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    Default Major US banks worse than Japan's zombies?

    Major US banks worse than Japan's zombies?

    Why aren't massive expansions of banking reserves by the Fed working this time?

    Back in September 2008 we posted this chart that shows the Fed vastly expanding reserves for member banks. We show the expansion as a percentage rather than an absolute change because the numbers are so large as to be meaningless. The real story is the proportion relative to past crises -- real, as in the case of 9/11, or imagined, as in the case of Y2K:
    ...the Fed expanded its total asset holdings by $600 billion over the last 30 days, with less than a third of this going directly into reserve balances. The graph below puts the latter magnitude in perspective. When the World Trade Center towers burned down on September 11, 2001 many of the financial institutions that played a key role in trades of government securities and interbank loans were wiped out or incapacitated, posing potentially huge liquidity problems. Reserves ballooned to $67 billion, as excess reserves simply piled up in some banks while others remained in need. Last week's spike of $171 billion was 2-1/2 times as big-- the breakdown of interbank lending last week proved more profound than that caused by the physical disruptions in New York in 2001.

    Anyone who suggests that last week's ballooning reserve deposits represent inflationary pressure or the Fed monetizing the deficit simply doesn't know what they're talking about. Banks are sitting on the reserves, not withdrawing them as cash. When markets settle down, the Fed can and will absorb those reserves back in with sterilizing sales of Treasury securities, just as it did in 2001 or after the more modest spike in August 2007. Providing new reserves aggressively is absolutely and unquestionably the way the Fed needs to respond to this kind of development. - Econbrowser.com, Oct. 2008
    This explanation seemed reasonable back in October 2008 when the expansion of reserve deposits were up 150% year over year, only two and a half times larger than ever occurred before during a financial crisis, but now that the expansion has continued to 625% year over year, more than eleven times larger than during the 9/11 emergency, new questions arise.


    Pre-crisis reserve level in blue post crisis in red


    Pre-crisis reserve level in blue post crisis in red


    Pre-crisis reserve level in blue post crisis in red


    We went for a second opinion to a banking expert we know who prefers to remain anonymous of this particular opinion. For the purposes of this interview we’ll call him Dr. Banker.

    iTulip: What do you make of the extraordinary levels of bank reserves that the Federal Reserve is pumping into the Federal Reserve System, now at more than 600% higher than November 2007 levels?

    Dr. B: Think of the commercial banks that take loans from the Federal Reserve banking system as a person and the money that flows through them as the blood in a person's body. Now think of that person as injured. When he suffers a severe injury and loses blood, the Fed gives him an emergency money transfusion. You can see in your chart below the money transfusions in late 1999 just before the end of the year, due to the Y2K scare -- false, as it turns out -- and in 2001 after 9/11. Some believe that the withdrawal of reserves in mid 2000 caused the market decline that led to the recession of 2001.



    Dr. B: After the injury is operated on and healed and the patient is producing his own money again, the money that was added earlier by the Fed's transfusion is drained back out. As you can see from your chart above, the transfusions usually take two to six months and typically six months or so after the crisis is over are gradually withdrawn over a period of several months to return total money in the system to pre-crisis levels.”

    iTulip: That makes sense. But why has the Fed this time had to continue to transfuse money? Why are the transfusions so huge and why do the transfusions seem to not be working? Is he still bleeding and the money is pouring through the system? If you try to compare previous expansions with this one on the same chart on the same scale, the differences are quite stark.



    Dr. B: My theory is, and I admit not everyone will agree with it, is this: the patient is dead.

    iTulip: Interesting. That does not bode well for the efficacy of future transfusions.

    Dr. B: No it does not. They can keep the intravenous tube hooked up to a pint bottle or a 100 gallon drum of blood but it doesn’t matter if the blood is not circulating through the patient so he can take it in.

    iTulip: Controversial. I see why you are giving this to us on the sly. What evidence do you have to support this theory?

    Dr. B: Note that many smaller banks that do not operate as part of the Fed system are working just fine.

    iTulip: Go on.

    Dr. B: The reason: Credit Default Swaps. It is now well understood that CDS are at the root of today’s financial crisis. Your readers have known that risk since 1999 when you first posted Someone Please Turn on the Lights. Some have suggested the simple expedient of canceling them all, declaring all of the CDS contracts null and void.

    iTulip: That will bring the dead patient back to life, assuming as you assert that he is dead?

    Dr. B: CDS certainly killed him but removing them is no cure.

    iTulip: Why not?

    Dr. B: Federal Reserve Bank of New York Staff Report no. 276 "Credit Derivatives and Bank Credit Supply" by Beverly Hirtle, February 2007 concluded that all of the nation’s largest banks used credit default swaps not to protect existing assets but to expand their balance sheets between 1997 and 2006.
    Summary and Conclusions

    This goal of this paper is to examine the relationship between banks’ use of credit derivatives and the supply of bank credit. Credit derivatives represent an important credit market innovation that, in theory, allows banks to originate and fund loans without holding the associated credit risk. More broadly, credit derivatives are the latest in a series of innovations that have facilitated credit risk management and made it easier for banks to diversify their credit risk exposures.

    The key question is whether banks have used these instruments primarily to diversify and thus reduce their risk exposures, or whether banks have undone the diversification by expanding their lending. Research on earlier credit market innovations has found that activities such as loans sales and securitizations have not resulted in overall reductions in bank risk, but rather an expansion of lending (Cebenoyan and Strahan 2004 and Franke and Krahnen 2005). Such an increase is credit supply would be an important consequence of the recent rapid growth of the market for credit derivatives.


    Source: Federal Reserve


    Dr. B: That was in 2006. As we all know, CDS have doubled again since then.

    iTulip: So all of the largest banks relied on CDS to make new loans since 1997.

    Dr. B: Correct, and that means that central banks cannot wave a magic wand and declare all CDS contracts null and void because if they do loans that were made in the US by the largest banks only because they were insured by CDS will have to be declared null and void, too. No one knows exactly the total loan value is of these CDS-dependent loans but it must be high enough to call their solvency into question because these banks refuse to lend to each other no matter how much the Fed increases reserves.

    iTulip: Have you tried to estimate total CDS dependent loan value?

    Dr. B: I have. Back in 2006 when the Fed did the research there were eight banks with assets over $100 billion. As of May 2008 there are 20, as you can see in the chart below.

    Bank Assets in $1,000s


    Source: Federal Reserve


    Dr. B: How much of the combined $10 trillion in assets of these banks was taken on since 1997 and what portion of that expansion was enabled solely by use of credit derivatives? Conservatively, let us estimate the total is 20% of loans. That represents $2 trillion in loans that have to be cancelled in order for the CDS to be cancelled. That is why canceling them is a non-starter.

    iTulip: But why does the total value need to be that high to make the decision to cancel all CDS a non-starter for central banks? Doesn’t the act of canceling the CDS mean that these loans are technically ‘bad" loans? No bank can survive a write-down of 10% of assets never mind 20%. Doesn’t this mean these largest banks are technically insolvent?

    Dr. B: Now you understand the problem! You nailed it. That is why I say they are dead and all the cash infusions in the world from the Fed won’t bring them back to life. They are dead with the CDS and dead without them. The Fed may as well stop the intra-venous injections of reserves.

    iTulip: That implies a loss of, if not all of the banks' assets, a portion of the aggregate value at distressed sale prices. Best case, what, 50% or $10 trillion?

    Dr. B: For a $10 trillion loss.

    iTulip: Thank you for the opinion. I'm sure it will generate a lively response.

    Dr. B: You are very welcome.

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    Last edited by FRED; 12-02-08 at 12:02 AM.
    Ed.

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by FRED View Post

    Dr. B: My theory is, and I admit not everyone will agree with it, is this: the patient is dead.
    Excellent insight. Bottom line, the patient is dead and CDS killed him is consistent with what Sinclair has been saying for a long time.

    Although others here disagree, I cannot see how gold [& commodities] will not rise significantly over the next few years, as the governments of the world attempt to reflate.

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    Default Re: Major US banks worse than Japan's zombies?

    enlightening facts!

    I too was reminded of J.Sinclair.

    Regarding CDS:
    If there is no cure for the patient - turn of that machine and let them die !

    The rest of the economy can't wait for the banks to be saved, because there is no cure.

    This also implies the big banks will never lend out to main street again.
    A sudden stop of lending to main-street has already occurred. And not only consumer credit. Anybody tried to get an Letter of credit (L/C) these days - The Dry-Ship says no?

    So let them fail and start programs to direct lend to sound main-street projects & companies. Maybe via remaining sound banks or via a public bank. (like in Germany with the KfW Bank after WWII). (Sound projects exclude the carmakers )

    Hole of the discussion about the crisis in the mainstream media and all of the rescue programs seem to be dominated by the big banks.
    But they can not be part of the solution. They are already dead. All that money is wasted.
    The same goes for Europe.

    The world needs credit - but the world does not need these zombie banks.

    However the current spin seems to be: the world needs credit - so you need us (wall-street) - save us!!
    Last edited by makkie; 12-01-08 at 08:37 PM.

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    Default Re: Major US banks worse than Japan's zombies?

    I'm glad CDS was brought up because it is does seem to be the one piece that few analyze in terms of what will happen and it is downright scary that Sinclair seems to understand it - having been in the clearinghouse / derivatives business.

    What's interesting is where iTuilip and Sinclair converge and diverge. Both see gold rising above $1500 and a reconstitution of gold into the monetary system - perhaps halting the devaluation of the dollar. However, Sinclair seems more and more certain of hyperinflation - and it is precisely these OTC derivatives that he blames as the eventual culprit.

    I had a conversation with him the other day if you can call it that via email and he remains steadfast that hyperinflation is a real possibility based on this derivative problem despite the debt being denominated in USD.

    What I have not been able to understand is:

    1) By what mechanism does banking circulation become unclogged?

    2) What level of investment margin is in the system and has yet to be deleveraged? Everyone throws in the towel on this, yet there must be some way to measure leverage, no?

    3) What does the Fed have to do if the $8 trillion pledged already has not already compelled trading partners to begin exchanging dollars for non-dollar denominated assets?

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    Default Re: not just dead but about to be declared dead?

    What was that movie "Weekend at Bernie's." Now starring Hank and Ben

    There's a very valuable discussion of the significance of CDS in the Institutional Risk Analytics report from today:

    http://us1.institutionalriskanalytic...ry.asp?tag=326

    A few details are sort of mind blowing:

    - no collateral is posted for CDS contracts (infinite levearge?)
    - they have been used as a tool to trade equity volatility (ie, if I understand it correctly, in the way they are actually used there is no serious attempt to assess the actual default risk of the underlying entity)....

    Best to just read it; its beyond me to paraphrase. But the takeaway is exactly as described by EJ above:

    "... we have taken the view that the only way to deal with situations such as AIG (NYSE:AIG) is bankruptcy. Funding the AIG CDS portfolio is an open-ended proposition. But of course Paulson, Geithner et al would rather use tax dollars to subsidize this example of global casino gambling rather than tell the American people the truth about AIG and the other large CDS dealer banks such as C and JPM. And the truth, in our view, is that these large, CDS dealers are basically insolvent, with or without the distorting effects of fair value accounting. And the solvency problems arise not only because of their own CDS positions, but because their dealer counterparties have problems of their own."

    But most importantly, the piece of perhaps prescient news is this:

    "We hear from a very well placed Buy Side investor with extensive business interests in the US and EU that three primary banking institutions in Europe, two French and one German, have such significant CDS exposure and other problems that they cannot even begin to fund the payouts anticipated over the next quarter.
    The funding squeeze reportedly is exacerbated by a near-collapse among weaker players in the hedge fund market, who were accustomed to receiving loans from one large French institution, which then stupidly converted the loans into equity. That's right. This past summer, when the bank put out a call for redemptions of $4 billion in hedge fund investments, says the source, only $400 million was returned. And the French bank also used these same hedge funds and others to reinsure some of its own CDS exposure. Sound familiar? Yup, just like AIG.
    Unlike the approach taken by Paulson and Geithner to bailout AIG and JPM (via the Bear Stearns rescue), however, the investor claims that EU officials are considering a moratorium on CDS payments by the three Euroland banks in question. The banks would be given ten years to write down their CDS and hedge fund exposures and would receive additional infusions of capital by their respective governments. The source claims that French banks have such huge exposure to both hedge funds and CDS, sometimes linked together, that the positions are beyond the ability of the EU governments to bail them out without a cessation of CDS payments.
    The IRA was not able to obtain a comment from EU officials over the weekend about these allegations. We'll be making some calls Sunday night and Monday. But if this unconfirmed report turns out the be true, then the beginning of the end of the CDS market as we have known it will be at hand. And ironically, the catalyst for the final solution will come not from the failure of a US dealer, but instead by a moratorium on CDS payments by an EU bank"

    There's a lot of colour here that somehow fleshes out the issue... well worth a read.

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    Default Re: not just dead but about to be declared dead?

    Quote Originally Posted by oddlots View Post

    "... But of course Paulson, Geithner et al would rather use tax dollars to subsidize this example of global casino gambling rather than tell the American people the truth about AIG and the other large CDS dealer banks such as C and JPM.
    I just read Traders, Guns & Money by Satyajit Das, and the only word to describe the CDS and other OTC derivatives is as a casino. It's an absolute joke/outrage/crime what has taken place.

    A good interview by Das my be found here although is was recorded in September, 2007 and the focus was subprime mortgage meltdown.

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by Down Under View Post
    Although others here disagree, I cannot see how gold [& commodities] will not rise significantly over the next few years, as the governments of the world attempt to reflate.
    Down Under's was the first reply to EJ's latest. It also seems his is the only one to ask the most important question. Throughout the article EJ is describing a deflationary meltdown. The Fed is responding just the way iTulip has been predicting it would--massive cash injections into the banking system.

    But EJ also points out, for the first time as far as I know, that the cash injections are not working. Banks are hoarding the cash and consumers along with the economy in general are not getting access to the green. Unless the cash gets to the real economy, it can never be inflationary, can it? The treasure might just as well print trillions of dollar bills and store them in the Utah salt mines. That would not be any more (or less) inflationary than what is happening.

    So what should we conclude? Is EJ hedging his bets, preparing us for the possibility that he might be wrong? Or maybe he expects us to conclude that all those dollars sitting in the Fed's own reserves will eventually cause China, Japan, OPEC, etc. to start dumping their T-Bills/Bonds. I have trouble seeing that. Unless real money hits the markets, what reason is there for the world to panic out of their dollars?

    So what gives EJ? Granted we are in uncharted waters. But you are the prognosticator here. Lay out some scenarios for us and give us your best guess for how likely each one is to occur.

    Or at least come back and explain how this most recent post fits into the Ka-Poom scenario. Because for now, I'm not getting it.:confused:

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by hugh_lawson View Post
    Down Under's was the first reply to EJ's latest. It also seems his is the only one to ask the most important question. Throughout the article EJ is describing a deflationary meltdown. The Fed is responding just the way iTulip has been predicting it would--massive cash injections into the banking system.

    But EJ also points out, for the first time as far as I know, that the cash injections are not working. Banks are hoarding the cash and consumers along with the economy in general are not getting access to the green. Unless the cash gets to the real economy, it can never be inflationary, can it? The treasure might just as well print trillions of dollar bills and store them in the Utah salt mines. That would not be any more (or less) inflationary than what is happening.

    So what should we conclude? Is EJ hedging his bets, preparing us for the possibility that he might be wrong? Or maybe he expects us to conclude that all those dollars sitting in the Fed's own reserves will eventually cause China, Japan, OPEC, etc. to start dumping their T-Bills/Bonds. I have trouble seeing that. Unless real money hits the markets, what reason is there for the world to panic out of their dollars?

    So what gives EJ? Granted we are in uncharted waters. But you are the prognosticator here. Lay out some scenarios for us and give us your best guess for how likely each one is to occur.

    Or at least come back and explain how this most recent post fits into the Ka-Poom scenario. Because for now, I'm not getting it.:confused:
    We spend far more time and effort exploring the arguments and evidence that we are wrong than the the arguments and evidence that confirm our thesis. We realize that most sites don't do that and some readers find this practice confusing. But we feel we owe it to our readers to be rigorous.

    Dr. B seems to think that the banks are incapable of reflating. We believe that when push comes to shove, politically speaking, governments can always inflate.

    Dr. B thinks that the largest banks in the US are "dead" due to extension of loans based on CDS.

    We disagree. We think the market can be cleared quickly so we can all move on but for the politics -- who will be sunk.

    The longer the banking system goes on uncleared, the worse the pain to the system in general. If it goes on long enough, it does die, but we are not there yet.
    Ed.

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    Default Re: Major US banks worse than Japan's zombies?

    If think this discussion ties in with a comment EJ made in one of his recent articles...

    How much pain has to be inflicted (EJ referenced unemployment rates of 10-20% IIRC) before the political pain of killing off the FIRE economy rents with high inflation is less than the political pain of really high unemployment.

    According to Eric the government still thinks it can avoid the choice between crushing unemployment and rampant inflation, and so continues to try and revive the banks.

    At least that's how I read it.

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by FRED View Post
    We spend far more time and effort exploring the arguments and evidence that we are wrong than the the arguments and evidence that confirm our thesis.
    Great practice. Keep it up.



    We realize that most sites don't do that and some readers find this practice confusing.
    That would be me. On another thread you said you had 10,000 smart businesspeople to bounce ideas off of. I'm thinking it's more like 9,999 smart businesspeople and me. Maybe we could develop some type of a code so I know when you agree or disagree with whatever you're posting, like a wink, or brushing your nose (a la The Sting).

    Seriously, it would be helpful if you would add a small commentary, much like the post I'm responding to, whenever you post something you disagree with. A couple of sentences explaining why and everybody's happy, and those of us who aren't smart businesspeople aren't (as) confused.

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by Andreuccio View Post

    Seriously, it would be helpful if you would add a small commentary, much like the post I'm responding to, whenever you post something you disagree with. A couple of sentences explaining why and everybody's happy, and those of us who aren't smart businesspeople aren't (as) confused.
    He probably wouldn't get as valuable of feedback if he did that.

    I see the spreads on CDS are really blowing out.


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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by Charles Mackay View Post
    He probably wouldn't get as valuable of feedback if he did that.
    That's true. If I were a smart businessperson, I would have known that. Maybe we can try the wink, then. ;)

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by Charles Mackay View Post
    I see the spreads on CDS are really blowing out.

    What do we think the CDS spread index really indicates now? It cannot be simply the risk of underlying bonds defaulting. Does the spread now also embed the risk of CDS issuers defaulting? Or systemic risks?

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by FRED View Post
    Dr. B thinks that the largest banks in the US are "dead" due to extension of loans based on CDS.

    We disagree. We think the market can be cleared quickly so we can all move on but for the politics -- who will be sunk.

    The longer the banking system goes on uncleared, the worse the pain to the system in general. If it goes on long enough, it does die, but we are not there yet.
    Fred, you are referring to something along the lines of the Fed picking winners and losers, a la AIG?

    New Entity Buys $46.1 Billion In CDOs, Cancels AIG's CDS Contracts

    So far, $46.1 billion of such CDOs have been purchased, canceling the CDS contracts and relieving some pressure on AIG's liquidity.

    An AIG spokesman said the CDOs were purchased for fair-market value, which is far less than their original value, and the CDO holders are keeping the cash collateral already paid by AIG. The deals essentially have made the CDO holders whole.

    The entity was created by the Federal Reserve Bank of New York last month to mitigate AIG's liquidity issues in connection with its CDS contracts. The Fed said then that it would lend up to $30 billion to the facility and AIG would lend $5 billion.

    The additional purchases of $7.4 billion in CDOs are expected to be concluded by the end of the year.

    The entity will collect cash flows from the CDOs and pay a distribution to AIG for its equity interest once principal and interest owed to the Fed have been paid in full. After payment of the Fed's senior loan and AIG's equity interest, all remaining amounts received by the entity will be paid 67% to the Fed and 33% to AIG.

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by FRED View Post
    We spend far more time and effort exploring the arguments and evidence that we are wrong than the the arguments and evidence that confirm our thesis. We realize that most sites don't do that and some readers find this practice confusing. But we feel we owe it to our readers to be rigorous.

    Dr. B seems to think that the banks are incapable of reflating. We believe that when push comes to shove, politically speaking, governments can always inflate.

    Dr. B thinks that the largest banks in the US are "dead" due to extension of loans based on CDS.

    We disagree. We think the market can be cleared quickly so we can all move on but for the politics -- who will be sunk.

    The longer the banking system goes on uncleared, the worse the pain to the system in general. If it goes on long enough, it does die, but we are not there yet.
    The government is clearly trying to reflate, as it has in every downturn for 50+ years. It's not working this time because we are in a liquidity trap. Obama and his economic advisors are Keynesians - when conventional monetary policy fails they will, I think correctly, use government as the demand supplier of last resort. The questions become:

    (1) how long will it take for stimulus and make work programs to get money circulating through the system again?
    (2) will it be enough to pull the economy out of the liquidity trap?
    (2) if so, just how inflationary will this be?

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by CharlesTMungerFan View Post
    The government is clearly trying to reflate, as it has in every downturn for 50+ years. It's not working this time because we are in a liquidity trap. Obama and his economic advisors are Keynesians - when conventional monetary policy fails they will, I think correctly, use government as the demand supplier of last resort. The questions become:

    (1) how long will it take for stimulus and make work programs to get money circulating through the system again?
    (2) will it be enough to pull the economy out of the liquidity trap?
    (2) if so, just how inflationary will this be?
    Reflation never "worked". I believe the Austrians were correct although they get very little respect here on iTulip. Each stimulus that "worked" simply created a worse problem down the line.

    Because elected representatives are temporary caretakers, their incentives are to pass the buck to the next guy and give away as much as possible of the taxpayer's own money while still in office.

    The chickens do come home to roost. As Mises said, the worse the booms, the worse the bust.

    Reflation takes money from productive uses and mis-appropriates it to political ends. It steals from people who work and save, and pays it to profligate and irresponsible people who made money through financial engineering, inflation on the backs of those same savers and workers and retirees.

    You are entirely wrong, and so is EJ, about the supposed benefits of "stimulus." Couldn't be more wrong.

    It makes the depression WORSE. The Great Depression was a depression because of the New Deal. The New Deal made unemployment and inflation worse in 1937 than they were going into it.

    Stimulus is another word for MORE DEBT and that is exactly the wrong medicine.

    And, beyond that, the stimulus is an immoral, reprehensible joke and the taxpayers don't realize it.

    They are against the bailout of GM/Ford/Chrysler, when they are responsible (through Pension Benefity Guaranty, a public entity) for the major costs of those firms going belly up...and they don't squawk with trillions of dollars surreptitiously spent by the Fed on bailing out the worst creators of this mess, the big banks (in league with the US government of course.)

    And I'm not defending a bailout of the auto companies, just pointing out how messed up the lumpen's thinking is on anything economic and how remarkably stoopid people are...

    And yet again, this is EXACTLY what made a brief sharp recession into the Great Depression.

    If you want to stimulate,

    1. Remove all capital gains taxes
    2. Remove all taxes on dividends
    3. Start raising interest rates so savers get a return

    THAT would stimulate the economy. We need LESS debt, LESS deficit spending, MORE saving, MORE investment.

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    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by grapejelly View Post
    Reflation never "worked". I believe the Austrians were correct although they get very little respect here on iTulip. Each stimulus that "worked" simply created a worse problem down the line.

    Because elected representatives are temporary caretakers, their incentives are to pass the buck to the next guy and give away as much as possible of the taxpayer's own money while still in office.

    The chickens do come home to roost. As Mises said, the worse the booms, the worse the bust.

    Reflation takes money from productive uses and mis-appropriates it to political ends. It steals from people who work and save, and pays it to profligate and irresponsible people who made money through financial engineering, inflation on the backs of those same savers and workers and retirees.

    You are entirely wrong, and so is EJ, about the supposed benefits of "stimulus." Couldn't be more wrong.

    It makes the depression WORSE. The Great Depression was a depression because of the New Deal. The New Deal made unemployment and inflation worse in 1937 than they were going into it.

    Stimulus is another word for MORE DEBT and that is exactly the wrong medicine.

    And, beyond that, the stimulus is an immoral, reprehensible joke and the taxpayers don't realize it.

    They are against the bailout of GM/Ford/Chrysler, when they are responsible (through Pension Benefity Guaranty, a public entity) for the major costs of those firms going belly up...and they don't squawk with trillions of dollars surreptitiously spent by the Fed on bailing out the worst creators of this mess, the big banks (in league with the US government of course.)

    And I'm not defending a bailout of the auto companies, just pointing out how messed up the lumpen's thinking is on anything economic and how remarkably stoopid people are...

    And yet again, this is EXACTLY what made a brief sharp recession into the Great Depression.

    If you want to stimulate,

    1. Remove all capital gains taxes
    2. Remove all taxes on dividends
    3. Start raising interest rates so savers get a return

    THAT would stimulate the economy. We need LESS debt, LESS deficit spending, MORE saving, MORE investment.
    Evidence please?

    Thought experiment: what if everyone saved tons of money and decided to retire at the same time. By your logic, the economy would be in ship shape.

    There is a reason Mises at al get no traction in academic circles. And no, the reason is not some vast conspiracy.

  18. #18
    Join Date
    Jun 2006
    Posts
    3,863

    Default Re: Major US banks worse than Japan's zombies?

    Look at the analogue between an ecosystem and an economic system -- where are the "savers" "producers" and "consumers" in each system

    From Energy Flow Through the Ecosystem


    The diagram above shows how both energy and inorganic nutrients flow through the ecosystem. We need to define some terminology first. Energy "flows" through the ecosystem in the form of carbon-carbon bonds. When respiration occurs, the carbon-carbon bonds are broken and the carbon is combined with oxygen to form carbon dioxide. This process releases the energy, which is either used by the organism (to move its muscles, digest food, excrete wastes, think, etc.) or the energy may be lost as heat. The dark arrows represent the movement of this energy. Note that all energy comes from the sun, and that the ultimate fate of all energy in ecosystems is to be lost as heat. Energy does not recycle!!

  19. #19
    The Outback Oracle Guest

    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by Rajiv View Post
    Look at the analogue between an ecosystem and an economic system -- where are the "savers" "producers" and "consumers" in each system

    From Energy Flow Through the Ecosystem

    Sorry rajiv...your point is?

    As an old biological scientist....I'd have to take great exception to the use of such a child's drawing to represent complex biological systems.

  20. #20
    Join Date
    Jun 2006
    Posts
    3,863

    Default Re: Major US banks worse than Japan's zombies?

    Quote Originally Posted by The Outback Oracle View Post
    As an old biological scientist....I'd have to take great exception to the use of such a child's drawing to represent complex biological systems.
    Then take issue with Marietta University Department of Environmental Biology, and not with me. Why don't you write them an e-mail, stating your objections as to how they explain ecosystems to their undergraduates. I think you could fruitfully spend some time on that endeavour. I do believe that the savers are the nurient(money) recyclers.

    And yes I agree with you that in reality, ecological systems are much more complex than as depicted -- just as economic systems are much more complex than EJs simplified FIRE/PC economy depiction.

    However, my point was to think of the parallels between the economic system, and the ecosystem and to identify what is being recycled and what is not being recycled. Clearly, in a gold based money system, where the amount of gold is more or less fixed, money represents the inorganic nutrients. And this nutrient pool cannot be enlarged in a limited ecosystem. Then where do savers, consumers and producers lie in this diagram.

    BTW, I am not disagreeing with you there -- I was just getting to the point that the quantity of money in the society has to be fixed to avoid the problems we are having, and the paradigm of infinite growth is not feasible.
    Last edited by Rajiv; 12-07-08 at 09:53 AM.

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