The Sage of Main Street
Gold Member
Wooiy Ideas Are for SheepIt all works fine with growth and dutiful lending by banks. Money is, or should be created thru growth. Unfortunately we have a central bank, the Feral Reserve, who believes they can reverse prime the economy by printing money, QE, to encourage growth. Instead they created asset inflation. Witness the stock market at an all time high even though we have had very slow growth since the 2008 recession. QE has also created high housing cost and made the wealth gap even worse.
Not that I'm defending QE as a policy (because I'm not), but people who bash it forget that the world economy was on the brink of disaster. Would you have let banks fail and the economy to implode, or would you have done something different? If so, what?
You talk as if the bailout worked and diverted disaster. The reality is we don't know how it will eventually unfold. Adding trillions of dollars into the economy and making too big to fail banks even bigger, driving asset prices thru the roof while creating less 2% growth will have consequences.
What those consequences are and the ultimate severity of pain caused is still in question.
I think what you're saying is that the bailout averted the disaster in 2008, but may have caused another, potentially larger problem long term.
However, none of the money created via QE has circulated in the economy. What QE did was drive down the price of borrowing such that it has enticed the wealthy to borrow money at one rate, let's just say 2% and turn around and invest in markets. The thought is that if they can earn a return higher than 2% then basically it's free money.
I agree that this policy has driven the demand for assets, perhaps we might say artificially.
However, the real question is, are the loans made adequately capitalized?
If so, as loans fail bank investors (that that invest via investor capital common and preferred stock) will lose value.
If there is enough capital, the system will self-adjust, though it will have the effect of transferring wealth from investors to those that took and defaulted on those loans which present another issue altogether.
The other possibility is that as interest rates rise, investors will slowly withdraw their capital and repay their loans. The stock market will fall and companies will have to go back to "old fasioned" methods of capitilization and value, things like;
Investing in labor plant and equipment
Stop utilizing buy backs as a way to increase value.....
If this is done slowly markets will adjust.
The question is, is there adaquate incentive for the wealthy to repay the loans they took, or should they just default?
That is the real underlying problem. We saw what happens in 2008 when a market isn't adaquatly capitlized and the incentive of default outweighs the incentive to repay.
The Big Bank Bailout
In an article Secrets and Lies of the Bailout, Matt Taibbi says “It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people. We were told that the taxpayer was stepping in – only temporarily, mind you – to prop up the economy and save the world from financial catastrophe. What we actually ended up doing was the exact opposite: committing American taxpayers to permanent, blind support of an ungovernable, unregulatable, hyper concentrated new financial system that exacerbates the greed and inequality that caused the crash, and forces Wall Street banks like Goldman Sachs and Citigroup to increase risk rather than reduce it.
After the original $700 billion bailout, the ongoing bailout was kept very secret because Chairman Ben Bernanke, argued that revealing borrower details would create a stigma — investors and counterparties would shun firms that used the central bank as lender of last resort. In fact, $7.7 trillion of the secret emergency lending was only disclosed to the public after Congress forced a one-time audit of the Federal Reserve in November of 2011. After the audit the public found out the bailout was in trillions not billions; and that there were no requirements attached to the bailout money - the banks could use it for any purpose.
Few thoughts....
First, it's really hard for me to comment on the entirety of the claims here. I will agree with this article in Forbes that I found when I Googled "The Big Bank Bailout" which says some of the same things you are saying.
There is undoubtedly financial corruption and the result is massive wealth transfers. IMO, much of it is the result of the speed of markets made possible by computer technologies. It also affords too much anonymity IMO...
That said, taxpayers aren't really funding this stuff...At least not directly. The explanation for that is long and requires that I go into a lot of underlying detail I'm going to skip here...For now unless you insist I explain.
The Fed is independently audited every year.
The problem isn't the Fed, or even the government, though they are FAR from perfect and need many changes. The Forbes article identified the problem, wholesale banking corruption and a lack of accountability.
The Fed to my knowledge has no enforcement arm, that is left to the Federal government and this is where the Federal government fails and must be reformed.
But again, the general population doesn't understand how the system we have works and as a result vote people into Congress to do things like "audit the Fed" (which, btw has nothing to do with auditing the Fed, it's about taking control of monetary policy) and running "balanced budgets", not doing things like removing the influence of money from government and getting rid of things like Citizens United and the idea that money is speach.
It's guys like Todd who promote ideas like banks lending customer deposits to other customers and the idea that the supply of savings affects in the interest rate that is so wrong he doesn't even understand the question, never mind the answer (and I say that with all the respect I can). Something I'll continue to debate with him you can make up your own mind about the strength of that argument.
In the end, the problem, IMO, is there are people making money hand over fist, who can use that idle money to influence policy. Things won't change until we can separate the influence of money on our government officials. I try not to mix policy decisions and fiscal reality because it often confuses people, but this thread is really a mix of policy and fiscal reality.
Politics and money is like peanut butter and jelly. Good luck separating the two.
Ultimately, economics has a natural ebb and flow. If the Fed or any other central bank thinks they can divert down times and maintain a consistent growth in the economy, we will suffer. Our founders warned us against a central bank- Our founding fathers were against the federal reserve and central banking system..
The Fed exist at the pleasure of our government, and the Fed allows our government to borrow without consequences, but for how long?
Despite the corporate public-relations experts who pose as independent academic economists, there is nothing natural about the economy. It is controlled by the Loot 'n' Scoot private-sector oligarchy until the government is forced to intervene.