petroleum). So basically, having the monopolistic (or oligopolistic) right to engage in banking means you can skim some extra off from the charges for your services since if people want to borrow money, they can only go to the holders of the state-granted charters.
So, how do we analyze the economics of this bribery and its effect on society as a whole:
In the limiting case, rent seeking costs could be substantial. [I.e., if banking is restricted as outlined above, you’d have to spend a lot of money to get a charter.] If, for example, a group of prospective bankers believed that the discounted net present value of the stream of monopoly profits from banking was $1 million, each applicant would have invested an amount marginally less than the product of the probability of receiving the monopoly grant and the discounted stream of monopoly rents in obtaining a charter. If there were ten applicants, each with an equal probability of obtaining a charter, each would spend $100,000, and the expected monopoly rents would be completely expended in the race to obtain the property rights.
Clearly, the winner benefited because he spent only $100,000 to get the rights expected to be $1 million, but the players as a group spent $1 million to obtain $1 million. Society was no better off because the the expected net social return was zero.
This analysis is start-staring mad, bearing absolutely “zero” resemblance to historical reality. Let’s start with false premises. Where would this figure of $1 million in future revenue come from? How could anyone have known the circumstances of the distant future? Over what period of time? How could they have known whether the charter would be revoked or another granted to another bank? Might the bank go bust, and when? Would the charter applicant/briber die of appendicitis tomorrow? Even if it were theoretically possible to figure out the future income, how much would be applicant discount the present value of future earnings? Clearly, while a specific figure for future earnings is theoretically possible, it’s very difficult to determine what it would be for any individual. And there is not the least historical indication that anyone actually did think along such lines.
In any event, we take this putative figure and then divide it equally among out ten applicants. This seems to presuppose that the situation was an auction, where all applicants have an equal shot at a single charter. But in fact what you have is multiple, separate applicants, each with their own distinct proposal, which would be adjudicated separately from the rest. So the notion that they’re all equal and would have been evaluated on an equal basis is another ahistorical premise.
But even if it were like an auction, that doesn’t mean that the applicants reached joined decisions via some sort of open organization like the “bank applicants for charter X business group,” so that they could pool information about each other’s activities and costs. The idea seems to be that “bidding” on the charter is like the interaction of offers and acceptances on a commodities exchange. That may well be how the price of a bushel of wheat is determined, but has nothing to do with how much each applicant would spend on the costs of attaining a charter. Nobody said to himself and his rivals, “Okay, this thing’s worth $1 million and they’re are ten of us trying to get it, so it would be nuts for the ten of us to spend more than $1 million in aggregate for the thing. So, what say we agree to spend no more than $100,000 each?” Surely, everyone made his own determination of how much he could afford without consideration of other people’s spending (except conceivably to determine that it wasn’t worth his while to spend anything because somebody else had much deeper pockets and so it would be a waste to spend much of anything).
But the real kicker comes from the conclusion that under this scenario, “the players as a group spent $1 million to obtain $1 million. Society was no better off because the the expected net social return was zero.” Apart from the fact that there is absolutely no reason to imagine that the amount spent on aggregrate in bribery equaled and did not exceed some putative sum of expected future “rent” to be derived from the banking monopoly conferred by the charter, how could anyone conceive of this transaction as being a “social return”? We’re talking about a group of investors bribing the state legislator (in one way or other) to give them a monopoly that allows them to fleece the public. Who in his right mind would characterize this as a benefit to society?
So we have a conception that is completely divorced from practical or historical reality being analyzed abstractly as if a form of state-mandated theft is of benefit to society as a whole. Only a madman would think along these lines.
And it gets worse. The author goes on to discuss how early charters tried to undermine control of banks by wealthy individuals by watering down the voting rights of large shareholders. For instance, the first five shares owned by an individual would give that person five votes, but after that each block of five granted only one additional vote (there were lots of variants on such schemes). The author notes that such practices “reduced incentives to monitor managerial behavior” (not entirely sure why that should be), and then states that “it is possible that legislators weighed these incentives and developed voting schemes that, they believed, would equalize the cost at the margin.”
Well, yes, that is possible. It’s also possible that early legislators were actually alien impostors sent as spies by a sinister civilization that lurks somewhere in the Andromeda Galaxy and has evil intentions about our lovely green planet, but until such time as there is evidence to this effect, we have no warrant to believe anything of the kind. Basically, our author’s understanding of the world is so clouded by his abstract theorizing that he know believes it possible that the Jeffersonian and Federalist legislators who were squabbling with each other in a most unseemly manner while taking bribes from bank applicants were determining their votes on the basis of some sort of wacky economist’s theory about equalizing costs at the margin, which they’d never heard of and could just as well have been an intercepted communication from that planet in the Andromeda Galaxy for all the sense it would have made to them if they had heard of it.
Human agents in the past could hardly have acted on the basis of modern theories they didn’t know, and for that matter, there is no reason to believe that present-day human agents in the economy act this way, either. But economists cook up these theories to explain how the worldshould that way, and then interpret the world on the completely unjustified premise that it does work that way.
One last bit of craziness from this book before Keyser completely loses it himself. One of the constant problems of early American banks was their lack of proper capitalization. That is, the share holders were supposed to kick in “real” money or “specie” (that is, gold) for the bank to start its business with, but frequently banks started before the full sum was paid in, or the capital consisted of defective forms of money (e.g., undervalued banknotes or depreciated government securities – items that weren’t actually worth the amount that the shareholder was obliged to contribute), or worst of all was eventually paid in through loans given to the shareholder by the bank itself. In effect, the so-called capital was actually “generated” by the bank’s own lending, which in effect meant that the bank was a fraud, lending out money it doesn’t have. (Say, when you think about, this isn’t a problem of only early banks, but that’s a different story.)
After describing this situation, the author cites a pair of earlier academics, who praised this use of “stock notes” (that is to say, loans made by the bank against its own stock as a way of creating its own capital) as an example of practicality. He concludes:
If Americans had allowed the chronic shortage of capital and specie to impede the formation of banks, the circle of capital shortages and underdevelopment observed in so many other places would have operated in the United States. The pretense of paying capital was forgivable because it inited baking services that stimulated trade and growth.
And there you have the madness of modern economic (Krumaniacal) theory. It’s okay to pretend that banks have money when they actually don’t, because lending out money that you don’t have “stimulates” the economy and causes growth.
Once again we have the fundamental error of confusing money and wealth. Buying stuff with fistfuls of paper money that’s been created out of nothing by banks does lead to production – in the short term. But any investment in productive capacity that is encouraged by such purchasing is a mirage, since there isn’t the actual accumulation of surplus wealth to justify the production.
And it’s precisely this sort of thinking that would lead to financial disasters like the great panic of 1837. Or 1929 for that matter. Simply wishing that there was more capital available than was in fact the case because that’s what we’d prefer is the way that children think. You shouldn’t be getting a PhD in Tooth Fairy Studies!
And it’s not just the past that’s at issue. The present economic crisis was caused fundamentally by the same fallacy that you can play games with money to make it look as if you have more wealth than you do. And the “remedies” of people like Bernanke and Geithner is to extend this game, creating more charades through the invention of trillions of dollars for the benefit of Wall Street by the Fed and the borrowing of vast sums of money (ultimately from the Fed as well) by the US Treasury.
While it may be that there will be some restraint on this gutter-variety quasi-Keynesianism as a result of the fall elections, so long as the underlying premises that are illustrated in this book and carried out in practice by the geniuses in Washington, the debt juggernaut will keep chugging along. Until it collapses under its own weight, which will not be a pretty sight.
So, purchase Keyser came across a page about low-budget movies that became cult classics, and was instantly struck by this:
Often credited with starting the “slasher” genre, John Carpenter’s Halloween is one of the most financially successful films ever made. Produced on a shoe-string budget, this babysitting job gone wrong went on to gross $60 million worldwide (which is the equivalent of $203 million today).
So, since 1978, the value of well over two thirds, huh? Looking at it the other way around, if the people who wound up with the profits of the movie (assuming the profits were all realized in 1978, which undoubtedly isn’t the case but we’ll pretend for argument’s sake) left it in cash, then today the purchasing power of that money would only be 30% of what it was in 1978. That means that if they waited until today to spend that money, they’d get for their $60 million goods that would have cost them only $18 million back then. (Oh, and if you want to play this parlor game, here’s a great website that let you convert sums of money from one year to another and see how they increase though inflation if you move forward, and conversely how much cheaper the same money would be in the past. The last year the site gives is 2009, when the movies $60 million would be $197 million.)
Keyser had an extended post the other day about the gross fallacy underlying the setting of interest rates by the Federal Reserve through a flatulent combination of misguided Keynesian economics and political expediency. Basically, since the dollar has become a debt-based fiat currency, the value of the dollar has been grossly eroded over the years through the insidious and ineluctable effect of compounding low-level (and occasionally not so low-level) inflation (the graph up there supposedly shows the declining value of the dollar, no idea how accurate it is). This little nugget about the decline of the value of money since 1978 is confirmation of the practically unnoticed affect of this process.
Of course, the Fed is run basically by the banking sector for its own purposes, and while high inflation is definitely not in their interest (ha ha), persistent low inflation is. The above decline shows how it’s very harmful to keep money in cash. The value just seeps out over the years, so you have to invest cash into “stuff” if you want to preserve your value, and as the intermediaries of most financial transactions, the banks profit by getting their cut. They want to force you out of cash and into “stuff.” Also, it’s easy to make money by having access to the lowest interest rates and then lending the borrowed money to someone less privileged at a higher rate. And guess who has first access to “cheaper” money. Why, the banks, of course! They get the prime rate from the Fed, and then lend the money to the poor slobs who are trying to avoid inflation caused by the Fed. Win-win!
For the banks, at any rate.
Keyser’s been a bit mum on economic topics recently. It’s not that he hasn’t been paying attention. Far from it. But there isn’t much news in this analysis. Basically, sickness the Fed and the US Treasury have spent trillions of dollars that don’t signify anything real, rx and this “money” has resulted in a lot of institutions that are fundamentally bankrupt from not going out of business. Sounds great, online no? Well, that’s the problem. It sounds good, but it isn’t. And most so-called economists don’t even understand reality.
Here’s an example of people’s non-comprehending frame of mind:
Stocks rose Monday as investors avoided big bets before the Federal Reserve’s meeting this week.
The Dow Jones industrial average gained 42 points in midday trading. Broader indexes had modest gains.
Investors are waiting for the Fed’s latest assessment of the economy that will be issued at the close of the central bank’s meeting on Tuesday. They also want to know if the Fed will restart some of its stimulus programs to help the recovery regain momentum.
The market’s growing concern about the economy has added to the importance of the Fed meeting. Recent economic reports have shown that the recovery is slowing. And Fed Chairman Ben Bernanke just a few weeks ago said the forecast for the recovery remains “unusually uncertain.”
The Fed will likely leave its federal funds rate near zero, but the central bank could signal plans to restart some stimulus programs, such as its purchase of mortgage-backed securities. Those programs ended earlier this year when it appeared the recovery was proceeding well.
“The Fed has a lot of tools in its tool shed,” said Larry Rosenthal, president of Financial Planning Services in Manassas, Va. “They have to bring buyers back into the market; they have to bring consumption back into the market.”
“Have to bring consumption back into the market.” This is like a child imploring Santa to bring nice presents for Christmas. Sounds nice, but that’s not how the real world works. In this instance, the child wants Santa Bernanke to get people to buy stuff they can’t afford with made-up dollars that they borrow, ultimately, from the Fed.
The Federal Reserve is hold-over from the “Progressive Era,” the first decade or so of the last century before the start of the First World War. Basically, a bunch of smart people decided that the laissez-faire economy of the nineteenth-century was anarchic and dysfunctional, and everything would work a whole lot better, if only smart-asses with degrees from Harvard were allowed to “manage” things “rationally.” The consummate example of this line of thinking was the Soviet Union. Turns out that in practice it wasn’t so easy for the geniuses in Moscow to figure out how many, say, paper clips should be made in a given year. And indeed, without the feed back of prices determined freely in an open market, they couldn’t figure out the “right” amount of anything.
But somehow, the notion persists that a pack of idiots like Bernie Bernanke can get together every few months and figure out the value of the single most important commodity in a modern economy: money. To understand the full madness of this, we need a bit of background.
Everybody uses money, but most people don’t really understand what it is. Money is a commodity. That is, it’s something useful, like a bushel of wheat or a barrel of oil. But instead being an actual useful item, it’s seem a unit of account that can be instantly converted into a specific commodity at will. In effect, it’s a claim on a commodity, and it’s reality derives from the fact that it’s not a specific commodity. As the old example goes, if you make a shoe but need a hammer, the shoe doesn’t do you much good unless you can find someone with a hammer on offer who happens to need a shoe. Not too likely, right? But if you can exchange the shoe to someone who needs one and has something valuable like gold to give in return, then you can take the valuable stuff and use it to get the hammer. The step of converting “valuable stuff” to money is when it’s made into a fixed quantity in the form of a coin. This “money” with its fixed units then has a lot of ancillary functions, like allowing you to compare value via prices and to store value over time.
Until the 1930s, the US dollar was a fixed amount of gold. In 1933, Franklin Roosevelt confiscated the freely available monetary gold. The dollars then issued by the Federal Reserve had a theoretical connection to gold, but this was ended in 1971, when the French tried to turn in their dollars for gold, and since there were more dollars than gold, the US government was forced to end the pretense. The dollar is now nothing but a number of “units” that have no external value apart from people’s willingness to accept them in return for stuff like hammers.
Now, here’s where things get a bit complicated. Money is of worth only to the extent that it represents a certain amount of value. That is, a dollar is of value only because it can buy something, and has no inherent worth of its own. Substantive value that has been converted into money for the purpose of investment is called capital.
Money has existed for something like 2500 hundred years, since around 500 BC when the Lydian kings started marking lumps of electrum (a natural alloy of gold and silver) and thereby discovered coinage. But the extensive use of money to invest is not much more than 500 years old. Back in antiquity, if you had money to invest, you had to purchase something with it. If you had a lot, you could buy a business venture, but you had to run it (directly or indirectly). There were no paper investments. That is, you couldn’t buy a piece of paper giving you a fractional share of the profits in some fixed organization in return for giving it the funds to operate with. That’s why today we occasionally find thousands of ancient coins buried in the ground. There was no other way to save value in abstract form.
For some hundreds of years, it’s been possible to invest your money abstractly by providing economic organizations (“companies”) with the “capital” they need. The so-called capitalist system involves the wide-spread practice of using money to invest without having to have any direct role in the investment. While some would equate the capitalist system with a free-market system, the two are actually two distinct notions. One can certainly have capitalism without free markets. That’s true even of most highly-regulated Western economies, and when you get down to it, the so-called communist system is simply capitalism entirely regulated and owned by the state. And the Federal Reserve’s control of the money supply fits in much more easily in a communistic system than a free-market one.
Maybe you don’t want to make a specific investment. Instead, you want to keep your “invested” money in as “liquid” a form as possible. And “liquid” means convertible into cash at will. So instead of buying a share in a company or a bond issued by a company or the government, you choose to lend the money as such. In this sort of transaction, you give someone else money to use for whatever he wants, and the receiver of the money pays you “rent” for the money. But instead of calling it “rent” we call it “interest.” Since money takes the form of monetary denominations, it’s easy to calculate the “rent” as a given percentage of the total loan per period of time.
What then is the interest rate? In a free market, it’s the amount of rent that can be charged for borrowing the available money. And what is money? As indicated before, it’s basically just a claim on value in terms of the prices for goods determined by the free market. In effect, borrowing money is way of acquiring the right to enter into that market with the claim on value you have in the form of money.
Proper interest rates than are simply a pricing mechanism on the worth of liquid capital. And capital becomes available because people forgo either keeping their money in the form of money or using that money themselves to buy stuff (which is known as consumption). Real capital is then made available through two processes: consumption and the desire to lend the money out to someone else in return for interest. If not much capital is available in this way for borrowing, then the rate of interest that the market will bear rises.
High interest rates then have two effects. First, it discourages the borrowing of “expensive” money. Why is this good? Because the refusal of people to save and lend means that the capital available for investment is restricted, and so people shouldn’t be making use of loaned money for the purpose of, say, expanding their business, because there isn’t the excess capital to support such activity. The second result is that because there’s a high rate of return, people will be encouraged to save money and to lend it out for interest, which in turn increases the available capital. Interest rates will then fall as more money (“capital”) is made available, and in turn more people will be encouraged to borrow for investment.
Eventually, the supply of increasingly available capital and increasing borrowing will reach natural equilibrium. Conversely, if interest rates are too low, people will be discouraged from borrowing, and rates will rise, with a corresponding reduction in borrowing. That’s how the system is supposed to work.
But that’s not how people like it to function. Back in the late nineteenth century, bankers used to bitch about the “inelasticity” of the money supply. At harvest time in the fall, farmers would take out a lot of their bank savings in the form of cash to pay their workers and pay for the transport of their crops to market. This would lead rural banks to withdraw balances that they would otherwise keep in larger cities, and this compounding process of withdrawal would have the most magnified effect in the financial capital of the country in New York City, where the big bankers had been lending these deposits out for speculation. Somehow, bankers were too stupid to predict the fall harvest, and they repeatedly had troubles caused by the fall withdrawals, culminating in the crisis of 1907. The upshot was the creation of the Federal Reserve Bank, as a banker’s bank whose supposed purpose was to alleviate these purposed crises caused by seasonal fluctuations in the money supply.
In the first place, the whole purpose of interest rates is to reflect the availability of capital. If Mr. Haney is taking his money back to pay the farm hands, then J. Pierpont Morgan should be subject to higher interest rates. And if some idiots have gotten themselves in trouble by borrowing money to speculate in stock and now can’t pay it back, too fucking bad, dumbass. You shoulda looked at the calendar, moron.
But no. God forbid anything should stand in the way of New York speculators. So let’s cook up the Federal Reserve as a way to provide bucks to our worthy NYC speculators by making up money to pretend that capital is available when it isn’t until real capital reemerges when the farmers start banking their surpluses again. So they created the Fed in 1913.
It took ’em a while to figure out the full potential of their diabolical powers. Somehow or other, the Fed has decide it has the right to buy $1.75 trillion worth of bad debts from banks. Now that one’s an eye opener, but its deleterious effects are basically passive. It means that the big banks like Citigroup and Bank of America can pretend they’re solvent when they aren’t. Now of course there is harm caused by this. In effect, the loser banks can acquire cash more cheaply than they deserve because lenders believe (probably rightly) that the “too big to fail” policy means that even if the big banks do stupid things with that money, the government will bail them out. And the ability to borrow money cheaply gives the big banks an advantage over the smaller banks that a) weren’t so foolhardy in the first place and b) can’t count of a Timmy/Bernie bail out. But that’s small change.
The Fed has the ability to manipulate the interest rate for the whole country (by making up money for banks and putting money in circulation through buying government bonds, among other ploys). Why anyone thinks this is a good idea is a beyond Keyser. The theory is that in times of expansion, the Fed will put the brake on excess by increasing interest rates, and in times of trouble, it will encourage consumption via low rates. So how’s that turned out?
Clearly, the Fed and its low interest rates have led to a massive expansion in prices since the ’50s as a result of a constant expansion of credit. In effect, the Fed is always inclined to have low interest rates, either to keep the good times rolling or to pump them up again in recessions. As we all know, low interest rates in the years following the bursting of the dot com bubble in 2000 resulted in the massive real estate bubble that burst in 2007 and caused the financial meltdown in 2008. And what’s the prescription for this problem? Why, low interest rates of course.
The point being to get people to borrow more money to buy shit they can’t afford, and in the process reinflate the price of housing to bail out the banks stuck with millions of mortgages on houses whose current market value can’t cover the loans taken out to buy them.
But this is insanity. As any dimwit should be able to predict, low interest rates discourage savings, and in the absence of actual capital behind it, lending for its own sake with made-up money is entirely deleterious. In the first place, the Fed has no control of what anyone does with the borrowed money. Since economic prospects aren’t good, many businesses and people aren’t so inclined to borrow and in any case, banks are now being stingy with lending. So that means that the cheap money provided by the Fed is borrowed to speculate (hello, stock market run up since March of last year!). Secondly, and perhaps more importantly, the whole purpose of interest rates is to give people feedback about the availability of capital. That is, low interest rates should tell economic agents that savings is making excess capital available for investment in things like more production. But we’ve already seen that the low rates are having the exact opposite effect on savings, and true economic state is that there’s excess capacity, so investment is counterproductive.
You know, in a show last night, there was talk about who the worst presidents were, and the name Warren G. Harding came up. Now, it may be true that he had some losers in his cabinet. But he was also responsible for the Great Depression of 1920. Oh, wait a minute. No, he wasn’t. Harding was the last president whose attitude was “not my problem.” Prices had become inflated during the big borrowing to pay for the First World War, and there was a major retraction in 1920 as prices began to tumble. Instead of trying to reflate prices, Harding let things go. The imprudent and improvident went bust, there was high unemployment for a year and a half, and then… It was all over, and the boom of the ’20s started. Of course, there was another inflation in the later ’20s, and when that one went bust in 1929, the “modern” period of economic intervention started. With all the deleterious consequences of government intervention, and other Keynesian nonsense.
You’d think by now that the manifest failure of the Fed and the parallel policies in the Federal government should be clear by now. Yet idiots like Bernanke and Geithner are listened to as if they weren’t responsible for the disaster we’re in in the first place. Interest rates are the most basic of signals for a free market, conveying to investors the availability of capital. They shouldn’t be manipulated at will by a pack of pseudo-experts, who have a large number of abstract theories of how the world works and little or no understanding of its fundamental principles. People like this are so deluded by their own misconceptions that they can actually argue that because they have no more ability to lower interest rates since they’re pretty close to zero already, it’s advisable to induce a higher regular inflation rate, so that they’ll have more “wiggle room” to keep lower rates (can’t find the link, but some lunatic proposed this last year). That’s like saying that because the fever-reducing medicine that you’ve prescribed isn’t bringing down the fever much, the patient’s body should be made to have a persistent low-grade fever to improve the effectiveness of the drug. That’s entirely back to front, but fully in keeping with the idea that the Fed should apply its delicate touch to the level of interest rates on the grounds that its board knows best.
Surely, it should be clear enough by now that the Federal Reserve board, and virtually all economists for that matter, have little idea of even what’s gone on and what’s happening now, much less what’s going to happen. And the idea that they can manipulate interest rates in helpful manner is thoroughly laughable.
Emulate Warren G. Harding, the president least known for solving an economic problem, because his lack of action forestalled a far worse downturn than the one that resulted from letting the system work out the problem on its own. A bit less 1900s progressive arrogance and a bit more 19-century laissez faire is what’s called for. No doubt Goldman Sachs and Citigroup and some other “big boys” wouldn’t exist. So what?
But today’s economists and politicians can never leave well enough alone. Because they know better…
Who knows? The world seems to be full of what they take to be the wisdom of good ole Maynard Keynes, look whose shtick was that the government’s supposed to save money in good times and then binge in times of economic recession to prime the pump (which has always struck Keyser as an image from masturbation, buy but maybe that’s just Keyser). The only thing that the Neo-Mayntards remember is the spend part, pharmacy but they all seem to forget about the savings bit. That is, even in good times they use monetary policy to crank up production (and produce assets bubbles), and then when the resultant malinvestment results in excess capacity and bad debts, which in turn necessarily leads to contraction, they use monetary policy to crank up production (and produce assets bubbles), and then when the resultant malinvestment results in excess capacity and bad debts, they use monetary policy to crank up production (and produce assets bubbles). Rinse and repeat.
Seemingly, this cycle can go on ad Keynsian infinitum. Or ad libitum. Or maybe that’s ad nauseam. Anyhoo, check out this following graph.
Supposedly, Sir Mayntard said that there would be problems in the long term, but in the long term we’re all dead. It would appear that we may have the pleasure of seeing the long term while still alive. Buckle up. This may be a bumpy ride.
Back in the day, ambulance Keyser used to write a lot about the economy. That was when the sky was falling, shop back in late 2008 and early 2009. Since March of last year, sovaldi the stock market has regained about 50% of its losses, and seemingly the situation has been stabilized.
But it’s all madness. Bernie Bernanke has “saved” the leeches at Goldman Sachs and the rest of their ilk by “buying” $1.4 trillion of their bad debts (in the form of shitty mortgages given out recklessly with fake money concocted by the Fed in the preceding half decade or so and of shitty “securities” made up out of such mortgages as a way for GS and the other scum to make more money for themselves knowingly selling this shit, a lot of which the banks wound up with). And of course, when Keyser says “buy,” that’s rather misleading. Normally, when one person buys something, that involves a transfer of funds. But the Fed has absolutely no actually wealth. It just has the ability to add a bunch of zeroes to the end of the account balances of member banks. That is, the debts haven’t been “bought” in any substantive sense of the word. Rather, they’ve been concealed with concocted money.
Oh, here’s another one. The whole purpose back in 2008 for bailing out the banks was that then they’d be able to lend. But of course they’ve done nothing of the kind. Lending is declining, along with many prices (that’s called deflation). Instead, what the banks have been doing is borrowing money from the Fed at fundamentally 0% interest (the ridiculously named ZIRP, or “zero interest rate policy”) and using that money to buy US bonds paying 3% or so. And what does the US government do with the vast amount of money it borrows in that way? Well, one thing is to prop up unsustainable levels of state and Federal government employment. And another is to stick vast sums in the Fed, which, of course, has been lending vast sums to the banks to lend to the Federal government. This must be great work if you can get it, but sooner or later, all this charade of passing non-existent wealth (that is, fiat money that represents no actual value) back and forth has got to hit a wall.
But Keyser speculated a long time ago that perhaps the worst effect of all the deficit spending might get the nitwits in Washington accustomed to the idea of spending vast amounts more than they have. That is, the US government has run deficits for years (with a minor stop in the late ’90s), but it was mainly nickels and dimes comparatively speaking. The debt would inch up all the time, but only incrementally. Now, it turns out that the Federal government can spend more than $1 trillion more than it takes in every fucking year. For a while at any rate. With China and Europe in economic chaos, the US$ seems “safe,” so that helps too. But get this. Back in Ronald Reagan’s day, the entire national debt was $1 trillion. Now they add that much to the total each year. And the other day, the total surpassed the $13 trillion mark (and no one seemed even to notice). How long can that go on? Well, we’ll see, since there seems not to be the least sign that anyone in Washington is willing to do the least bit to reduce that extravagance.
Speaking of which, the housing market is continuing to decline despite the best efforts of the Federal government to prop up the bubble. Used to be that most mortgages in the US were actually put together by that institutionalized source of fraud, Fannie Mae and Freddie Mac. But it turns out that these days the single largest creator of mortgages is the fucking FHA. The what? Why, the Federal Housing Authority. And why’s that, you might ask? Because their standards are even lower than those of the Fannie and Freddie. That is, in order to prop up the market, the Federal government itself is active attempting to give mortgages to people who can’t afford them.
How fucking insane is that?
Oh, well, the “paper of record” (the Nude York Times) had a story the other day about how people who took out loans they shouldn’t have are now practicing “strategic defaulting.” What this means is that they’ve figured out that the banks aren’t too eager to foreclose because doing so means that the loss on the mortgage loan is realized, whereas up until that point, the banks can pretend that the loan is worth more than it is. That is, an unserviced loan looks better on the books, so the banks are dilatory about foreclosing. So the fuckers who bought some home they could never have afforded now figure that it’s okay to stick it “to the man,” so they simply don’t pay anything towards the mortgage, stay in the house, and squander the “saved” payments on vacations, and televisions and other shit! Well, it’s even better than using your house equity as an ATM. This is just flat-out theft.
And how’s all that vast amount the Federal government borrows for “stimulus” doing, anyway? Well, last month, there were 431,000 new jobs supposedly created. But the statistics are simply made up by the BEA on the basis of some sort of formula of theirs and not on actual employment facts, so it’s bullshit to begin with. But even by their reckoning, 411,000 of those were temporary census workers. So absolutely fuck-all is going on the “real” world, where people actually create wealth rather than helping find out how many illegal aliens need to be represented in Congress.
Meanwhile, Europe is totally falling apart. The European Central Bank has “bailed out” the completely irresponsible national spending in Greece with money they don’t have, and are now on the hook for Portugal, Ireland, Spain and Italy. The euro continues to drop, going from $1.31 to $1.20 since the great bailout. And it seems Hungary is now teetering on the brink. And the reason the ECB had to bail out Greece is not because anyone really cares about the Greeks but because all that debt the Greeks took out irresponsibly is actually held by European banks, which are really in terrible shape, but their lack of transparency makes the US situation look clear as day by comparison. This clip is humorous but sadly true:
Fundamentally, what’s going on is that in 1933 Franklin Roosevelt confiscated privately held monetary gold as part of a hare-brained scheme to end the deflation that had been going on since 1929 by devaluing the US$. Under the gold standard an ounce of gold had been worth $20.67, but after a year of playing games with the value, he settled on the tidy sum of $35, a devaluation of something like 40%. On this basis was set up the Bretton Woods system at the end of the Second World War, with the US$ serving as the world reserve currency and being itself backed by the US gold reserves. No private individual had access to this gold, but supposedly foreign central banks did. The US abused this system in the ’60s to issue more dollars than the gold could support in order to fund the Great Society and the Vietnam War on the cheap. Eventually, the French called the US bluff and asked for gold for their dollars. The US didn’t actually have that much gold, and so ended any pretense of convertibility in 1971. Richard Nixon called the French assholes for causing this. But in this instance, if anyone was acting like an asshole, it wasn’t the French.
In any event, since 1971, there has no actual value whatsoever behind any currency. It’s all paper and zeroes made up by central banks across the globe. You know, everyone takes the institution known as the “central bank” for granted, but if any group on earth should be discredited after a record of unmitigated disaster, it should be central banks. Just since 1960, you’d need three times as many dollars to have exactly the same purchasing power. That is, two thirds of the value of the currency has been inflated away in the space of 50 years. That in effect forces everyone to “invest” their money rather than keep it, which of course helps out the boys on The Street, who make money off all these transactions (apart from their ability to make more money through their insider advantage and other manipulations).
So what is the dollar based on? Well, nothing. It’s legal tender, and people have no alternative. But the currency is fundamentally based on an ongoing increase in debt. But debt has to be paid off eventually, or it’s unsustainable. You can’t just go adding on to it in the futile effort to “create” more money to service the debt. This is the basic error of confusing money and wealth. Money is merely a claim to wealth, and money created in excess of the available wealth is in the final analysis worthless.
Do you know what happens when a warship is breached on one side and begins to list? The let in water on the other side as a counterbalance. This is known as counter flooding. Now, if you didn’t do this, the ship would just keep on listing until it capsized. But counter flooding does nothing to solve the underlying problem. It simply gives you time to plug the hole and pump out the water. And if you can’t do that, then the counter flood actually makes things worse, since you’ve now got more water in the ship. It just settles more slowly on an even keel. In the meanwhile, things might seem better to someone who’s merely judging the list and not paying attention tot the freeboard (how far the deck is above water level).
Think of the stock market as being the inclinometer that registers the degree of list. Since spring of last year, they’ve open the sea cocks on the other side of the ship, so the list has decreased.
But how much lower in the water is the ship? And more importantly, will she make it back to port before foundering? There is no way to know, but the situation looks bad. And the bulkheads seem to be giving way.
God help us if they give way.
This is from a personal message from Timmy “Hey, viagra It May Be Buried in There Pretty Deep, But You Can’t Say I Didn’t Warn You” Geithner to anyone willing to listen:
As discussed in this 2009 Financial Report of the United States Government (Financial Report), the federal government is on an unsustainable long-term fiscal path driven primarily by rising health care costs and known demographic trends. The Statement of Social Insurance, for example, shows that the present value of projected scheduled benefits exceeds earmarked revenues for social insurance programs (e.g., Social Security and Medicare) by about $46 trillion over the next 75-year period. In addition, our most recent long-term simulations for all federal government programs show that absent policy changes, debt held by the public as a percentage of GDP could exceed the historical high reached in the aftermath of World War II in a little over 10 years. Absent a change in policy, under this scenario, the interest costs on the growing debt together with spending on major entitlement programs could absorb 92 cents of every dollar of federal revenue in 2019. Clearly, this is not sustainable. (p. 36)
So, let’s play the important bit over: “Absent a change in policy, under this scenario, the interest costs on the growing debt together with spending on major entitlement programs could absorb 92 cents of every dollar of federal revenue in 2019. Clearly, this is not sustainable.”
And what exactly is the “change in policy” that Timmy and his boss Barak “Hey, let’s spend a trillion large more every year than we have, and oh, yeah, let’s give everybody free medical care” Obama have in mind? Cutting Social Security? Giving AIG back to Keyser? Reneging on the national debt?
Nah, of course not. They’ve got no fucking plan. Why? Because there is no conceivable solution to the problem because the modern welfare state has obligated itself to pay huge numbers of people open-ended “entitlements” without any control over how much will be spent, and while this seemed like a great idea when things like Social Security were cooked up, now there are too many recipients and too few “payers” by a long shot. This is the very definition of a Ponzi scheme, that is, a fraudulent financial plan that actually makes no money but pays out huge supposed returns to the older investors on the basis of additional “investments” made by new investors. With a Ponzi scheme in the real world (the so-called “private sector”), word of the huge returns attracts new funds, but sooner or later, the supply of suckers is limited, and the scheme collapses once it can’t attract enough new money to make good on its “unsustainable” obligations (sound familiar?).
A government-sponsored Ponzi scheme is a bit different. It doesn’t have to “attract” investors, but simply uses the state’s compulsory powers to confiscate funds (politely known as “taxation”), with the ostensible promise that everyone will get their chance to belly up to the trough. Which is all good and well provided that there are enough taxpayers to contribute the sums needed to “pay” off the older dupes. The scam began with the institution of Social Security back in the ’30s, when few people received and lots paid in. The government pretended to put the excess above expenditure into a trust fund, but it turns out that the “trust fund” is nothing but a bunch of pieces of paper saying “Okay, the US Treasury will pay you X billion dollars.” Lots and lots of such pieces of paper, stuck into meaningless folders in fucking Parkersburg W. Virginia. Anyway, that scheme was so much fun that the government has taken on many trillions of dollars in unfunded obligations.
Well, the bill is now due. And the US Treasury doesn’t actually have any billions to spare. In fact, they’re borrowing money at the rate of $220 billion a fucking month.
Here’s a nice graph that comes from Timmy’s missive.
Can you repeat after Keyser, “This plane is about to crash, so please debark by the specially marked emergency exits, except they’re all sealed shut, and we’re going to die, so enjoy the rest of the trip”? Yes, Keyser knew you could, children.
Enjoy the rest of the journey. The trip down is a bit turbulent, but it ends with a bang (and not the good kind).