Fed Creates $1 Trillion 'Out of Thin Air"

[mhaze]

While I don't claim much expertise in this area yet, I've been doing some reading and trying to get a broader view of the issues here. In doing so, I've come across Stephen Zarlenga's ideas on monetary reform. They are worth looking at. That doesn't mean I am or am not advocating his ideas. But they are credible. He hasn't been completely dismissed as too fringe or anything. I don't think we can or should go back to the gold standard. But I do think the control of money creation should be in the public and not private hands. .....

Yep, we could run the world on Paypal, backed by a value-indexed average of Ebay goods sales, currency independant, and tell the Wall Street Banksters where to go.

Just one example, of course there are many others.

 

[lomiller]

As you just wrote, the government as we have claimed, can and does create money. It has just created one trillion new dollars this way in order to stem the economic slide. It had no choice because the Neo Conservative Republicans have been so critical of Obama's stimulus package when two the Bursh Administration passed and failed that there was no other choice. As you indicate, it is done only in an emergency.

Again, the Fed creates money. The Fed is an arms length quasi-government agency specifically because that removes it’s day to day operations from direct government control while maintaining a reporting relationship. IOW while the Fed chairman is a government appointee, short of new legislation no government body can dictate his actions.

This freedom is given to him specifically because it removes government meddling in day to day money supply and because it removes the ability for government to pay it’ bills by printing money. When money is “printed” it cannot be used to pay bills and appears on the government balance sheet as a liability. This is essential for accountability, on the government side, while the ability of government to appoint the fed chairman and it need be replace him ensures accountability on the fed side. It’s a good system, the best ever devised for managing a money supply and economy.

The semantics of whether the Fed is “government” aside, what isn’t semantics is that the department of the Treasury cannot expand the money supply. Even with paper currency, which must be physically printed by the treasury they cannot put that money into circulation on their own or dictate to the Fed just how much they will purchase.

With the fact it’s the fed that expands the money established let’s move on to why. The Feds primary job is to insure there is sufficient money in the system to keep it healthy. Since population and economic activity are expected to grow constantly so must the money supply. If the Fed doesn’t “print money” on a regular basis the consequences for the US economy are dire because it would trigger deflation and a long term economic decline. To provide a buffer against the danger of deflation the fed aims for a small but steady amount of inflation. As long as inflation remains near this target they will inject as much money as possible in order to allow economic growth.

The Fed is “printing money” now because the US economy is in danger of slipping into *deflation*. Inflation may or may not be a future risk but deflation is a risk right now, and that risk needs to be dealt with.

 

[mhaze]

Bull****.

 

[TraneWreck]

Completely false. AIG has many business units. The one that did credit derivatives is not the one that insures your house or your local metro subway. Bankrupcy allows splitting out the business units, selling some which are profitable, and dissolving the others.

Which brings up the possibility of bailing them out in a more intellegent fashion than just dumping money blindly into the company.

The notion that they're too large to fail is necessarily built on the fact that they insure so much of the US economy. If you dissolve the company and split their functions, they will no longer have the necessary size to insure huge transactions. THat's why it's relevant to keep it together, according to Summer, Geitner, and the rest of that crew.

I would support a bankrupcy that split the business, allowing the sections that weren't engaging in such questionable behavior to survive, but then you have to somehow enable other comapanies to take over those massive insurance situations. I would support offering the money aimed at AIG to banks and insurers who behaved correctly. Multiple small institutions could cooperatively insure those massive transactions, but that's not how it's done now.

 

[lomiller]

But I do think the control of money creation should be in the public and not private hands.

There are distinct downsides to both. The problem with direct public control over the money supply is that it’s very easy to play politics with. Practical experience shows that this will almost always happen eventually. Full private control allows private institutions to manipulate or decimate the entire economy to their benefit.

A quasi-public body like the Fed, however, can avid both risks and has been extraordinarily successful. Indeed history has made it amply clear that neither extreme of public vs private works very well, and that’s not just in relation to the Fed it’s for economies in general. Each has it’s strengths and the best success will always mean choosing the best tool for the job.

 

[mhaze]

Which brings up the possibility of bailing them out in a more intellegent fashion than just dumping money blindly into the company.

The notion that they're too large to fail is necessarily built on the fact that they insure so much of the US economy. If you dissolve the company and split their functions, they will no longer have the necessary size to insure huge transactions. THat's why it's relevant to keep it together, according to Summer, Geitner, and the rest of that crew.

I would support a bankrupcy that split the business, allowing the sections that weren't engaging in such questionable behavior to survive, but then you have to somehow enable other comapanies to take over those massive insurance situations. I would support offering the money aimed at AIG to banks and insurers who behaved correctly. Multiple small institutions could cooperatively insure those massive transactions, but that's not how it's done now.

I have a suspicion that the "If you dissolve the company and split their functions, they will no longer have the necessary size to insure huge transactions. THat's why it's relevant to keep it together, according to Summer, Geitner, and the rest of that crew."...

is completely false and a certainty that this is counterproductive to the interests of the people of the world. First, if AIG was split up the parts are not small, but HUGE. What "keeping it together" means is propping up the CD swapsters at the expense of the other - PROFITABLE - divisions.

What keeping AIG out of the bankrupcy courts means is keeping the whole matter private or "secret", instead of exposing all of it to the light of day.
To some extent, proceedings in bankrupcy might be set to not be publicly disclosed but that'd be at the disgression of the court.

Does "Too big to fail" just mean "We can't have all this come out in the open?"

 

[TraneWreck]

I have a suspicion that the "If you dissolve the company and split their functions, they will no longer have the necessary size to insure huge transactions. THat's why it's relevant to keep it together, according to Summer, Geitner, and the rest of that crew." is completely false and a certainty that this is counterproductive to the interests of the people of the world.

First, if AIG was split up the parts are not small, but HUGE. What "keeping it together" means is propping up the CD swappsters at the expense of the other - PROFITABLE - divisions.

What keeping AIG out of the bankrupcy courts means is keeping the whole matter private or "secret", instead of exposing all of it to the light of day.
To some extent, proceedings in bankrupcy might be set to not be publicly disclosed but that'd be at the disgression of the court.

Does "Too big to fail" just mean "We can't have all this come out in the open?"

I completely agree that the "too big to fail" is a silly justification for dumping money into your buddies' pockets. I'm just repeating the argument that they give.

I will say, however, that a great deal of business will be stunted if we don't figure out another way to insure massive transactions. I can say with great certainty that the absolute worst way to get this done is by giving the corrupt fools that caused this mess more chips to gamble with.

 

[lomiller]

The notion that they're too large to fail is necessarily built on the fact that they insure so much of the US economy.

Their financial services unit by itself is “to large to fail” because of the chaos it would create in the financial sector. Splitting up the company would simply strip out the valuable assets that could have been used to recoup taxpayer money needed to keep the financial services unit from collapsing.

 

[mhaze]

I completely agree that the "too big to fail" is a silly justification for dumping money into your buddies' pockets. I'm just repeating the argument that they give.

I will say, however, that a great deal of business will be stunted if we don't figure out another way to insure massive transactions. I can say with great certainty that the absolute worst way to get this done is by giving the corrupt fools that caused this mess more chips to gamble with.

I think I indicated there wasn't a problem but let's take an illustration. Split up AIG in and as part of a Chapter 11 bankrupcy filing. Now where does the Metro or the Airline get insurance? From that business unit of AIG, of course. Chapter 11 is not a dissolution of the company, it continues operating. There is a great deal of flexibility in the hands of the bankrupcy judge and of course he desires asset preservation.

Yet currently the CD division of AIG is operating, and vast sums are pouring through it - that's our money. This doesn't benefit us and should be stopped.

Meanwhile there isn't any higher risk of airlines crashing or the subway system being sued than last year.

It's just my opinion, but I think that it is wrong to place as equal, the right of the insured playing financial games in a credit derivative swap and the right of an insured party with an airline or public transportation fleet. I think most judges would see this point of view. These should not be equal rights creditors.

Their financial services unit by itself is “to large to fail” because of the chaos it would create in the financial sector. Splitting up the company would simply strip out the valuable assets that could have been used to recoup taxpayer money needed to keep the financial services unit from collapsing.

See above. Actually the chaos can be stripped out but hasn't been, it's been paid off. But that seems to have just made it hungrier since it's grown bigger, sings "FEED ME".

 

[Piggy]

Bull****.

Where exactly do you see the error, mhaze?

 

[TraneWreck]

I think I indicated there wasn't a problem but let's take an illustration. Split up AIG in and as part of a Chapter 11 bankrupcy filing. Now where does the Metro or the Airline get insurance? From that business unit of AIG, of course. Chapter 11 is not a dissolution of the company, it continues operating. There is a great deal of flexibility in the hands of the bankrupcy judge and of course he desires asset preservation.

Yet currently the CD division of AIG is operating, and vast sums are pouring through it - that's our money. This doesn't benefit us and should be stopped.

Meanwhile there isn't any higher risk of airlines crashing or the subway system being sued than last year.

It's just my opinion, but I think that it is wrong to place as equal, the right of the insured playing financial games in a credit derivative swap and the right of an insured party with an airline or public transportation fleet. I think most judges would see this point of view. These should not be equal rights creditors.

That's not really the example that's causing the worry. Let's say company A is acquiring company B in a $20 billion deal. Only a company the size of AIG will have the ability to insure that transaction because all of the premiums they're recieving from banks, airlines, companies, individuals, etc.

A great many deals cannot go through without some kind of insurance, and there are only a handful of companies on the planet with the worth to serve that purpose.

If you divide up AIG, they won't have the size and wealth to serve that function, and no one else really can. Thus, they're "too big to fail." Like you, I find that argument silly, but something has to exist to insure those deals, if we want large transactions to continue to take place. I'd be happy with the government doing it straight up, or with them temporarily providing funds for smaller groups to take over that function.

Now one of the huge problems in this current situation is that AIG offered credit default swaps in vast excess to their ability to pay out, should there be a default. So say you take out a mortgage from bank A. Bank a creates a credit default swap (CDS) using AIG to insure that loan. If you default, AIG pays bank A, so that bank essentially eludes risk. Usually an insurer must show they have the ability to pay off that obligation should you fail to keep up with your mortgage payments.

Through various lobbying procedures, banks and insurers convinced the fed to do away with the requirement that insurers show they could cover the (CDS). That allowed AIG and others to essentially give out CDS to banks that didn't hold mortgages. So your mortgage to bank A is insured by AIG, but AIG also has liability to banks B->Z, meaning that if you default on your loan, AIG has to pay the value of that morgage to 26 banks, 25 of which have nothing to do with the loan, save that they gambled on it.

Thus the entire institution of AIG owes billions of dollars they cannot pay. So now they don't have the ability to further insure deals. THe current plan is to just pay off those retarded CDSes.

That's a bad idea, but something has to be done to allow loans to be given and deals made.

 

[TraneWreck]

Their financial services unit by itself is “to large to fail” because of the chaos it would create in the financial sector. Splitting up the company would simply strip out the valuable assets that could have been used to recoup taxpayer money needed to keep the financial services unit from collapsing.

This has to be the plan, nothing else makes sense. It's strange to me that the guys Obama put in charge are acting like idiots. They pretend like there's no possible way to distinguish the transactions with real value and those that were essentially blind gambles.

Step one has to be letting the bad deals go bad. Step two has to be using government funds to take over the essential functions that AIGs division would leave unfilled.

But the Obama crew seems to be of the opinion that this was just a rough patch, not that this entire system is broken and perverse. That opinion scares me.

 

[gdnp]

That's not really the example that's causing the worry. Let's say company A is acquiring company B in a $20 billion deal. Only a company the size of AIG will have the ability to insure that transaction because all of the premiums they're recieving from banks, airlines, companies, individuals, etc.

A great many deals cannot go through without some kind of insurance, and there are only a handful of companies on the planet with the worth to serve that purpose.

Why is this a bad thing? How does it hurt me, the consumer, if Company A does not buy Company B? It simply leads to less competition and the creation of another conglomerate that will some day be deemed "too big to fail".

 

[TraneWreck]

Why is this a bad thing? How does it hurt me, the consumer, if Company A does not buy Company B? It simply leads to less competition and the creation of another conglomerate that will some day be deemed "too big to fail".

I have a certain amount of sympathy for that view, and I am absolutely with you on stopping companies in the future from achieveing the "too big to fail status."

The problem is that we've allowed our economy to grow like a festering tumor and restricting such large transactions will likely lead to the failures of companies and then, in turn, the loss of jobs.

It's a lot like the question surrounding GM. They made crappy, fuel inefficient cars and are now suffering the consequences. I have no sympathy for their business plan, but allowing them to fail will cost the United States something like 2.4 million jobs.

Likewise, if you restrict the ability of one comapany to purchase a failing company, for example, that company just disapears and everyone loses their job.

This crisis has to be approached both from a short and long term perspective. In the long term, I'm right with you. We need to reinvigorate the laws and oversight agencies to keep this nonsense from every happening again. But to bridge to that point, we need to keep the economy, twisted as it is, going.

Things are rough now, but imagine where we'd be with 3x the job loss.

So to answer your question, you as a consumer will be hurt to the extent that the general economy struggles. Perhaps you are in a safe employment situation, but a huge percentage of the country isn't, at this moment.

 

[mhaze]

That's not really the example that's causing the worry. Let's say company A is acquiring company B in a $20 billion deal. Only a company the size of AIG will have the ability to insure that transaction because all of the premiums they're recieving from banks, airlines, companies, individuals, etc.

A great many deals cannot go through without some kind of insurance, and there are only a handful of companies on the planet with the worth to serve that purpose.

If you divide up AIG, they won't have the size and wealth to serve that function, and no one else really can. ....

Actually, that's the very point where I disagreed. A pretty good example of this is insurance on satellite launches, by the way.

The very idea that insurance is required as part of a transaction to insure a positive outcome is false.

And a fairly recent concept, historically.

 

[TraneWreck]

Actually, that's the very point where I disagreed. A pretty good example of this is insurance on satellite launches, by the way.

The very idea that insurance is required as part of a transaction to insure a positive outcome is false.

And a fairly recent concept, historically.

There are two separate questions here: 1) Can large transactions go through without insurance, and 2) Will businesses engage in large transactions without insurance.

I won't argue that the answer to one isn't "yes." But #2 is what's at issue for Geitner and the bailout situation.

I haven't really considered the possibility of sitting these companies down and saying, "hey, tough ****, we can't insure your big transactions anymore. Either go through without an underwritter or don't do it at all." I don't know enough to understand what the ramifications would be for the economy, but for the short term it would seem prudent to reduce risk, rather than increase it by removing insurance.

Again, in the long term I'm not sure we have much disagreement. The sort of excuses used to justify the continued existences of AIG and its bretheren are pathetic. But I agree with the economists who recommend dealing with the immediate crisis before going through with drastic systematic change. In fact, even with the crisis I lean heavily towards avoiding handing money to the charlatans that messed everything up.

I don't know, if you can give me something to read about the possibility of going ahead without groups like AIG I'd be curious to hear another opinion.

 

[mhaze]

There are two separate questions here: 1) Can large transactions go through without insurance, and 2) Will businesses engage in large transactions without insurance.

I won't argue that the answer to one isn't "yes." But #2 is what's at issue for Geitner and the bailout situation.

I haven't really considered the possibility of sitting these companies down and saying, "hey, tough ****, we can't insure your big transactions anymore. Either go through without an underwritter or don't do it at all." I don't know enough to understand what the ramifications would be for the economy, but for the short term it would seem prudent to reduce risk, rather than increase it by removing insurance.

Again, in the long term I'm not sure we have much disagreement. The sort of excuses used to justify the continued existences of AIG and its bretheren are pathetic. But I agree with the economists who recommend dealing with the immediate crisis before going through with drastic systematic change. In fact, even with the crisis I lean heavily towards avoiding handing money to the charlatans that messed everything up.

I don't know, if you can give me something to read about the possibility of going ahead without groups like AIG I'd be curious to hear another opinion.

Risk is NOT reduced by removing insurance, rather it is monetized and a premium (profit) added. Now you somehow must weight the asserted social good of "keeping insuring business as usual" againt the cost of wiping out a large percentage of the acquired savings and retirement funds of hundreds of millions of people?

1...2...3 microseconds- I've done my weighing of alternatives.

 

[TraneWreck]

Risk is NOT reduced by removing insurance, rather it is monetized and a premium (profit) added. Now you somehow must weight the asserted social good of "keeping insuring business as usual" againt the cost of wiping out a large percentage of the acquired savings and retirement funds of hundreds of millions of people?

1...2...3 microseconds- I've done my weighing of alternatives.

Yes, risk is increased by the removal of insurance. Transaction A: I ship you 3000 widgets by boat, uninsured. Tansaction B: I ship you 3000 widgets by boat, insured for their full value. Let's assume you purchased the insurance. Let's say a hurricane begins to brew in the shipping lanes. Which transaction is riskier for you?

So the question is how we continue to provide insurance if we just allow AIG and like institutions to fail and don't create another process.

And that second part is a false choice. Bailing out the companies and making sure that banks can continue to give out loans is not necessarily done at the expense of people's retirement funds. That's such a massive leap of logic I don't even know what you think is going on.

 

[gdnp]

Actually risk is lowered by the removal of insurance. What insurance does is disseminate the risk, not reduce it. People will undertake risky projects if they can be insured because the risk of failure to them is lessened.

Thus the problem with mortgage backed securities and credit default swaps. People kept doing risky things because (1) they were highly profitable and (2) they could transfer much of the risk to other people and still make a nice profit.

Mortgage originators would not have made loans to people with no money down and no income check if they were depending on those people to pay them back. But they knew they could sell the mortgage as soon as it closed and collect their origination fee. Now it's someone else's problem. The person who bought the mortgage to securitize wouldn't have done so if they couldn't sell the security. And the hedge funds and banks that bought the security wouldn't have done so if the security didn't have a AAA rating. And the security wouldn't have had a AAA rating if they hadn't been insured by the world's largest insurance company, AIG. Thus the whole risky chain would have not been possible without AIG's insurance: essentially, mortgage lenders would have been forced to lend money only to people who they thought would be able to pay them back.

So once again, insurance causes an overall increase in risk-taking: it allows people to engage in risky behavior that they would avoid if they had no insurance. Which is not usually a bad thing. Risk leads to innovation and advancement.

 

[applecorped]

Damn money changers.