Money vs. Credit

[Al_U_Card]

The Federal Reserve creates money that it loans to the US government at interest.

This despite the fact that the US government could print that same amount of money for the cost of printing.

 

Now, world banks are injecting "credit" into the "money markets" to alleviate the current "crisis"....

 

When I have borrowed to the max and I want another loan, doesn't that mean that my interest rate on the next one will be at an even higher interest rate?

 

Who benefits from that?

 

If more money is in circulation, so inflation goes up and we can spend more dollars for the same items but the money continues to circulate...more outstanding credit just gets us deeper in the hole...

[blackshoe]

I blame FDR (he's the one who took us off the gold standard).

[hrothgar]

I blame FDR (he's the one who took us off the gold standard).

Not sure what you are referencing

 

As I recall, one of the key elements of the Bretton Woods agreement was pegging the dollar at $35 per ounce of gold.

 

This continued until the late 1960s...

 

I did a quick scan at

 

http://economics.about.com/gi/dynamic/offs...ser/chrono.html

 

which didn't mention the US dropping of the old Standard during the FDR years. The closest thing that I found was the following entry:

 

p 611

 

1934 US Gold Reserve Act

The official price of gold is raised from $20.67 to $35 per ounce, a substantial devaluation of the dollar, and the internal circulation of gold is ended.

 

There was an execuitve order in 1932 that prohibted citzens from own significant quantities of gold. Admittedly, this does have an impact on convertibility, however, this is separate and distinct from maintaining a gold standard. (Indeed, it can be argued that said executive order was a response to the gold runs that forced the Bank of England off the gold standard. Said executive order can be cast as an attempt to maintain the standard rather than abolish it)

[Al_U_Card]

Wasn't it Tricky Dick that put the nail in the coffin in '72?

[blackshoe]

It seems I was mistaken. It wasn't FDR's fault, although he did make private ownership of gold illegal. And yes, Tricky Dick did have a hand in it ('71, according to Wikipedia, not '72, but close enough). B)

[Lobowolf]

"Making private ownership of gold illegal" de facto took the U.S. off the gold standard; the gold standard pegged the value of currency because it was exchangeable at a fixed rate. The ending of the Bretton Woods system (Nixon '71) was essentially the last straw, ending fixed exchange gold trading between other countries and the United States. The key dates are 1933 and 1971, and "off the gold standard" and even "THE gold standard" are somwhat ambiguous, but it was more (and first) Roosevelt.

[Al_U_Card]

So let me get this straight.

 

A bunch of rich guys play fast and loose with investors money (while raking in hellacious commissions and bonuses) and then lose it all only to be saved by the government sending money in to save the day....

 

Where do governments get money? Oh yeah, taxes.

 

And taxes are for.......providing services to taxpayers.

 

So if they take, say, 100 billion, that would be about 1000 per taxpayer. EVERY taxpayer. That means you AND Jimmy Cayne. I wonder who will miss it more.....

[Mbodell]

Amount of money every individual taxpayer is paying for the bailouts (so far):

 

Bear Stearns: $ 217.39 ($30B total)

Freddie and Fanny: $1449.28 ($200B total - I think this may be underestimated as there are ~$5T in balance sheets)

AIG: $ 615.94 ($85B total)

 

Total: $2,282.61 per US tax payer.

 

And we are certainly not out of the woods yet either on how many things will need bail outs or on how much each of these will finally cost or on other expensive things that are coming. How about:

 

FDIC where the amount of money saved up to cover banks failing is way too small

 

to name one.

[kenberg]

As I understand it, the figures cited for how much this will cost the taxpayer are really figures for what it will cost if the entire guarantee is used. We might (yes and we might not) get out for less.

However:

I would love to see the candidates pressed on exactly where they see this money, however much it may be, to be coming from. Back at the time the stimulus plan came out I suggested that giving money to cash strapped families is fine since it helps them and helps the economy as long as you find a source for that money. No one ever lost an election by promising to give people more money, but explaining where it will come from gets trickier. It seems reasonably clear that we cannot just keep spending money that we don't have forever.

 

But right now the old saw "When you are up to your ass in alligators it may be hard to remember you came in to drain the swamp" comes to mind. I am enormously impressed by the ability of Paulson to shoulder an immense responsibility and I hope to hell he knows what he is doing. Right or wrong, he's the guy whose judgment counts.

[Al_U_Card]

Generally, we elect representatives in the hopes that they will do what is best, in the long run, for all of us. When theydo do not succeed, we do not re-elect them.

 

Appointed officials and our elected representative are always subject to other influences that may be expedient or self-serving.

 

Ultimately, those that made a killing in the market up to now (and the CEO's are the best, easily verifiable example) do not deserve to gain from their own incompetence or worse, malfeasance.

 

If I run my lemonade stand into the ground, it is my responsibility.

 

If the system is so fragile and apt to collapse when such events occur then it is better that we let it do so and replace it by a sturdier conveyance. Kind of like those houses on the gulf. Their shoddiness is a danger and they must be replaced by quality craftmanship. What is the force that desires to keep them in place? Sentimentality? Indolence? Greed? Certainly not a desire to do the best thing for all of us...

[Lanor Fow]

Fannie May and freddi mac have about 1.2 usd worth of morgages on their books (if i get my numbers right).

 

AIG suplpy hundreds of billions of inurance to banks, companies and directly and indirectly to the average person on the street.

 

If you run your lemonade stall into the ground then I dont get to drunk lemonade. Though I am partial to a glass of the stuff now and again, I thin ki can manage without too much inconvience.

 

There may, therefore, be somethign siad for lettling the obvoiusly somewhat flawed system fail, if your analogy were to hold.

 

The trouble is, though it may seem to provide a nice argument, I dont think that it is a partiucualy useful analogy. If these companies had failed I am not sure exactly the impact, noone is, hence a lot of the market turmoil, but I am pretty sure it would had a direct affect on millions of poepels insurance, pensions, morgages and possibly even savings.

 

We saw that Lehmans beign allowed to fail caused such market uncertanty that, for example, Hbos was hurredly bought. Would it have failed if it hadn't been? Who knows, if it had what woudl have happened to the savings in the bank? Also proabbly not clear.

 

AIG falling, according to most analysts, woudl have created a much bigger problems than lehmans.

 

 

 

I'm not an economist or market analyst. I can claim no expert status on this subject, far from it. But I venture, in my mostly ignorant state, to suggest that allowing the system to self distruct would very possibly cost the average tax payer more than $2,000., very possibly a lot more.

 

In these unprecidented times no doubt changes will have to be made to stop such a crisis happening again. However getting through the crisis first should probably take precidence.

[Al_U_Card]

Each moment is unprecedented....

 

If there is still a demand for lemonade, another seller will appear.

 

Other than their employees and investors, the bankruptcy of Lehman Bros. would have hurt ???? or provided an opportunity for whom?

 

Were Microsoft to fail tomorrow (and admittedly THEY are 80% of the ENTIRE world computing establishment) would not Apple and Sun and others rise to fill the gap? (hopefully more efficiently)

 

Finances are dicey as far as our own insecurities are concerned(pun not intended) so take the emotion out and put the sense in. Let them fail for as badly running engines, they were polluting the environment anyway....

[Lobowolf]

Generally, we elect representatives in the hopes that they will do what is best, in the long run, for all of us.

I don't think this is true. I think it's more of a case of trying to elect representatives who, it is believed, will do best for people in any given voter's group of choice to identify with. Congressmembers are elected so they can do best not for "all of us," but for "people in my district," or, with the support of PACs who in turn receieve financial support from individuals not necessarily in the interests of "all of us," but in the interests of (union members/gun owners/ members of a particular race, gender, or sexual orientation/retired persons/ farmers/the wealthy/the poor/etc.)

[kenberg]

Generally, we elect representatives in the hopes that they will do what is best, in the long run, for all of us.

I don't think this is true. I think it's more of a case of trying to elect representatives who, it is believed, will do best for people in any given voter's group of choice to identify with. Congressmembers are elected so they can do best not for "all of us," but for "people in my district," or, with the support of PACs who in turn receieve financial support from individuals not necessarily in the interests of "all of us," but in the interests of (union members/gun owners/ members of a particular race, gender, or sexual orientation/retired persons/ farmers/the wealthy/the poor/etc.)

A bit of both, from my viewpoint. For one ting, doing good for all will also be doing good for me in the long run. The country works best if everyone feels that they have a stake in it. But I feel more able to judge accurately when someone is addressing issues that directly impact me. When it gets to helping others whose life experiences are far different from mine I may favor it but be uncertain that good intentions will translate into good results, even if the good intentions are real which often they are not.

[barmar]

Each moment is unprecedented....

 

If there is still a demand for lemonade, another seller will appear.

 

Other than their employees and investors, the bankruptcy of Lehman Bros. would have hurt ???? or provided an opportunity for whom?

 

Were Microsoft to fail tomorrow (and admittedly THEY are 80% of the ENTIRE world computing establishment) would not Apple and Sun and others rise to fill the gap? (hopefully more efficiently)

 

Finances are dicey as far as our own insecurities are concerned(pun not intended) so take the emotion out and put the sense in. Let them fail for as badly running engines, they were polluting the environment anyway....

Microsoft provides the software that runs 80% of the world's computers. Yeah, the other companies would step in to fill the gap, but it would take a long time for everyone to convert, and it would be extremely painful.

 

So yeah, if we let the financial institutions fail we'll eventually recover, but in the mean time millions of people will suffer. Not just the employees and investors of the companies, but customers who were depending on them. When a bank fails, its depositors lose their savings. Yeah, most of them are insured, but how much can the insurance companies afford to pay out before THEY fail?

 

When enormous institutions like these fail, there's a snowball effect, and that's how you get depressions and recessions. Furthermore, as we now see, it's not just one or two badly managed companies, but widespread practices across the financial industry.

[Al_U_Card]

I couldn't agree more. No pain, no gain.

 

Will the administration that gave you the de-regulation (foxes in the hen-house) that brought this about come up with the brilliancy that they were previously lacking? How do they know what to do now, when they didn't know then?

 

I fear that their "fix" will do more than fix us. It will let the scoundrels (but not so much their poor victims) off the hook and encourage them to continue on their merry way while the taxpayer foots the bill.

 

I can see it now, when they decide, after the smoke clears, to give the financial reins back to the "private" concerns because a) the government are not bankers B) the government has no business telling business how to do business and c) they will come up with something to divert our attention from the final coup de grace.

 

There were lots of reasons for the big depression but being fiscally responsible was not one of them. Two wrongs do not make a right. They should do the right and not the expedient thing.

[mike777]

I hope people realize that deregulation did not mean no regulation. In fact both Lehman and AIG were and are heavily regulated.

 

These companies are under constant government audits of compliance.

 

No one in the media reports come out and say this but it seems for many regulation somehow equals no risk to go bankrupt or go out of business for lack of being able to compete in the market place.

 

I told this story before but years ago out in Calif I interviewed with the SEC. I was told by person after person that in all their years with the SEC no one, not one company had ever fully passed an SEC inspection. There were always compliance issues. These are companies that are audited year after year after year.

 

I have my doubts even more regulations are going to make things better.

 

In this case you can debate or perhaps you guys even know what the problem is.

In this case going out of business is the result of the problem not the actual problem.

[Al_U_Card]

The way they were headed, the next "instrument" might have been taking long and short positions on the players at the craps tables in Vegas...

 

When oversight can't see that obviously bizarre tactics (no matter how "mathematically" sound they may be) go beyond the ethics and the intent of the investor (you and me and joe public) that they must not be allowed to become commonplace and accepted.

 

Options, options trading, currency speculation, all very questionable for the man in the street (with the mortgage plays, there were bound to be less in houses and more in the street) barely qualify so long as they are held in check by review. Qualifying anything that transiently creates an imaginary profit ( that someone gets but that creates nothing of value) as being business savvy is inherently wrong.

[mike777]

As a side note this week investors were buying 3 month Tres. at a guaranteed loss.

 

 

For example they were putting in one dollar with full knowledge they would only get back something close to 99cents 3 months later. This is a panic.

To put it another way they thought they had nowhere else safer to put their billions.

[mike777]

I am too lazy to check the facts but let us assume:

company A makes:

4.7 billion bucks in 2007

 

 

 

how many vote it will be bankrupt in 8 months?

 

How many vote more regulation will stop it?

[Al_U_Card]

If it is run by people that want to make a buck more than do what is right.

If it is not subject to regulation and oversight by competent and impartial authority.

If it takes commissions and bonuses for "imaginary" profits.

 

I vote for it won't be long.

[PassedOut]

The FDIC was started in 1933 after 4000 banks had failed, wiping out the life savings of many families. Confidence in banking was restored, and (in my opinion) the general welfare of the nation was much enhanced.

 

If the taxpayers are going to be the insurers of last resort for other financial institutions, it seems to me that those businesses, like banks, should pay insurance premiums to a federal agency that would bail out the failures.

 

I don't see the regulatory aspect of that as particularly onerous to the businesses. Transparency would be required, of course, as it should be anyway. And the premiums would be established based on the risks being taken.

 

I do understand that the financial institutions that have failed, or are in big trouble now, would have had a problem quantifying their risk to federal regulators. They would have been upset by the high premiums demanded. However, that would have clipped their wings a good deal and would have been better for the country than what actually happened.

 

Although AIG supposedly insured many of those risky investments, their managers were caught up themselves in the profit-making euphoria of the bubble. A federal agency does not face the same temptations.

[Al_U_Card]

Exactly. They made off like bandits and John Q. takes the heat.

 

I am not so sure that speculation insurance (as compared to deposit insurance) will ever come about altho malpractice insurance premiums are almost as high as the lawsuits so....you never know <_<

[kenberg]

As the price tag moves towards the trillion dollar mark I guess I am getting a bit pissed.

 

If the gov has to hit me and my wife with a ten or fifteen thousand dollar tax surcharge to finance this w/o sending the national debt into outer space then OK, take it. But I want something in return: I want the people who have taken on the job of leading this country to stop *****ing around. There is work to be done in many areas and I want them to stop preening and start working. This applies equally to Democrats whom I usually vote for and Republicans whom I sometimes vote for.

 

The other morning there was a front page picture of Paulson, Bernanke and Pelosi and a story saying that Paulson and Bernanke would be bringing the Congress into the action. My first thought was God help us, do we have to?

 

They could start by each and every one of them listing all contributions and favors that they have been receiving from the investment bankers and then giving an accounting of just why it is that we should trust them to do anything. Congress right now has approval ratings lower than a canceled sitcom and there are reasons for that. Perhaps they can get their souls back but I wouldn't lay any heavy bets.

[Gerben42]

It gets better. Now the US governments is asking other countries to help them pay this package... I would hope the politicians here will not go weak and pay even 1 cent.

 

A US government decision is an internal decision and please leave us out of it. Rather make sure that the first 700 billion profit of these banks goes back directly into the US treasury rather than into the hands of some investors or managers.