Financial topics

[vincecate]

I would compare what you are saying to assessing a person who has a small lung tumor.

I am saying the equivalent of that the person is deciding whether they may want to quit smoking or face much greater problems in the future.

You are saying the person does not need to quit smoking because their neighbor was in a similar situation a few years ago and he is still smoking and still alive.

Of course, we can run up our debt like Japan did. But I think the consensus is that if we do, the US will slip as a world power like Japan has.

This is such a good point. Saying that the US does not have to take steps to improve the situation because Japan is still alive is just like saying a cancer patient does not have to take steps because some other patient is still alive. Bad logic.

There are like 100 cases where countries with debt and deficit levels like the US got hyperinflation and one country that lived longer, Japan. This does not prove the current level of debt and deficit are safe. Bad logic.

[Reality Check]

I would compare what you are saying to assessing a person who has a small lung tumor.

I am saying the equivalent of that the person is deciding whether they may want to quit smoking or face much greater problems in the future.

You are saying the person does not need to quit smoking because their neighbor was in a similar situation a few years ago and he is still smoking and still alive.

Of course, we can run up our debt like Japan did. But I think the consensus is that if we do, the US will slip as a world power like Japan has.

This is such a good point. Saying that the US does not have to take steps to improve the situation because Japan is still alive is just like saying a cancer patient does not have to take steps because some other patient is still alive. Bad logic.

There are like 100 cases where countries with debt and deficit levels like the US got hyperinflation and one country that lived longer, Japan. This does not prove the current level of debt and deficit are safe. Bad logic.

IF, and I repeat, IF I had ever suggested that Dr. Obama or Dr. Romney should not treat the patient for a cancerous lung tumor (1.2 Trillion Deficit), this might be "such a good point".

IF, and I repeat, IF I had ever suggested that Dr. Obama or Dr. Romney should not treat the banking system by removing the bad actors who caused this crisis and changing the banking system, such that bad actors, and those that have learned from the example of rewarding the bad actors, can NOT keep on doing what they have been doing and can NOT do it again, this might be "such a good point".

I never suggested lung cancer not be treated. But it is a fact that neither Dr. Obama nor Dr. Romney are proposing a quick surgery to excise the tumor ( 1.2 Trillion Deficits). Both are talking about some combination of good nutrition, weight loss, body building, practicing good 'values", and some vague references to different types of semi-secret magic pills to slowly reduce the size of that tumor. And each calls the other's magic pills snake oil.

But, all this talk about the deficit ( the tumor ) is nothing more than changing the subject. This patient has multiple life threatening maladies and also the patient is being independently "treated" by multiple unelected people who do not have the consent of the patient, and some do not have the patients best interest at heart; But instead SOME, of the patient's "professional care takers", have a short term financial ( or political ) interest in his health getting worse, or in his health getting better, or in his death, or in some combination of these occurring at different points in time.

Setting up a straw man argument and then attacking it is one way to have a discussion, but that is not what H or Vince normally do, and I try not to.

I will, in my next post, propose a modification of your cancer analogy for this discussion, I hope you find it both humorous and thought provoking.

The later was my original intent when starting this "outside the box of recent history" discussion. In many ways what happened 65 to 90 years ago is much more relevant to what is going to happen, than what happened between 1960 and 1990. When we catch ourselves using arguments which could be re-phrased as : "It did not happen between 1960 and 1990, so it can not happen today" we should look at that critically.

[Reality Check]

There isn't much the banks can do to increase loan demand except to lower interest rates to rock bottom or decrease their standards. Here, I'm talking about private sector loan demand from individuals and businesses. The banks are somewhat constrained in doing that, and the Fed has done just about all they can to help.

If we were having this conversation in 1960 that would be a very astute and mostly accurate analysis of what the options, and limitations, of what a banker could do.

Even in 1960 having a substantial part of that 1.4 Trillion of "monetary base" excess capital in your Federal Reserve account would be an exceptional opportunity, but your analysis of what those opportunities were, in 1960, is accurate ( although your assumptions regarding small and medium size business loans being offered at low interest - and reasonable risk aversion loan qualification standards - might need to be validated).

In 1960, if you were a banker with Federal Insured Deposits as even part of your Fractional Reserve Asset Base, what you could do with that 1.4 Trillion dollars to make money was rather limited ( if you wanted to avoid 30 years in Federal Prison ).

In 1960 doing any of the following activities related in any way to your bank, would land you in Federal Prison for thirty (30 ) years ( if you were a banker with federally insured deposits in your bank):

0. Conducting banking transactions across state borders within the United States.

1. Buying and Selling Stocks.

2. Buying and Selling Futures.

3. Buying and Selling Options.

4. Trading in Derivatives of other types.

2. Speculating in the Stock Market, Futures Market, Option Market, or any other speculative market place.

3. Selling Insurance.

4. Giving you brother a loan.

5. Behaving like a Pirate.

In 1960 if you were a banker with Federally Insured Deposits, you made fractional reserve bank loans as your best means of making money.

***
By 2005 every activity was legal and widely accepted, except behaving like a Pirate, which was still reserved for Investment bankers who did not have federally insured deposits and were risking their own, and their stock holders, and their bond holders, and their depositors money when they speculated and behaved like a Pirate ( at least that was the conventional wisdom regarding risk at investment banks in 2005 ).
****
By 2010 Investment Banks also had federally insured deposits. What is more they also were still free to speculate and they had a de-facto license to behave like a Pirate and they had officially been declared "Too Big To Fail" and their Executives had been given bonuses and bail outs with tax payer money, allowed to assume the federally insured deposits of other banks, and the "Too Big To Fail" banks were further rewarded by being allowed and encouraged to grow even larger by absorbing the federally insured deposits of other banks.

***
By 2012 - Today - Dodd-Frank had been passed, but not yet fully written ( most of it is regulatory law ), and the opportunities, and restrictions, it places on banks and so-called "financial institutions" are not yet fully known. It is not even fully defined as to what a financial institution under Dodd-Frank is. The nations largest banks are being fully consulted, and having input, as these regulations are being drawn up. There remains a certain degree of uncertainty for bankers, but it is less than for investors not involved in writing the new regulations.
***
In 2012 - Today - Many of the largest U.S. Bank Holding companies still have material quantities of Toxic Assets on their books AT FACE VALUE.
***

Your suggestion than in today's wide open environment the best way ( or only way ) for Banks ( all of whom now have federally insured deposits ) to use this 1.4 Trillion in excess reserves, is to make fractional reserve loans needs to be looked at very critically.

The banks can rationally be keeping their powder dry ( 1.4 Trillion ) to take advantage of speculative opportunities when the Debt Bubble collapses ( speculative opportunities that did not exist for banks in 1960 ) , or,

They could be using the 1.4 Trillion as an enabler and expeditor for a Private Bank driven, as opposed to a government driven, restructuring of the Bank Holding Companies, with one goal being isolation of Toxic Assets in totally separate Bank Holding Companies than solid Assets ( Keeping in mind that by law toxic assets are still carried on the Bank's books at Face Value ), and,

They could be planning to use it first for reorganization, and then for speculative opportunities during the Debt Bubble collapse.

The point is this is not 1960. The banking laws have no resemblance at all to what they were in 1960 or 1970 or even 1980.

These are not your grandfather's Banks. These Banks are not run by your Grandfather's Banker.

( I know - my "next" post did not match my prediction of my "next post" )

[Higgenbotham]

I would compare what you are saying to assessing a person who has a small lung tumor.

I am saying the equivalent of that the person is deciding whether they may want to quit smoking or face much greater problems in the future.

You are saying the person does not need to quit smoking because their neighbor was in a similar situation a few years ago and he is still smoking and still alive.

Of course, we can run up our debt like Japan did. But I think the consensus is that if we do, the US will slip as a world power like Japan has.

This is such a good point. Saying that the US does not have to take steps to improve the situation because Japan is still alive is just like saying a cancer patient does not have to take steps because some other patient is still alive. Bad logic.

There are like 100 cases where countries with debt and deficit levels like the US got hyperinflation and one country that lived longer, Japan. This does not prove the current level of debt and deficit are safe. Bad logic.

Researchers have learned that every case of cancer is unique to the individual. I think hyperinflation is like that too. As you have pointed out many times, there are only two thresholds that are in common with all these cases of hyperinflation, and the US has crossed both those thresholds. It would seem logical that once the thresholds are crossed the US must cut the deficit enough (stop smoking) and get back under the thresholds. Just like with cancer, there isn't any way to predict the outcome of this unique case by comparing it to any other unique case. All that can be done is to compare the two variables that are in common with all the cases. The example of Japan probably can't be used to predict what will happen if the US does something similar.

[Reality Check]

It would seem logical that once the thresholds are crossed the US must cut the deficit enough (stop smoking) and get back under the thresholds.

Smoking may cause lung cancer. Cutting back, or even stopping smoking, may avoid aggravating some of the symptoms ( like coughing).

But, cutting back, or even stopping smoking does NOT cure cancer.

And, cutting back, or even stopping smoking does NOT shrink a lung cancer tumor.

It is an expletive deleted poor analogy.

[aedens]

No matter how you dissect the dead frog's they are still dead. In 26 civilization most have studied they went the same way. Debasement and inflate the debt until total implosion of the core values that held it together called the consumer who ultimately decides on what the medium of exchange is. I know it is painful but read Human Action on the consequences to Statist sickening intent for it is the play book on these jokers in real time. I do not recall the survey name but the number of members in Government who had economics clarity of education was under 10 percent.
Do you think academics attached to the taxpayers pocket book even, or ever pretend to care? Given the actual construct since FDR who set it in motion I say they do not, or will not admit the capture to there design. If you hold paper claims you deserve your fate plain and simple. Coke or Pepsi will never provide what you need since they simply cannot. At least Murder Inc. listed upfront the cost of there services than these dim wits we have today. They are simply a cult to convince you you need them for your own good. At least the local services are semi competent at least around here since a few got bounced for being found of non value added services and debt is wealth minded devotion slaves to defunct policy's since you cannot tax and grow with destitute people impoverished from defective ideologues.

[Higgenbotham]

There isn't much the banks can do to increase loan demand except to lower interest rates to rock bottom or decrease their standards. Here, I'm talking about private sector loan demand from individuals and businesses. The banks are somewhat constrained in doing that, and the Fed has done just about all they can to help.

If we were having this conversation in 1960 that would be a very astute and mostly accurate analysis of what the options, and limitations, of what a banker could do.

Banks are primarily in the business of making private sector loans and when loan demand falls, banks have historically gotten smaller or gone out of business. There have been occasional strong attempts to resist the natural forces of falling loan demand. The strongest attempt I know of was that leading to the collapse of the Peruzzi and the Bardi in 1346. At that time, the Florentine bankers consolidated banks, established derivatives based trading businesses, and bankrupted countries in order to try to stay afloat. But the bottom line still seems to be that once private sector loan demand falls after a bubble bursts, banks are going to get smaller in the end and the only question is what road will be taken, the easier road or the harder road. In this case, it appears the harder road has been chosen, similar to the road that led to the collapse of the Bardi.

[Higgenbotham]

It would seem logical that once the thresholds are crossed the US must cut the deficit enough (stop smoking) and get back under the thresholds.

Smoking may cause lung cancer. Cutting back, or even stopping smoking, may avoid aggravating some of the symptoms ( like coughing).

But, cutting back, or even stopping smoking does NOT cure cancer.

And, cutting back, or even stopping smoking does NOT shrink a lung cancer tumor.

It is an expletive deleted poor analogy.

Cutting the deficit may not stop hyperinflation either. And cutting the deficit may not shrink the debt. But it's the logical first step to take.

[Reality Check]

...

Banks are primarily in the business of making private sector loans.

No.

Banks are primarily in the business of making profits for the benefit of the people running them, and, except when the people running them are thieves, for the benefit of the shareholders. Just like any other private business.

In the 1960s the only way banks with Federal Insured Deposits were allowed to legally make substantial profits, was by making fractional reserve bank loans. Laws put in place during the Great Depression, after bank failures, and after the federally mandated bank holiday, made it illegal for banks to act as stock brokers or make speculative investments, or act as insurance companies, or do any transactions with related parties, or conduct banking operations across state lines, and doing almost any kind of business other than fractional reserve bank loans was prohibited by federal law to avoid the kind of conflicts of interests bankers had in the late 1920s and early 1930s.

It is interesting to note that business across state lines limitations were to prevent banks with federally insured deposits becoming "too big to fail" and also to allow state regulators to be able to insure financial entities within their borders were following the state's security brokerage and insurance brokerage laws, and brokers were not able to avoid state regulation by doing business with out of state banks.

That has changed. Most of the restrictive federal laws were systematically repealed in the 1980s, 1990s and 2000s.

Banks were even exempted from state regulation of their insurance activities by federal law.

Today's banks, especially the "too big to fail" bank holding companies, have federally insured deposits, and may legally conduct all kind's of different types of business with both related, and unrelated parties. These bank holding companies do indeed conduct a mix of many different types of business, even with related parties, in the manner the bank holding company views as most profitable for the bank holding company.


The point is this is not 1960. The banking laws have no resemblance at all to what they were in 1960 or 1970 or even 1980.

These are not your grandfather's Banks. These Banks are not run by your Grandfather's Banker.

[aedens]

https://bajan.wordpress.com/2011/10/21/ ... r-gadhafi/

Bankers love these guys.