By the way, it's quite possible for the Fed to bear large losses (on behalf of the banks) without anyone noticing. They can print money for free, but that does show up as increased liability on their balance sheet. Luckily, the Fed earns a spread from the interest bearing securities it holds against the no interest currency with which it finances purchases. So long as the losses it bears are smaller than this spread, losses can be hidden in reduced profit rather than showing up as embarrassing balance sheet holes. That amounts to tens of billions in loss-bearing capacity per year. By timing the recognition of losses, the Fed can finance very large losses over a period of years without politically awkward balance sheet issues.
So long as the losses it bears are smaller than this spread, losses can be hidden in reduced profit rather than showing up as embarrassing balance sheet holes.
That amounts to tens of billions in loss-bearing capacity per year. By timing the recognition of losses, the Fed can finance very large losses over a period of years without politically awkward balance sheet issues.
quote from waldman which is also elsewhere in the Comments to this Diary, because it is a correct representation of what lies behind the smoke and mirrors of Central Banking.
However, it does not address inflation, which is the issue here, and presupposes that no-one will notice the "bail-out".
Francois in Paris:
It will be inflationary if the Fed is deliberately complacent on the valuation of the collaterals offered by the banks to the TAF. The scenario is: Banks borrow at the TAF and the TAF accepts banks' rotten assets at a grossly inflated value, slightly below facial value to "be tough" on the banks but way above what a market would bear if there was a market left in the first place to negotiate those turds.
The scenario is:
I think you are confusing the Capital the banks hold with the credit swirling around the system which the Banks created and implicitly guaranteed, backing that guarantee with their capital.
Whether the Fed takes collateral or not, and what the quality is of the collateral they do take, does not affect the amount of credit in circulation, merely the risk the Fed is taking in its dealings with the relevant banks.
The Fed lets the banks walk on their TAF loans and keep the rotten assets. The banks have effectively sold their rotten assets at an inflated value. Money for nothing and piles of cash to inject in the economy.
Hang on a minute, I think your logic fails at this point: are you saying that the Fed pawnbroker would quietly let the Banks walk away, leaving the Fed with the fake Rolex?
I don't think that would be possible, because it could not remain hidden, I suspect, and if it is done transparently then politicians, in the US or more likely overseas, would have a field day.
I give you that if it were possible, it would indeed repair the banks' balance sheets, which would allow them to create new loans=credit=money and perhaps then refinance distressed borrowers enough to stabilise asset prices.
But that doesn't reinflate the bubble - merely stop it deflating, and it does nothing for retail price inflation because none of the money will get out into circulation anyway.
It's the only "acceptable" way the Fed has to inject cash (and inflation) in the system as the open market operations are broken and may even be deflationary at this point.
I don't think so. The best the Fed can do is to avoid deflation by providing "quasi equity" through pumping in liquidity for as long as it takes banks to rebuild their balance sheets.
The Japanese have been trying - and failing - to bring back, - a conventional rate of inflation for years using monetary means and are still failing.
The other approach, as we both agree, is to force the financial sector to liquidate its rotten assets and wipe out the leverage - meaning for nearly all actors in the financial sector to go under, fold and lose their shirts and their underpants - inject liquidity directly in the economy by taking over the failed actors and restructuring debts and deposits in the productive sector so the real economy is not hurt (too badly). But this is not going to happen.
The other approach, as we both agree, is
But this is not going to happen.
Well I believe that there is another way to do this which is a "debt/equity" swap on a fairly cosmic scale by "unitising" the flows of land/property rentals and energy which actually constitute value rather than a claim over value issued ex nihilo by a credit institution aka bank.
This essentially takes us to Keynes' International Clearing Union concept. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Yes, I think that the system has become that corrupt. Otherwise, the Fed needs to nationalize the banks and that cannot be done. It would be socialism and it would hurt friends.
You mean a field day like they already had one on the bullshit about Iraqi aluminum tubes and biological labs on trailers? Yeah. It worked really well.
You've seen Mozilo, O'Neal and Prince in front of the House Oversight committee on Friday, right? It's not really that they are disconnected from reality. They are very well connected into reality. They simply don't give a shit. Nothing the government can do unless it takes radical steps to lock them up, seize their assets and, more importantly, given the hold of the ruling class on mass media, to muzzle them. Can't happen. The government would have to turn upside down the two major tenets of Murika, property rights and freedom of speech (for those who own a lot of property and the loudspeakers).
And silly furiners, well, they are already voting with their feet if you look at the dollar/euro exchange rate. Anyway, no one cares about silly dirty furiners in Murika. They are nasty Yank-haters and if they bark, US politicians will blame them for hurting the US economy.
The money will get out in circulation because it won't go to the housing bubble but somewhere else. You can count on them to find an other way to push US consumers deeper into debt. The housing bubble will be the Fed problem, which will tide it up by throwing free money to support existing loans with very low rates and by holding rotten loans outside of the market.
It's not about the economy. Ultimately, I'd say it's not even about the financial sector. It's about saving the ruling class at everybody's else expense. All the rest can be blamed for the commoners on nasty furiners: China, petro-monarchies, Europeans, etc. They don't give a shit if the economy tanks and everybody else is impoverished as long they can hold and reinforce their relative position. It can actually help them by making their targets weaker for their predation. If there is a shock, great! Just another opportunity to push for more "reforms".
Chris, I think your problem is that you seriously underestimate how degenerate and shameless modern capitalism has become. You are still trying to look at it as if it was run in everybody's interest. You are 25 years late.
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Actually, something about the House hearing shocked and depressed me quite seriously. AFAIK, it was focusing on fuzzy notions of fairness about the CEOs pay.
But (AFAIK) no one pointed out the absolute obvious : a corporation doesn't go from record profits to abysmal losses overnight. For that to happen requires grossly rigged accounting, either out of staggering incompetence or outright fraud, or both. In that case, the answer is clear and deliberate fraud and it doesn't matter if it is wrapped in GAAP, anointed by audit firms and backed fantasy mark-to-market valuations on markets where no one gives a shit about what they are buying and selling. It was clearly not borne by any reality, very much like the famous opinion letters used by Enron to justify its accounting acrobatics. It was just mutual back-scratching in a giant Ponzi scheme.
Put plainly, fraud.
So no one pointed out that the CEOs outlandish pay days were "justified" by completely unsubstantial and fraudulent accounting and were never earned in the first place.
I was a Director of the IPE (now ICEFutures) and blew the whistle in 2000/2001 on how the investment banks were (and still are) milking the oil (and energy) markets, and got shafted because of it.
So yes, I do understand how shameless modern capitalism has become more clearly than most, both in terms of inside knowledge and personal experience.
You are assuming that the rest of the world will look on blithely, watch the Fed pumping in gazillions of dollars to bail out banks' balance sheets, and do nothing about it.
It simply won't happen. The dollar would disappear up it's own backside.
The Japanese had to work things out over time, and the same discipline will IMHO be forced upon the US.
Credit intermediation is finished in the US and Wall Street is going to have to find an alternative. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Those fuckers would sell their country into slavery if they could and it'd help them to make a buck. So blowing up their own currency, they won't care a wit. They won't be the ones suffering.
