Wealth-Ed.com – Dialogue on Global Markets, Investment Ideas and the Personal Financial World. Helpful Things to Bear in Mind
First in a Series of Debates on Money Supply, the Federal Reserve and our Economic Crisis
In this post, I debate with a blogger who is a self-proclaimed "Free Trader" / Libertarian. While I am all for market-based capitalism in our American economy, I believe that the innate greed that drives human economic behaviour must be managed to some degree. Regulations are important, especially in the area of money supply and banking. Money is the lifeblood of an economy and must be carefully protected by the national authorities to whom we entrust that responsibility. My opponent calls regulation "Central Planning", which is a big overstatement. I make the argument that our current economic crisis is due to a complete breakdown of that care which comes from prudent regulation. This is now what we need to repair. Please read on:
Free Trader (FT): “I’m not sure what you base your opinion on (regarding the inherent strength of the American economy), but from what I understand the fundamentals to be, they show that we’re in for some trouble. This is just the beginning; the crash has not yet happened. Think about the trade deficit, the national debt, the deficit spending…we’re poor, we just don’t know it yet. When done slowly the destruction isn’t as noticeable. But sometimes, as in the case of the housing boom, the Federal Reserve inflates (creates new money) at a tremendous rate. In that instance, there is lots more money chasing the same amount of goods (like houses).”
Regulated Capitalist (Me): That was what I thought, too, until about a year ago (early 2008), that it was the Fed that had expanded money supply driving down interest rates and making cheap loans easily available. Then I read one of the Paul McCulley's (PIMCO) columns that talked about the “shadow banking system”, an idea Mr. McCulley attributes to economist Hyman Minsky. What a revelation. Shadow banking in the past 10 years completely swamped the amount of money created by the Federal Reserve. The Fed even tried raising rates in the 2004-07 period to slow money supply growth, with no effect. It was not the Federal Reserve that caused the housing bubble (even Greenspan got caught by surprise on this one), it was the unregulated “Shadow Banking” system making cheap and plentiful money available to home buyers.
What is the Shadow Banking System? It is a Wild West “free market” banking system that came about because of an over-abundance of global savings. During the 1990s and early 2000s, the Western world, especially America, imported more and more goods from Asia. We know this because of the problems Asian imports caused with labor outsourcing and balance of trade. Labor unions and the political Left made it very clear that the transfer of wealth from America to Asia through free trade was unacceptable. But most people don’t understand the reciprocal problem this exchange created was greater than the loss of jobs.
The economies selling the West their goods (manufactured goods in Asia and increasingly petroleum products from the Middle East) could not hold the dollars they received without experiencing an appreciating currency that would make that currency less competitive globally and also might precipitate deflation in their home market (as savings exceeded consumption making the currency more and more valuable). So, what did they do, they sent their US dollars back to America by buying securities denominated in dollars. At first, they just bought U.S. Treasuries, but soon that was not enough to clear the accumulating dollars and they needed more places to send them. So, they started purchasing securitized packages of mortgages and other American credits (broadly known as “derivatives” today). Wall Street was happy to create and sell those securities and become wealthy on the margins. The buyers were reassured by the triple AAA ratings given those derivatives by American rating agencies (that the buyers may have misunderstood to be government-sponsored entities), as well as by the historical dynamism and relative safety of the American economy.
However, and this is the most important point to understand, this money flowing back into America from other countries was completely unregulated (free market banking), and it was plentiful measuring into the trillions. It was so plentiful that soon credit standards started to drop to clear all of the available funds and anyone who could “fog a mirror” as the real estate profession likes to say, could get a loan.
Beyond credit derivatives, another source for “shadow banking” money flows were private banks and hedge funds playing the so-called “carry trade”. The economies that had strong economic exports in the same period, but with low interest rates (Japan, New Zealand, Australia, even Iceland) became hotspots for borrowing by these private, unregulated, non-bank “free market” entities. With Glass-Steagall banking regulation a thing of history, hedge funds and other private investors could make themselves into, effectively, a bank. These private “banks” became so by borrowing cheap foreign currency, and then lending (or buying commodities, businesses, real estate) at a higher rate / price. This was all well and good for a while, but the incredible amount of money created, multiples of the American M2 or M3 money supply, swamped markets and caused the pricing bubbles in all asset classes as we observed from 2004 to 2007. It is this “carry trade” unwind in 2008, into early 2009, that has crushed the commodities and energy market the past year and it is the “derivatives” unwind that is crushing the financial, housing and commercial (busines loan) markets.
So, don’t put this economic disaster at the feet of the Fed and Treasury, though characters like Hank Paulson, Ben Bernanke and Tim Geithner are easy and appealing targets. Upon analysis, they were helpless to stop the bubbles and then the crash with current laws and regulations (though Greenspan’s cheerleading in 2004 did not help because it emboldened borrowers). Rather, it was the unregulated Shadow Banking System, administered by the investment banking industry, and run through mortgage brokers with Fannie and Freddie approval, that caused the disaster.
As for Freddie / Fannie complicity in this deal, that was enabled by some in Congress (led by Dems Frank and Dodd) who wanted to make home ownership a national right rather than a privilege. And it was also given an assist by the Repubs who wanted to extend free markets to the banking system by deregulating them through the abolition of Glass-Steagall and the declawing of the SEC.
The bottom line: we had no national banking problems until free markets got involved. Banking is one industry that cannot be Free. Other crises in banking happened because of insufficient regulation and oversight (including the S&L crisis due to a lack of Federal regulation during the 1980s). Sorry, if I have to make a choice between free markets and central planning where banking is concerned, "Central Planning" wins.
NEXT in the Series: Debating the proper course to deal with money supply contraction / deflation: "a balanced budget, higher taxes and induced consumer saving", or "more of the dog that bit you: money expansion, looser credit, encourage consumer spending"
Learn how to earn and how to save paper money from inflation with Canadian silver maple leafs!
Tags: shadow banking, United States, U.S. Securities and Exchange Commission, paper money, carry trade, national banking problems, Dems FrankFiled under 28 by 
Comments on Wealth-Ed.com – Dialogue on Global Markets, Investment Ideas and the Personal Financial World. Helpful Things to Bear in Mind
Open Your Eyes News » US Money Supply – Adjusted Monetary Base … –
Tim Geithner was busted for not paying his income taxes but this didn't cause President Obama to even briefly reconsider nominating him to head up the Fed.
In fact, this stunning disclosure didn't cause the Congress to think twice about confirming him.
I was concerned about Geithner then and I remain uncomfortable with him in such a powerful position.
5 2011 1 OUNCE CANADIAN SILVER MAPLE LEAF COIN GEM BU
The 'Scenic Route' — Tutukaka, New Zealand –
I think that EX-MEMBER speaks for many quiet voices and does so incredibly eloquently.
::I was there when the guy Ramson Mumba was announcing his US gig and that he loved us all and we are all going places as a church because he's moving his family to Texas and taking us with him in his heart. However the death-nail for me was when he said he needed £300,000 or half a Mil US Dollars to launch the campaign on TV and the lawyers and the moving costs. The man then ordered his spivs to lock the doors and said no one was leaving unless they pledged something and he began to justify why by saying thats how they donated the lambs and goats in the Old Testament.
This left such a bad taste in my mouth I just saw the man for who he trully is. He noticed that some pple looked uncomfortable and then said if we wanted to know how good the Lord is we should donate the last bits of cash to him and "although he was not advocating debt"-if anybody had funds on Credit cards he'd be happy to that as well.
Needless to say NOT all pple question this sort of blatant extortion and because of our innate greed, some put in the money like a Ponzi scheme but hoping for a Heavenly return. REALLY??? Why doesnt't he pray and get the money by other means-why limit God by taking a short-cut of making the congregation pay. Is it just me or is the logic of it all a bit skewed?!!!
"This Case Is the Last Resort if the Federal Government Fails"
…You do realize (no… you probably don't) that today's American conservative movement is the equivalent of the Pharisees of two millenia back. There are many parallels today that remind us of the days the three great desert religions were forming the basis of the world's current religious dichotomy. Christianity arose in the aftermath of the crucifiction; the existing religion of Judaism was in full swing; the advent of Islam a few centuries later completed what would be the basis of today's social and economic strife.
The conservative movement today, which has been hijacked by a coalition of Neocons, religious nutters, and Tea Party fanatics, is a mirror image of the Pharisees. Back then, and today, the baser elements of human nature are in play. Intolerance, class warfare, and the ready development of specious arguments to bolster agendas that are light on content with a tenuous grip on reality existed in ancient times, and the same things exist today.
Taxation? Way too high for both the rich and the poor. The rich? Some of them have gone belly up because of bad policies and their own innate greed. The poor? Try to exist, as a low income American, on only 7 1/2 months of income left after taxes.
Here is the difference between you and I, Tony… You say your heart bleeds for neither me nor my late mother… Well, my heart bleeds for you… Without knowing the specifics (and I do not want to), you have been greatly impacted by our nation's economic meltdown. That is not good for our republic–let alone the global economy. To not be caring about the state of economic health for all economic classes indicates a hard hearted arrogance. Go ahead, call me the perfect liberal… Bleeding heart, even. I would much rather run my life on principles stated by greats like John Donne (no man is an island), than on principles stated by people who would vilify those who are less fortunate than many others. You should call into question most everything that you stand for…
Oh, by the way… I'm not whining. My mother lived a good and happy life, and I am quite successful in what I do. So I look around, and try to make a difference–one life at a time. Do you? Or do you just…well… Whine? The whine of the better off, but higly disgruntled blame shifter? Those who would vilify others not in their life bracket? I don't know… Because I do not know you. It does seem likely on the surface that you will never understand what great masses of people have had to go through. Self absorption does that to people.
Think about it. See if you can become part of the solution, and not part of the problem.
Who wants to buy or sell real estate in the austin TX area ? Call me at
512-650-5979.
WASHINGTON (AP) — Federal Reserve Chairman Ben Bernanke and other regulators are updating Congress about their efforts to carry out the biggest overhaul of the nation's financial rules since the Great Depression….
Diane:
What happened here in this article is really discouraging. More than that, multiple ethical violations occurred and should be addressed. I wonder if the original listing agent is a member of the National Association of Realtors. If so, perhaps you should consider making a complaint as a member. Who better to police the profession, than those who abide by the correct, intelligent and professional code of conduct.
As well demonstrated by the following language in the NAR code of Ethics:
"In recognition and appreciation of their obligations to clients, customers, the public, and each other, REALTORS® continuously strive to become and remain informed on issues affecting real estate and, as knowledgeable professionals, they willingly share the fruit of their experience and study with others. They identify and take steps, through enforcement of this Code of Ethics and by assisting appropriate regulatory bodies, to eliminate practices which may damage the public or which might discredit or bring dishonor to the real estate profession. REALTORS® having direct personal knowledge of conduct that may violate the Code of Ethics involving misappropriation of client or customer funds or property, willful discrimination, or fraud resulting in substantial economic harm, bring such matters to the attention of the appropriate Board or Association of REALTORS®. "
Not only was the listing agent's "client" misrepresented by their listing agent, but the "customer" was not represented as well by an improper explanation of the representation disclosure, (the I don't work for fee, sign this or else ultimatum). It would be interesting to know if the "brother" was an agent.. or assistant, or neither and whether the seller had given permission for this "brother" to show his home in lieu of his agent – another possible violation.
So many things to think about,.. but ultimately, this agent and her brother are what give the true professionals a bad reputation. I urge you to consider making a complaint, as time consuming as it may be.
Specifically how To Split Test Sites | Hank Paulson 666: This will ass…
RT Orange preps NFC expansion: LIVE FROM THE GSMA MOBILE MONEY SUMMIT 2011: Orange plans to take its French NFC 'Ci…
Quants: The Alchemists of Wall Street (Marije Meerman, VPRO Backlight 2010) | LaNClip –
RT rel="nofollow" ???? ? ???????????? ??? ???????? ?? ?????? (???????????) | ??? ???
Shared the page "Will China Break? – NYTimes.com"
There’s a new danger spot in a world economy that really, really doesn’t need another one right now. – http://www.nytimes.com/2011…
You are in position to damage the US Federal Reserve System & the US dollar! The EU will see the dollar failing from debt!
US Federal Reserve Beige Book: Dallas District (Text): Apartment construction continues to increase,… #realestate
HANG EM HIGH !!Hank PaulsonBen BernakeAlan GreenspanChris CoxBarney FrankChris DoddNancy Pelosi]]>
I wanted to go into the real estate profession , bt ……….
Do you agree with the theory that George W. Bush is responsible for the current economic crisis?
Curious about your evidence that Dukakis played that card? He got booted around by Gephardt because he was a free trader and trade was barely a blip in the general. Not fair to lump all the Dems in one category because it suits your needs.]]>
Africa sees mobile money expansion