Financial Crisis

[Abrak]

Abrak I think this must be the biggest oxymoron you have ever posted in this thread ?

If you " recognize Bernanke's actually caused the crisis " ( which many other people would also agree with now ),

how can he be more intelligent than even a “ A ” level Economics student? Either that or has absolutely zero integrity

which means you cant believe a single word he speaks.

And by the way – AUDIT THE FED !!!!

Well he did score 1590 out of 1600 in his SATS.

My basic theory is this really he just continued some disastrous Greenspan ideas so it was nt ALL his fault. One of the reasons that he allowed the economy to get out of hand is that he was extremely confident that he could clean up the mess that followed (although admittedly he did rather feel he had the tools to avoid a mess.) That is why I was keen for him to be given a chance to make amends rather than kicked out for causing the problem. The other thing was that there seemed noone else around who felt they could do much about it. He made a lot of unconventional decisions that saved the US and bailed out several Central Banks. Now history is beginning to rewrite everything along the lines of unnecessary panic and AIG shouldnt have been bailed out etc but if you consider how Goldman Sachs panicked things must have been pretty bad.

Now he is Fed Chairman his comments should not be believed because he is trying to manage expectations. But his policies were spelt out in his works well before he became Chairman. Personally I dont think he is the right guy for the job now. There is no immediate crisis and the top priority should be the reform and reregulation of the banks. That is not his expertise. Do you think it is unreasonable to restrict Government guaranteed banks to lending only 70% against the collateral value of a property? Anyway someone should give Elizabeth Warren a job with a few teeth.

[Abrak]

For example I would still like to know how they can redress the imbalance between what has

been up until now the worlds 2 biggest economies paying wages to people which are up 10 times

higher for exactly the same task undertaken by an equally well educated person ( if not better educated person )

in countries what will be the next 2 worlds biggest economies ? What steps can be taken to avoid a

significant fall in living standards in USA, Japan and even Europe because I certainly can’t see how you avoid that ?

Well I do have ideas - theoretical ones - anyway to solve all those issues.

You shouldnt get too carried away with this china workers are paid 1/10th the salary to do the job better. The reality is that the US produces substantially more than China with 12m workers than China does with 120m.

Obviously China cannot be allowed to destroy the entire world economy by pegging its currency at an undervalued rate to the US and sustaining it through capital controls. It is destroying Thailand's competitiveness. Luckily all they are getting in return is USTs that will become increasingly worthless.

So in the race to the bottom China's balance sheet might suffer most.

The US must be relieved of its burden of being the central reserve currency, its economy is so shot to pieces it cant have the likes of China leeching off it anymore. More importantly it seems to have indicated that it is no longer prepared to act responsibly, It needs a serious devaluation to restore sustainable growth. Europe needs Germany to reflate to save the deflators (not very likely).

We need and SDR type independent central reserve currency where there are restrictions on China from exploiting it (tax on surpluses) (end of capital controls). I suspect this is a sensible idea that is possibly impossible to implement.

China has to revalue the yuan which is behind much of the race to the bottom and it needs to because it is the world's largest creditor nation and therefore most exposed to the costs of inflation if current trends continue.

[Naam]

for the record and the dismay of the gloomdoomers™:

last weeks Greece government bond was three times oversubscribed. credit default swaps fell sharply. my dogs are getting too fat. Thai Baht is strong. Bernanke called and mentioned casually "who the eff cares what they say?" but did not elaborate who they are. Merkel contradicts herself. Sarkozy steps forward and makes promises to Papandreou. the overflow tank of my pool is leaking. Hu has no intentions to let CNY float. i still refuse to watch silly yewtoob clips. it's hot in Pattaya. my portfolio looks prettier than ever. anal-lusters predict GBP/EUR parity.

to be continued...

[hhgz]

"The really cool thing they are doing at the moment is giving vague hints of revaluation..."

Every since - and nearly every day - China stopped pegging the RMB to the USD, the RMB has been "revalued". Over the past 4 years or so, the RMB has gotten significantly stronger. The US has wanted China to make the RMB stronger but, rather than doing it all at once, they've been doing it slowly.

[midas]

for the record and the dismay of the gloomdoomers™:

last weeks Greece government bond was three times oversubscribed. credit default swaps fell sharply. my dogs are getting too fat. Thai Baht is strong. Bernanke called and mentioned casually "who the eff cares what they say?" but did not elaborate who they are. Merkel contradicts herself. Sarkozy steps forward and makes promises to Papandreou. the overflow tank of my pool is leaking. Hu has no intentions to let CNY float. i still refuse to watch silly yewtoob clips. it's hot in Pattaya. my portfolio looks prettier than ever. anal-lusters predict GBP/EUR parity.

to be continued...

And being a proud member of the gloomdoomers™, I don’t accept this futile attempt to restore the Matrix

to be continued...

[Indonews]

i agree. i have seen in indochinavisa something same, but i think the crisis don't stop until 2013.

[Naam]

"The really cool thing they are doing at the moment is giving vague hints of revaluation..."

Every since - and nearly every day - China stopped pegging the RMB to the USD, the RMB has been "revalued". Over the past 4 years or so, the RMB has gotten significantly stronger. The US has wanted China to make the RMB stronger but, rather than doing it all at once, they've been doing it slowly.

every day during the last two years no such thing like revaluation vs. the Dollar and GBP happened. the same applies to EUR (in fact CNY fell vs. EUR) and vs. JPY the rate is the same as FIVE years ago.

next!

[Abrak]

"The really cool thing they are doing at the moment is giving vague hints of revaluation..."

Every since - and nearly every day - China stopped pegging the RMB to the USD, the RMB has been "revalued". Over the past 4 years or so, the RMB has gotten significantly stronger. The US has wanted China to make the RMB stronger but, rather than doing it all at once, they've been doing it slowly.

every day during the last two years no such thing like revaluation vs. the Dollar and GBP happened. the same applies to EUR (in fact CNY fell vs. EUR) and vs. JPY the rate is the same as FIVE years ago.

next!

I do wish that someone would at least look a chart before announcing a change in USD/RMB policy. It has been within 2% of 6.84 to the US$ since July 2008 which is not making it stronger slowly has gone nowhere every day. You do feel a bit foolish when you have to look up the chart to see it hasnt moved at all which was your natural assumption. We dont set the bar for posting at all high but it should attempt to be above ground.

[flying]

http://www.investmentpostcards.com/2010/03...be-the-endgame/

In this video interview, Chris Wood, CLSA’s Asia strategist and author of the top “Greed & Fear” newsletter, shares his views on global markets with CNBC.

Wood said: “My view is that there is an inevitable endgame as a result of all this massive spending of taxpayer money in the West and Japan to bail out bankrupt banking systems, so in my view unfortunately the end game will be systemic government debt crisis in the western world.

“It will probably happen in Europe and will climax in the US, and I am expecting on a five year view the collapse of the US Dollar paper standard … The key reason why that is the endgame is that this credit crisis we saw in the west in 2008 and 2009 has simply been deferred, because 95% of the so-called government policy solutions to deal with this crisis have simply been to extend government guarantees.

“So the problem has been transferred from the private sector to the public sector. It is just a matter of time before investors revolt against these sovereign guarantees … The crisis is going to happen first in Europe. The US will be the endgame

[lannarebirth]

http://www.investmentpostcards.com/2010/03...be-the-endgame/

In this video interview, Chris Wood, CLSA's Asia strategist and author of the top "Greed & Fear" newsletter, shares his views on global markets with CNBC.

Wood said: "My view is that there is an inevitable endgame as a result of all this massive spending of taxpayer money in the West and Japan to bail out bankrupt banking systems, so in my view unfortunately the end game will be systemic government debt crisis in the western world.

"It will probably happen in Europe and will climax in the US, and I am expecting on a five year view the collapse of the US Dollar paper standard … The key reason why that is the endgame is that this credit crisis we saw in the west in 2008 and 2009 has simply been deferred, because 95% of the so-called government policy solutions to deal with this crisis have simply been to extend government guarantees.

"So the problem has been transferred from the private sector to the public sector. It is just a matter of time before investors revolt against these sovereign guarantees … The crisis is going to happen first in Europe. The US will be the endgame

That's pretty much conventiional wisdom these days, so what else have you got?

[flying]

That's pretty much conventional wisdom these days, so what else have you got?

This was interesting....

Recovery?....What Recovery?

Gloomy?

http://www.marketskeptics.com/2010/03/it-w...than-great.html

Edited March 8, 2010 by flying

[Naam]

"The really cool thing they are doing at the moment is giving vague hints of revaluation..."

Every since - and nearly every day - China stopped pegging the RMB to the USD, the RMB has been "revalued". Over the past 4 years or so, the RMB has gotten significantly stronger. The US has wanted China to make the RMB stronger but, rather than doing it all at once, they've been doing it slowly.

every day during the last two years no such thing like revaluation vs. the Dollar and GBP happened. the same applies to EUR (in fact CNY fell vs. EUR) and vs. JPY the rate is the same as FIVE years ago.

next!

I do wish that someone would at least look a chart before announcing a change in USD/RMB policy. It has been within 2% of 6.84 to the US$ since July 2008 which is not making it stronger slowly has gone nowhere every day. You do feel a bit foolish when you have to look up the chart to see it hasnt moved at all which was your natural assumption. We dont set the bar for posting at all high but it should attempt to be above ground.

BINGO! when it concerns currencies i can only shake my head when reading either wild and completely unfounded speculations or like in this case not only worthless but wrong information. finding relevant currency charts in the net is not rocket science.

[Gambles]

Abrak,

Have you read Hyman Minsky - kind of Keynes for the 21st century in my opinion.

There's a great video clip in that same vein from Steve Keen at thefundamentalanalyst.com/?p=2120 that I'd strongly recommend (apologies if I've bored you with this before).

Also yesterday The Nation ran my piece on the rate hike that never was - not sure if you've seen it ? do try to be kind, gentlemen ! ;-)

The rate hike that never was…. (The Nation 8th March 2010)

The US Federal last month gained significant media mileage by hiking a virtually unused interest rate while keeping other rates at record lows. But to understand why there is something more sinister to this fiduciary sleight of hand than a simple desire to gain column inches, and to see how it could have a very real negative impact on export-dependent economies such as Thailand, one first needs to take a closer look at how the banking system works.

The modern banking system exploits fractional-reserve banking, meaning it only keeps a fraction of deposits in liquid reserves to maximise shareholder profits and depositor rates of interest. The remainder is lent out or otherwise put to work at higher interest rates than are paid to depositors. The difference, or spread, is how banking institutions make profits.

Fractional banking has dramatically increased credit supply over the past century. A fractional system that requires 10% of deposits to be held as reserves allows banks to initially lend $90 against every $100 of deposits held. The $90, once lent, goes into recipient bank accounts from where 90% can be lent out again. By the time 10 lending transactions have taken place the original $100 has created money in circulation of almost 7x the initial deposit.

This money multiplier has a major impact on economic growth rates, inflation, indebtedness and ultimately employment, prosperity and economic sustainability. Minimum reserve requirements set by central banks therefore have the combined effects of ensuring banks hold adequate reserves while also determining the magnitude of the money multiplier.

Banks generally hold reserves slightly above the statutory minimum requirement to cover daily cash flows and write-downs. But excessive withdrawals can result in a bank holding insufficient reserves while others consequently hold too much excess. Central banks typically oversee this by arranging ‘emergency’ funding, typically just overnight, while the bank implements actions to adjust its obligations and assets, such as raising additional funds by borrowing from money markets or calling in loans.

A systemic loss of confidence in 2008 caused banks to increase the rate at which they lent to each other. Following the Lehman Brothers’ collapse that September, interbank lending virtually stopped overnight.

Government responses to the crisis largely consisted of increasing guaranteed deposit amounts and ensuring that adequate liquidity was put in place.

In America, where the scale of problems was greatest, three main liquidity boosts were implemented: the Troubled Asset Relief Programme (TARP) injected a staggering $600 billion into the banking/finance sector within a matter of months; the Term Asset-backed securities Loan Facility (TALF) which allowed distressed assets, including defaulting residential mortgage backed securities, to be transferred from bank balance sheets to the Fed’s; and cutting the cost of emergency funding from 1.25% in October 2008 to 0.5% from December 2008 to this February.

The need to allay fears of banking system failure created an additional $435 billion of money supply, raising concerns of hyperinflation if the money made its way to Main Street.

To counter this concern, the Federal Reserve Act 1913 was amended to allow the Fed to pay banks interest on excess reserves deposited with it, allowing banks to profit from the Fed on funds that they had actually borrowed from it – the equivalent of your bank lending you money at 0.5% provided you deposited it back with them at 1.5%.

Effectively all American banks were in this situation in autumn 2008.

This unpublicised policy has two significant catches. Stimulus funds paid for by the US taxpayer were supposed to stimulate the economy, but instead of being circulated in the real economy where they could boost consumption and restore confidence – and you cannot have a recovery without confidence — banks were paid more interest to keep the funds in their vaults.

Imagine what a real surge in US consumption could mean for economies such as Thailand where exports account for about 65% of gross domestic product and 80% to 90% of locally produced electronic and electrical goods are sold abroad.

It gets better.

To allow unfettered remuneration to be paid, banks repaid these borrowings as quickly as possible, with TARP debt falling from $612 billion to $317 billion.

Simultaneously, borrowings through the traditional discount window plunged from a peak of $44 billion in 2008 to $14 billion currently. The Feb 18 interest rate hike 0.5% to 0.75% applies only to borrowings through that discount window, making it meaningless in real terms.

It has been suggested that the hike implies the worst economic conditions are over and that the Fed is prudently increasing rates to ward off inflation. But the impact of this move potentially goes beyond mere PR and financial spin.

Creating false hope in a global financial system that is largely based on sentiment is a dangerous game, and the policy of paying banks interest on excess reserves is so radical and untested that no one can be certain of how this policy is impacting the US economy now or what the future effect of reversing it would be.

Strange things are afoot in the ‘the land of the free (money)’ and things are definitely not what they seem. Has anyone seen the emperor’s, sorry Ben Bernanke’s new suit?

[flying]

Also yesterday The Nation ran my piece on the rate hike that never was - not sure if you've seen it ? do try to be kind, gentlemen ! ;-)

I liked it but....Im sure you will get some flack here

You said in your article 600B TARP but the initial amount was 700B no?

Not that they used it all AFAIK

[sokal]

Traders demand US credit default swaps be paid in gold. Full article hows that for you USD bulls ?

Even the smartest fiat bug of them all, Karl Denninger, is calling for a gold moon shot if there is any truth to this.

Edited March 9, 2010 by sokal

[Naam]

bullshit version: "Traders demand US credit default swaps be paid in gold."

correct version: "Are Traders Demanding US Credit Default Swaps Payable in Gold?"

http://jessescrossroadscafe.blogspot.com/2...it-default.html

[midas]

I am starting from the assumption that most people have in this thread that the recovery is a bit of plaster over a big wound and that most of the underlying structural issues have not been addressed. Personally, I am not that bearish about the World economic fundamentals if these structural issues are addressed

I would rather believe what David Rosenberg says than Bernanke any day and this is

why he doesnt think there is a recovery :-

1. If this was a normal monetary policy cycle, then we would be creating 150,000 jobs by now because that is what we usually get 2½ years after the Fed begins to ease.

2. While the headline unemployment rate managed to stabilize at 9.7% compared with consensus views of a modest uptick, the more inclusive U6 measure, which takes into account the overall level of underemployment in the economy, rose to 16.8% from 16.5%.

3. The message to Mr. Market is that while there was much to cheer about in terms of the headline payroll number, there is still enough rot in the labour market below the surface that should still be a cause for concern in terms of the sustainability of the nascent economic recovery.

4. It could well be that businesses see what we see — a recovery that has been engineered by massive bouts of fiscal and monetary stimulus that is likely to be unsustainable. So, against that uncertain backdrop they are opting to tap staffing firms to skate them for now rather than make a commitment to hire full-time staff.

5. We come back to the idea of what happens next? Companies are not deploying their cash for new capital spending growth and instead are focusing on merger and acquisition strategies. Growth through market share rather than organic expansion seems to be the course of action for many companies who understand what the broad contours of the economy will look like in the future in what is likely to be a multi-year deleveraging cycle.

6. To get back to full employment, we will need to see 12 million jobs created and here we are still waiting for the losses to come to an end. Until we get there, and it could take anywhere from 5 to 10 years, then expect deflation to be the primary trend in the future. Deflation in wages, rents and credit are hardly the hallmarks of a background conducive to anything other than lower bond yields, an obviously murky fiscal outlook and periodic counter-trend gyrations in market interest rates.

[Indo-Siam]

The best explanation of the financial crisis that I have ever seen comes out of a British two-part interview: http://www.youtube.com/watch?v=lWDdcD-1xoo

[Gambles]

Also yesterday The Nation ran my piece on the rate hike that never was - not sure if you've seen it ? do try to be kind, gentlemen ! ;-)

I liked it but....Im sure you will get some flack here

You said in your article 600B TARP but the initial amount was 700B no?

Not that they used it all AFAIK

Thanks, Flying

The agreed facility was indeed $ 700 bn but the peak drawdown that we identified was $ 612 bn - there is a full listing available of who took how much & when and also what was repaid & when. We've plotted it and plan to create some graphs and charts for future articles. For some reaons it's hard to find everything all on one page

thanks again,

Paul

[hhgz]

"I do wish that someone would at least look a chart before announcing a change in USD/RMB policy. It has been within 2% of 6.84 to the US$ since July 2008 which is not making it stronger slowly has gone nowhere every day."

Interesting response. You first mention that the USD/RMB exchange rate has changed over the past 18 months, and in the next breath mention that the exchange rate has only changed 2%. I posted that the exchange rate changed daily. I did not post that the RMB appreciated in value every day. Too, there is an "official" exchange rate, and there are other rates of exchange.

The problem with statistical myopia is that you can miss trends and patterns. I'm not sure why you have used the past 18 months as the basis of your analysis. Although the official China policy of appreciating the RMB has been on hiatus during much of the great recession, you ignored the significant RMB appreciation over the years previous to the hiatus. Accordingly, when China revives RMB appreciation (it will be about 3%/year), I'll see it as a continuation of a trend. You'll see it as an unheralded event.

[midas]

You shouldnt get too carried away with this china workers are paid 1/10th the salary to do the job better. The reality is that the US produces substantially more than China with 12m workers than China does with 120m.

I think you are missing the point …………

Despite poor U.S. economy, 6-figure salaries in state government on rise

" In 2009, the number of six-figure salaries on the public rolls grew to 23,685 workers,

up 16 percent from 2008. It's the largest total in state history and four times as high

as it was in 2000, when 5,800 state workers made $100,000 or more "

http://www.pressconnects.com/article/20100...01/2050321/1112

and yet at the same time :-

“ Gov: NY budget deficit could reach $8.2B ”

................. and just for comparision .

New York State Worker $100,000 or more per annum

Chinese State Worker 800 yuan (US $97) to 2,500 yuan (US $302 ) = $ 3 ,624 per annum

These people are like the banksters......grab what you can from the cookie jar before the entire pack of cards collapses

Edited March 9, 2010 by midas

[Naam]

I posted that the exchange rate changed daily. I did not post that the RMB appreciated in value every day.

then please explain what this sentence in your former posting means:

quote: Every since - and nearly every day - China stopped pegging the RMB to the USD, the RMB has been "revalued".

http://www.thaivisa.com/forum/Financial-Cr...23#entry3396723

[Naam]

chinese currency related information (market expectation):

non deliverable forwards USD/CNY, maturity one year = 2.82%

[Gambles]

Please find below the latest daily update from MBMG International.

and now for something completely different...........

You may already be aware of the recent UK Parliamentary Committee of enquiry before which Goldman Sachs' Gerald Corrigan testified, in relation to Goldman's involvement in the Greek debt scandal, as follows:

"With the benefit of hindsight, the standards of transparency could have been and probably should have been higher,"

This should be read in conjunction with the official comment from GS that

"The Greek government has stated (and we agree) that these transactions were consistent with the European principles governing their use and application at the time."

And also with damning new evidence about the role of banks in the Greek debt scandal came to me in a bizarre dream last night.

Imagined conversation from 2001 (Eurostat operator should sound like Clouseau).

Telephone ringing somewhere in Europe,

"Allo, zeez is Eurostat"

"Hi bud, I'd just like to just get some clearance on a currency swap I'm doing"

"To whom am I speaking?"

"That's not important. Just call me Gerry. I'm just a banker from New York. Listen if I wanted to do a currency swap for some guy that'd be Ok wouldn't it?"

"Well, zat really depends on who you are and who he eez and what ze swap eez. I can out you through to someone"

"No, that's OK. Listen it wouldn't make any difference if the guy was Greek would it?"

"Greek, zey still have ze Drachma, n'est-ce pas? I really think that you need to talk to ze specialist. I am just zee operator 'ere."

"No, that's fine bud. You've been great"

Call ends. A file note is prepared saying "Eurostat formally notified" $ 300 Million in fees ends up in the bank's account

Of course I need to stress that this is just a purely fictional account.....as far as we know!

As always, you can view this email or any of my past emails on Paul’s Blog at:

www.mbmg-international.com

Enjoy your day!

Once again, very best regards,

MBMG International

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG International cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG International. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

[teletiger]

Woe is us. We're all fcuked. How do I know? Firstly, the WSJ says so.

http://www.marketwatch.com/story/the-rise-...pire-2010-03-09

Secondly and much more tellingly.......Herr Naam quoted from a blogspot! (A rather discerning blogspot, it must be said, but a blogspot none the less)

Woe is us.

Regards.

[flying]

http://www.marketwatch.com/story/the-rise-...pire-2010-03-09

That show they quoted....Alan Weisman's brilliant "The World Without Us:"

Was very cool.....

[12DrinkMore]

The modern banking system exploits fractional-reserve banking, meaning it only keeps a fraction of deposits in liquid reserves to maximise shareholder profits and depositor rates of interest. The remainder is lent out or otherwise put to work at higher interest rates than are paid to depositors. The difference, or spread, is how banking institutions make profits.

- The fractional reserve system is not used to maximise depositor rates, which are generally held at just above the threshold that still keeps the depositors from taking their money out.

- Unfortunately although the shareholders theoretically should have the majority share of the profits of the operation, the bankers prefer to keep the profits for themselves and dish out humongous bonuses on top of their already bloated salaries. I am very annoyed at the lack of action by the shareholders in accepting this situation, look at RBS, a bank which is reporting billions in losses but still pays out billions in bonuses. In this case the majority shareholders are the UK tax payers. It is a pity that their combined voices were represented by a panel who deemed it essential that the bonuses be paid, instead of putting it to the vote. I cannot imagine that the UK tax payer would be taken in by the bullshit "we need to keep paying the bonuses to keep the staff".

- I wish that writers like you would finally make it crystal clear to the public exactly how this fractional reserve fraud works. Your article perpetuates the incorrect idea that the banks only make a small percentage "cut" on lending, basically the difference between what they pay to depositors and what they charge the debtors. This is a total misconception. The reality is that, for example, the UK banks, some of which run at 3% fractional reserve (I read somewhere that they are able to specify their own comfort level), are in effect able to lend out some 30 times the deposit base.

So, Joe Depositor leaves say 10,000 Quid in the safe care of Northern Cock and receives 1.5% interest, a massive 150 Quid over the year.

Along comes Joe Debtor and the bank lends out 97% of Joe Depositor's cash at 5% interest; making 485 Quid over the year.

And this is where the general public thinks the story ends.

Now you have to make the quantum leap that fractional reserve banking allows (which you have described) as the Joe Debtor generally does not stuff the cash under his pillow, but buys something and the money then reappears as a deposit in the banking system, 97% of which is then re-lent to another Joe Debtor.

So, the end result is that the bank makes 30 * (5% - 1.5%) * initial deposit from Joe Depositor or 10,500 Quid.

All the combined Joe Depositors created from the multiplier are paid 4,500 Quid.

So an incredible amount of "profit", 15,000 Quid in this example, is created by the original deposit from Joe Depositor, who earns just 150 Quid from it. A bit unfair, but that is life, I suppose.

This example also demonstrates just how fragile the whole system is, but it also demonstrates that it need not be so.

1. If just 4% of the 'assets' supporting the debts disappear, then the bank does not have enough money to repay the Joe Depositors in full.

2. If the bankers had not paid themselves such huge and disproportionate bonuses over the last decade, but retained more of the profits, then the whole dam_n banking crisis would not have happened.

3. By allowing such massive multipliers the amount of debt in the economy has spiralled up, creating bubbles and more bubbles.

---

And I disagree with two statements you make

1. The stimulus was designed to stimulate the economy through providing credit to the consumer.

Apart from a couple of short term stimuli, such as the "cash for clunkers", rapidly implemented in Europe and the States, all the so called stimulus was put in place to keep the bankers afloat. Whether directly with the provision of liquidity or indirectly through trying to prevent property prices from falling and keep the stock markets up.

2. Bernanke has no clothes.

Bernanke has a whole load of smoke and mirrors hidden under many cloaks.

:D

Edited March 11, 2010 by 12DrinkMore

[midas]

a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.

http://www.nakedcapitalism.com/2010/03/ny-...ting-fraud.html

[Gambles]

The modern banking system exploits fractional-reserve banking, meaning it only keeps a fraction of deposits in liquid reserves to maximise shareholder profits and depositor rates of interest. The remainder is lent out or otherwise put to work at higher interest rates than are paid to depositors. The difference, or spread, is how banking institutions make profits.

- The fractional reserve system is not used to maximise depositor rates, which are generally held at just above the threshold that still keeps the depositors from taking their money out.

- Unfortunately although the shareholders theoretically should have the majority share of the profits of the operation, the bankers prefer to keep the profits for themselves and dish out humongous bonuses on top of their already bloated salaries. I am very annoyed at the lack of action by the shareholders in accepting this situation, look at RBS, a bank which is reporting billions in losses but still pays out billions in bonuses. In this case the majority shareholders are the UK tax payers. It is a pity that their combined voices were represented by a panel who deemed it essential that the bonuses be paid, instead of putting it to the vote. I cannot imagine that the UK tax payer would be taken in by the bullshit "we need to keep paying the bonuses to keep the staff".

- I wish that writers like you would finally make it crystal clear to the public exactly how this fractional reserve fraud works. Your article perpetuates the incorrect idea that the banks only make a small percentage "cut" on lending, basically the difference between what they pay to depositors and what they charge the debtors. This is a total misconception. The reality is that, for example, the UK banks, some of which run at 3% fractional reserve (I read somewhere that they are able to specify their own comfort level), are in effect able to lend out some 30 times the deposit base.

So, Joe Depositor leaves say 10,000 Quid in the safe care of Northern Cock and receives 1.5% interest, a massive 150 Quid over the year.

Along comes Joe Debtor and the bank lends out 97% of Joe Depositor's cash at 5% interest; making 485 Quid over the year.

And this is where the general public thinks the story ends.

Now you have to make the quantum leap that fractional reserve banking allows (which you have described) as the Joe Debtor generally does not stuff the cash under his pillow, but buys something and the money then reappears as a deposit in the banking system, 97% of which is then re-lent to another Joe Debtor.

So, the end result is that the bank makes 30 * (5% - 1.5%) * initial deposit from Joe Depositor or 10,500 Quid.

All the combined Joe Depositors created from the multiplier are paid 4,500 Quid.

So an incredible amount of "profit", 15,000 Quid in this example, is created by the original deposit from Joe Depositor, who earns just 150 Quid from it. A bit unfair, but that is life, I suppose.

This example also demonstrates just how fragile the whole system is, but it also demonstrates that it need not be so.

1. If just 4% of the 'assets' supporting the debts disappear, then the bank does not have enough money to repay the Joe Depositors in full.

2. If the bankers had not paid themselves such huge and disproportionate bonuses over the last decade, but retained more of the profits, then the whole dam_n banking crisis would not have happened.

3. By allowing such massive multipliers the amount of debt in the economy has spiralled up, creating bubbles and more bubbles.

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And I disagree with two statements you make

1. The stimulus was designed to stimulate the economy through providing credit to the consumer.

Apart from a couple of short term stimuli, such as the "cash for clunkers", rapidly implemented in Europe and the States, all the so called stimulus was put in place to keep the bankers afloat. Whether directly with the provision of liquidity or indirectly through trying to prevent property prices from falling and keep the stock markets up.

2. Bernanke has no clothes.

Bernanke has a whole load of smoke and mirrors hidden under many cloaks.

thanks drink,

Some good observations but just a few clarifications

The point about fractional reserve banking was intended to convey that FRB significantly increases the aggregate of potential shareholder profits and depositor rates of interest. It wasn't making any comment about the way that these are then divided between depositors, shareholders and employees (this is in fact another fascinating topic but way too big to include in the scope of this piece. I can do another peice about that if enough readers are interested but this piece was about explaining central bank policy not about condemining commercial/investment bank irresponsibility - which I'd be very happy to do).

I was amused by the recent take of some of the guys at Agora that Wall Street has become the ultimate embodiment of Marxism - not because of the image that I'm sure many people have seen about how together we can bailout the banks -

but because of the fact that 70% of the profitability goes to the employees, the providers of labour and only 30% goes to the shareholders (the providers of capital). Only on Wall Street has the provision of labour assumed such primacy over the provision of capital!

The serious point here is that moral hazard not only distorts the quantum of profitability and loss but also the distribution of it. Rational market forces become suspended when individuals are empowered to control the outcome of such significant amounts of risk capital without the appropriate fiduciary constraints (to take risks without the dangers of losing). There are a number of factors but more important than the oft-quoted Glass-Steagall repeal to my mind was the moment when each institution ceased to be a partnership and became a public company.

Without wanting to just focus solely on the banking side of things when the article was more to do with Fed manipluation of banks, I think we're all annoyed at bankers' bonuses but until the system ceases to be a distorted moral hazard I don't see anything happening to change this. A symptom of the disease is that when bankers change employers they frequently get guarantees for a number of years - typically a requirement might be "one buck club for five" which means a million dollars guaranteed for 5 years whether the appointe does the new job well, really badly or just averagely. The distortions of the systems permeate thus into all individual contracts and packages. Trying to cure the symptom of pay through pay czars or any similar regulation is just specious while the system retains the disease. So the way that the rotten system remains, I'm afraid that they do "need to keep paying the bonuses to keep the staff" (who bankrupted the bank!)

The intent of the article was to explain to some extent "exactly how this fractional reserve fraud works" in relation to US central bank actions during the bailout. I'm very happy to make it much broader but how much do you want? I ended up with a 5000 word draft on this that would have been too long for an article and in which these really shocking points about the bailout would have been lost.

Sadly, there's something very wrong (either with my writing, your reading or both if your reading of the article "perpetuates the incorrect idea that the banks only make a small percentage "cut" on lending, basically the difference between what they pay to depositors and what they charge the debtors" - I was trying to highlight the idea that the multiplier multiplies both risk and also the aggregate sum of returns.

That makes me wonder what's the best way to try to get the fractional reserve explanation over? - you're obviously pretty well-versed on this, drink, but you do labour under quite a few misconceptions - for instance in reality UK banks have to satisfy UK banking regulators reserve requirements, which in turn has to complay with the Basle banking accords - they can't as you incorrectly state "specify their own comfort level" - but yes they are able to lend multiples of their own capital (the whole point of my article really being how that ability has been manipulated in America by the Fed and the implications of that not only on the banking sector but on the wider economy)

The worst widely reputed example is of UBS being almost 80 times leveraged!!!

Happy to host a lunch discussion on this or even a webinar if anyone's interested ??

Yes, correct ref the multiplier effect but you do have to look at this in context of moral hazards and of global, national and regional economic management. We have a huge moral hazard with individual self-interest and national self-interest and no effective form of constraint. The latest news suggest that it's now seemingly almost impossible now for governments to impose this. I haven't read all of Anton Valukas' report into Lehman Brothers but it seems that he's just focused on the isolated detail and not the big picture. Another chance to change this rotten core of the modern world goes begging and the Wall Street boys will be toasting his name.

I'm a little concerned that you may have totally misunderstood one of the main points of the article - namely that the manipulation by the Fed has prevented the money that was created from reaching consumers - it's locked in bank excess reserves because of the Fed but not many people realize this. I was trying to explain this but appear to have failed. The extra cash remains locked in the banks' reserves and we don't believe that The Fed ever had or currently has any intention of letting consumers get anywhere near this. So actually, drink, we do agree on this point and also that the bailout has manipulated asset prices by putting a false floor under both property and debt in the hope that this holds long enough for real values to rebound. (Personally I wouldn't want to have to rely on that)

We should talk about this some time; there's a lot of complexity going on here that is being obfuscated and I'm clearly not doing the best job of explaining it!

thanks for taking the time to read,

Paul

[Naam]

Woe is us. We're all fcuked. How do I know? Firstly, the WSJ says so.

secondly Midas says so