You mention that the Federal Reserve could lend out public money. You also say that it is a private entity. How is it possible that a private entity can loan out public money?
I didn't say that: Ellen Brown did.
In most countries - even the UK - the Central Bank is an arm, agency or entity in the ownership of the State.
In the US that is not the case. The Fed has since 1913 been owned by private banks, and operates in the interests of its owners.
Most money is created by private banks as interest-bearing debt, and the small amount (<3%) that is not is created by Central Banks as notes and coin.
The result in the case of the Fed is a strange hybrid for sure.
It is remarkable that at the moment of its greatest failure it is attempting to get rid of the last vestiges of democratic oversight by assuming a regulatory "conduct of business" responsibility in addition to its responsibility for financial stability etc.
Before Nemesis comes Hubris. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The Central Banks do act as bankers for the Government, and if they make decisions which hurt the Treasury maybe the treasury should go shopping for another banker. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
The Central Banks do act as bankers for the Government, and if they make decisions which hurt the Treasury maybe the treasury should go shopping for another banker.
Or maybe, as in Hong Kong, dispense with a Central Bank entirely and turn it into a "Monetary Authority".
As we have seen in Northern Rock, one of the major reasons for the f..k up appears to be the fact that the UK Treasury not long ago took away from the Bank of England -after 300 years - the core function of the "Debt Management Office".
True to grasping Treasury tradition they simply could not resist the "seignorage" income available from the loans they made to "bail out" the Wreck. The fact that this starved the system of liquidity passes them by: that's the Bank of England's problem....
Another triumph of central control freakery. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
So there isn't really anything unusual here. This isn't all that different to starting a stupid war for the financial benefit of contractors. And it's not exactly news that the easiest way to trade on insider information is to get a job associated with the government.
The scale of it may be unusual, but we're never going to know who did those trades, because it's never going to be investigated - in the same way that the massive profits from put options before 9/11 were never investigated properly.
The fact that so many knowledgeable people around these parts are shouting bloody murder about it tells me that someone is being ripped off. But damned if I can see who the sucker is if it's not the taxpayers. And you're saying it isn't the taxpayer? Or are you saying that it is the taxpayer, but in some indirect fashion?
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
These loans were not made at the expense of the Treasury, but at the expense of the Dollar itself, and of the underlying "Full Faith and Credit of the US Government". On this last point, I wasn't aware that the Fed had loaned over $20bn to Bear Stearns, but I was aware that the $30bn loaned to JP Morgan was in the form of allowing toxic-waste "subprime" assets as collateral instead of the "prime" US Treasuries customarily used as collateral. And even then, my memory was faulty...
Times Online: Bear Stearns sold to JPMorgan Chase under Federal Bank pressure
As part of the deal, America's central bank has effectively underwritten $30 billion worth of Bear's toxic sub-prime mortgage-backed bonds, to protect JP Morgan Chase shareholders. It is also providing special financing to JP Morgan Chase - of an undisclosed sum. Terms of the deal are unknown, and it is not clear whether such special financing is to cover the cost of JP Morgan's emergency loan to Bear made late on Thursday night.
But, in any case, the crisis is the result of bankers creating money to lend to themselves and each other through the Fed's dereliction of its monetary oversight duty, and now the Fed continues to create money to bail them out. Ultimately, this is an "inflation" or "devaluation" tax on every holder of US$ on the planet, but first and foremost for American residents. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
Which, of course means that the suckers are everyone who isn't among the recipients. That makes sense...
I understand how they printed the money (asset bubbles, cheap credit, etc.). But how were the Fed supposed to prevent that (if it had been doing its job)? It could have raised interest rates. But is that really the only weapon at its disposal?
Which interest rates can it change at all, by the way? The way I heard the story the central banks can only change the rate they charge from the banks - but if the banks can make money for themselves without the central bank, then what kind of fulcrum does the CB have?
Or does the CB control the ratio of "funnymoney" that banks can print to "real money" that they must have in stock to do so?
And what is "real" money anyway? Does "funnymoney" become "real money" once it's been loaned out and then re-deposited by the guy who took out the loan?
We seem to keep running into this relationship between central banks and the rest of the world. Maybe someone should write a Central Banking For Dummies diary and stick it somewhere we can find it. (Fortunately I'm not knowledgeable enough about the subject to do so myself :-P)
But the current crisis has little to do with margin requirements. It is really directly about skirting the banking regulation and the monetary policy limits of the Fed. The banks have done an end-run around banking and credit regulation with securitization and off-balance-sheet "special investment vehicles". I am not sure monetary policy tools like interest rates would have been effective at all. Tightening reserve requirements wouldn't have helped either because essentially what banks have done is outsource the credit risk from money creation by loans, which is what reserve requirements protect banks against, to institutions with no reserve requirements.
I have been called wrong a couple of times on my interpretation of just how regulation was skirted in the subprime case, so I can't say I know how this could have been prevented. However, it does appear that Greenspan was warned about both the lending practices going on in the subprime sector, as well as the financial risks, and chose to do nothing. The blame probably lies squarely with the Fed as bank regulator, not as monetary authority. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
For complex phenomena there is usually more than one way to influence them. Interest rates would have been one in this case. Mortgage lending regulation another, higher reserve requirements yet another, and there are probably even more. Using more than one measure to reach a goal is usually a good idea. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
But houses are no stocks. After all people were living in those houses and I doubt that many people are willing to take negative armotisation mortgages. Even if the house price goes on upwards for some more time, you still have the debt and you can't sell your house without some form of replacement. When your house price goes up so much, then probably your replacement would be expensive, too. So you would always end up in trouble. So people look on the loan and what they can pay back and decide.
But still as the banks had to figure in some risk, higher interest would have led to lower leverage? Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
So basically, the Fed has been printing something on the order of 50 million $1000 bills and handed them to the fatcats?
Not "handed": "loaned", secured by a heap of crap. But it's the Treasury at risk on these Fed loans, as I understand it.
Heads the banks win, tails the tax-payer loses.
Only Treasuries can "hand" : which is of course a pinko subversive act undertaken only by cheese-eating surrender monkeys and the like.... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Unlike wage demands.
So there will be no reason not to try to push for more bail outs in future, because - clearly - apart from making the dollar wobble for a week or so, this deal hasn't had any real effect on the real economy.
You are absolutely correct: "These loans were not made at the expense of the Treasury, but at the expense of the Dollar itself, and of the underlying "Full Faith and Credit of the US Government".
BSC is not an FDIC-insured bank, but JPM is on several accounts as it is a bank holding company with retail and commercial operations. Both bank's however are two of the FRB's 20 primary dealers of US treasuries. (more links here) The Primary Dealer Credit Facility was created the day that the JPM-BSC merger was announced, 16 March. These are the facilities for primary dealers as of 28 March. You will note also the Term Discount Window created 17 Aug 2007; at that time Bush and Bernanke announced a plan to "rescue" homeowners by extending FHA origination and insurance underwriting. This was a public signal that Treasury and FRB understood the MBS market and housing values were collapsing. OFHEO was not amused. By Dec 2007 reserve system non-borrowed funds were negative, and FRB established the Term Auction Facility.
And there is no law prohibiting or limiting FRB underwriting precisely because three of the FRB "core banks" are primary dealers and LIBOR panelists -- BoA (which has been "asked" to absorb Countrywide), JPMorgan Chase, Citigroup. I don't need to tell you that "the market" is forcing BoE to validate LIBOR panelists' compliance. In effect, the only thing keeping treasury yield level (USD) is market confidence in these institutions capacity to deflate housing value and suppress dilution (inflation) as directed by the US Congress.
I doubt "insider trading" triggered a panic or the JPM-BSC. Any institutional fund manager paying the slightest attention to BSC litigation, exposure, margins, or rumor of default, under the conditions described above would have pulled have pulled out ($17B over two days, iirc) at the first opportunity the last 10K was filed because they were well aware the company's market cap was bogus. Diversity is the key to economic and political evolution.
I doubt "insider trading" triggered a panic or the JPM-BSC.
Did JPM pick up BSC "on the cheap" in your view?
They already increased the offer from $2.00 to $10.00 per share of course... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
But what was the point of that move? Was it just a bit of fake haggling to stop the markets going into meltdown and ruin the party for everyone?
Or had someone made their money by then, so it didn't matter if prices started to climb back up again?
Quite.
The fact that they increased the price by 500% with such alacrity indicates there was a little slack in there..... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
