From The Federal Reserve Bank of St. Louis / <>
Real Estate Loans at All Commercial Banks. The market is not frozen. Let the banks take their lumps.
Date / Value of National real estate loans in $ Billions
4/01/08 / 3,651
5/01/08 / 3,653
6/01/08 / 3,644
7/01/08 / 3,623
8/01/08 / 3,642
1) The numbers are in billions -- so 3,642 = $3.642 trillion
2) Therefor --- in September the banks lent $3.642 trillion minus $3.623 trillion -- or $19 billion -- so the credit market is not "frozen"
3) I know from reading about defaults on Real Estate loans -- that defaults never go as high as 4%
4) If 4% of all the existing $3.6 (rounding) trillion in loans go into default -- that is $.145 trillion or $145 billion
5) Paulsen and Bush want the right to spend $700 billion, with virtually no oversight, to ward off financial disaster. That does not make sense.
6) The government could buy all the loans that are likely to default for $145 billion. Why should they spend five times that amount?
7) Why and how would they spend $700 billion?
8) And note -- those defaulting loans do not mean there is no value in the property. Each property can probably be sold for 50% of the book value of the loan at an auction -- so the worst case would be that $72.5 billion will be "lost" (1/2 of $145 billion). And it would not be the borrowers that lose that money -- they will only, in the worst case, lose whatever down payment they made -- which would be less than 20%. The loss ($72.5 billion) would be borne by the foreclosing bank. And why should the lending bank be protected? Aren't losses part of their cost of doing business -- shouldn't that be their risk?
Remember -- the banks were and are collecting something like 6% interest per year on the entire $3.6 trillion -- that is about $200 billion / year or $16.6 billion / month. That $72.5 billion is trivial when compared to the $200 billion they have been making, and will continue to make every year. The banks will make that one-time loss back in less than five months.
Write to everyone you know to stop this giveaway by Congress and power grab by The President.
Friday, September 26, 2008
Credit Is Flowing, Sky Is Not Falling, Don’t Panic
Credit Is Flowing, Sky Is Not Falling, Don’t Panic / From Robert Higgs on Sep 23, 2008
In democratic societies, every great surge of the government’s size, scope, and power rests on a foundation of fear, and the present occasion is no exception. The president, the secretary of the treasury, congressional leaders, and the vultures now swarming Washington to pick the remaining flesh from the taxpayers’ bones would have us believe that unless the colossal rip-off now being formulated in Congress is enacted, the future will be too horrible to contemplate.
Journalists, as usual, are doing their part to create an atmosphere of fear. Reports characterize the bailouts as “a bid to unlock the flow of credit” and make reference to “the frozen credit markets.” It’s hyperbole, don’t believe it.
Although certain financial institutions are undeniably in deep trouble—difficulties of their own making, we might add—the problems in particular financial circles should be kept in perspective. Note especially that credit markets in general have NOT ceased to operate. Moreover, lenders are extending credit in historically great amounts. To see this reality, however, we must break away from anecdotes in the financial press, which is eager to attract readers, and from fear-mongering by the political class, which is eager to seize more power, and examine the data that describe wider market transactions. For this purpose, the St. Louis Fed’s Web site is a useful resource.
Commercial and industrial loans of all commercial banks, which are reported monthly, have grown rapidly. The most recent report, for August 2008, shows outstanding loans of $1,514 billion, an all-time high. This loan volume is 15.5 percent greater than it was a year earlier, and 30.8 percent greater than it was two years earlier. Frozen credit?
Consumer loans at all commercial banks, which are reported monthly, have also grown rapidly. The most recent report, for August 2008, shows outstanding loans of $845 billion, an all-time high. This loan volume is 9.2 percent greater than it was a year earlier, and 16.5 percent greater than it was two years earlier. Frozen credit?
Even real estate loans at all commercial banks, which are reported monthly, grew rapidly until very recently. The most recent report, for August 2008, shows outstanding loans of $3,642 billion, only slightly below the all-time high (in May 2008). This loan volume is 4.1 percent greater than it was a year earlier, and 15.5 percent greater than it was two years earlier. Frozen credit?
Lest one suspect that I have cherry-picked my examples, consider finally the amount of all bank credit at all commercial banks, which is reported weekly. For the most recent week reported, the one that ended on September 9, this credit amounted to $9,406 billion, which is only slightly less than the all-time peak of $9,485 reached in the week that ended on March 26, 2008. For the past six months, total commercial bank credit has remained on a high plateau, well above the levels reached in previous years, when everybody seemed to think that credit was ample.
One might object that a leveling off, after a long period of steady, rapid growth does constitute a substantial change in credit-market conditions. True, enough. But we must also recognize that the rapid growth of credit during the years from 2001 to 2007 was scarcely a healthy development. In fact, this effusion of credit fueled the housing bubble and countless other malinvestments that now must be liquidated, because without a continuation of the very-easy-money regime, these projects cannot be brought to completion or, if already complete, operated without further loss.
That malinvestments must now be liquidated merely reflects the mistakes made in the past, induced by bad government policy at the Fed and other credit-related agencies, such as Fannie and Freddie. Of course, some of the necessary adjustments will be painful for the parties directly involved. But the huge bailout now being concocted in Congress will only compound the errors of the past by keeping some malinvestments on life support, deferring the day that lenders must write off bad debts, and preventing the entire financial system from returning to a semblance of economic viability without ongoing subsidies and bailouts that impoverish the taxpayers and threaten the entire economy.
For now, however, the important point to recognize is that the sky is not falling. Lenders continue to lend at high rates, and the economy continues to operate reasonably well. If people panic and allow Congress to exploit the hyped-up fears of the moment, however, much worse outcomes may be brought about, not the least of which is another giant leap in the size, scope, and power of the federal government—a direct threat to our economy and our liberties.
Tuesday, September 23, 2008
The One Root Cause Of The Money System Meltdown
It is quite clear that our current (September, 2008) monetary system problems are directly traceable to the ONE simple fact that "existing lending rules allow banks to negligently sell off shaky house loans".
Unless those lending rules are changed, no government action will correct the problem.
Allowing banks to sell off shaky house loans protects the banks from any losses on those loans and encourages the negligence of the bank's responsibilities to run a fair, honest and equitable banking / lending system.
But the system is bound to fail if banks are protected from losses on those loans.
It is those losses that are supposed to keep the banks from making bad loans.
In 10th grade English, this should be the way the system works.
1) Banks create new money by lending money to people who (a) have some skin in the game (have made a down payment on the house they are buying and (b) put the house up as collateral for the loan.
2) The banks make money by collecting interest on the loan over the life of the loan.
3) If the loan go bad, the banks foreclose and sell off the house, thus limiting the bank's losses to the difference between the money they have lent and they money they collect from the selling the house.
4) If the loan was prudent, the bank's losses will be very small if the loan goes bad.
5) Thus the banks are pressured to make prudent loans.
6) It is that pressure that is supposed to make sure that the bank makes sensible loans that will not go bad
7) But -- if the bank sells off a loan to a another company before the loan goes bad, the bank obviously protects itself from the risk of loss on the loan. That risk of loss is transferred to the buyer of the loan.
8) Selling off the loan removes the pressure and incentive to make prudent loans.
9) Obviously the banking rules should state that the banks can't sell off loans they have made. If the loans go bad -- they should be forced to take whatever loss arises. That loss should make them more prudent in future lending.
10) Removing the risk encourages the making of risky loans.
11) The built-in risk is the primary thing that keep the banks prudent.
12) The system is bound to fail if banks are allowed to sell off loans.
13) The leverage that is built into fractional reserve banking practically guarantees that banks will never run out of money to lend. The banks do not have to sell off loans in order to raise more money to lend.
14) Selling off a loan simply exchanges one asset of the bank -- (a) the loan for another asset (b) the cash they get from the sale. The selling does NOT make more money available to the bank for future loans. What the bank gains in cash immediately -- they lose in interest income.
15) The selling off of a loan has ONLY ONE PURPOSE -- the avoidance of risk to the bank on a shaky loan. That should not be allowed.
See the Money Section of my website for more information. The Money Section is linked from <<http://www.alphabeticalist.com>>
I would be happy to correspond with anyone who thinks this message needs clarification.
Remember,
- "Existing lending rules allow banks controlled by the Federal Reserve System to negligently, and perhaps fraudulently, sell off shaky home loans."
- They are negligent because the banks have an obligation to make sound loans.
- They are fraudulent because the banks are purposefully avoiding their implied contractual obligations to Congress and thus to the American People to run the money system in a responsible way.
martycarbone@yahoo.com
What limits the amount of money that can be put into an efficient monetary system?
What limits the amount of money that can be put into an efficient monetary system?
Is it (A) the amount of money that is available or (B) the amount of money that can be used profitably?
Surprise -- the answer is (B).
The answer is not (A) because If a bank doesn't have any money on hand -- the bank manager simply agrees to create money for a borrower by making a loan to that borrower who promises to use the money wisely and pay it back at some future date. When the loan is paid back, the new money is extinguished.
But if the Bank can't find a responsible borrower -- the bank simply can't make a loan. So it is (B) a lack of responsible borrowers, that limits the amount that can be put into the system.
That makes perfect sense
Shouldn't there be as much money available as can be lent, used for a good purpose and paid back? That is one of the wonderful parts of fractional reserve banking -- as long as there are qualified borrowers available -- the system will provide whatever amount of money they need.
Do you think that it is somehow immoral for a bank to have no limits on the amount of money they can create, as some say -- out of "thin air"?
I know this is a little mind boggling. Because of the laws of physics, we all tend to think (a) you can't make something from nothing.
In fact, Newton's laws of physics teach that Matter and Energy can neither be created nor destroyed -- (but they can be made to change form).
Fractional reserve banking essentially allows wealth to change form. A farmer can turn money into turnips and back again to more money if that farmer uses borrowed money to grow turnips that he sells for more money than he borrowed. Doesn't that make sense?
But what about the theories of the Austrian School of Economics that teach that adding money to a monetary system always causes inflation? That would be true if the added money did not create wealth. But if the new money is created as a loan and that loan creates enough wealth to pay the money back and still have a surplus -- there will be no inflation.
I know creating money by loans seems weird.
But how else would you place new money into the system without making a loan? -- would you simply give the money away? If you did that, it would be inflationary as taught by The Austrian School. But lending the money eliminates that problem of inflation since the debt has to be paid back -- thus canceling the surplus money and leaving the surplus wealth that was created with the loan.
Of course the government could spend the money into circulation by buying needed infrastructure, but that raises all sorts of problems. Who, for instance, would decide which projects to fund? I think it is simply easier to lend money to borrowers who would a-prioi prove to the government that the project will wind up creating wealth beyond the cost of the project. The best "proof' gets the money. They would pay the loan back by delivering the finished project. I just made this last paragraph up -- does it make any sense?
Martin R. Carbone -- 9/23/08
Is it (A) the amount of money that is available or (B) the amount of money that can be used profitably?
Surprise -- the answer is (B).
The answer is not (A) because If a bank doesn't have any money on hand -- the bank manager simply agrees to create money for a borrower by making a loan to that borrower who promises to use the money wisely and pay it back at some future date. When the loan is paid back, the new money is extinguished.
But if the Bank can't find a responsible borrower -- the bank simply can't make a loan. So it is (B) a lack of responsible borrowers, that limits the amount that can be put into the system.
That makes perfect sense
Shouldn't there be as much money available as can be lent, used for a good purpose and paid back? That is one of the wonderful parts of fractional reserve banking -- as long as there are qualified borrowers available -- the system will provide whatever amount of money they need.
Do you think that it is somehow immoral for a bank to have no limits on the amount of money they can create, as some say -- out of "thin air"?
I know this is a little mind boggling. Because of the laws of physics, we all tend to think (a) you can't make something from nothing.
In fact, Newton's laws of physics teach that Matter and Energy can neither be created nor destroyed -- (but they can be made to change form).
Fractional reserve banking essentially allows wealth to change form. A farmer can turn money into turnips and back again to more money if that farmer uses borrowed money to grow turnips that he sells for more money than he borrowed. Doesn't that make sense?
But what about the theories of the Austrian School of Economics that teach that adding money to a monetary system always causes inflation? That would be true if the added money did not create wealth. But if the new money is created as a loan and that loan creates enough wealth to pay the money back and still have a surplus -- there will be no inflation.
I know creating money by loans seems weird.
But how else would you place new money into the system without making a loan? -- would you simply give the money away? If you did that, it would be inflationary as taught by The Austrian School. But lending the money eliminates that problem of inflation since the debt has to be paid back -- thus canceling the surplus money and leaving the surplus wealth that was created with the loan.
Of course the government could spend the money into circulation by buying needed infrastructure, but that raises all sorts of problems. Who, for instance, would decide which projects to fund? I think it is simply easier to lend money to borrowers who would a-prioi prove to the government that the project will wind up creating wealth beyond the cost of the project. The best "proof' gets the money. They would pay the loan back by delivering the finished project. I just made this last paragraph up -- does it make any sense?
Martin R. Carbone -- 9/23/08
Monday, September 15, 2008
One Elementary Truth
My direct experience has led me believe the following -- it is by Goethe.
Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness. Concerning all acts of initiative and creation, there is one elementary truth the ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then providence moves too.
Whatever you can do or dream you can, begin it.
Boldness has genius, power and magic in it.
Marty Carbone -- Sept, 08
Until one is committed, there is hesitancy, the chance to draw back, always ineffectiveness. Concerning all acts of initiative and creation, there is one elementary truth the ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then providence moves too.
All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one’s favor all manner of unforeseen incidents, meetings and material assistance which no man could have dreamed would have come his way.
Whatever you can do or dream you can, begin it.
Boldness has genius, power and magic in it.
Marty Carbone -- Sept, 08
Friday, September 12, 2008
We plan to lobby Congress' Banking Committees
A Report to the Banking Committees of the House and the Senate
Saturday, September 13, 2008
My wife, Gladys, and I intend to make this material into a report and deliver copies to every member of both Congressional Banking Committees -- sometime in May of ‘09. Your advice is requested.
------------------------------------------------------------------------------------------------
Six Overlooked Minor Problems That Are Crippling The Banking System ... and ... The Simple Legislative Action Congress Can Take To Solve Those Problems
Problem #1: A Belief That An Increase In The Money Supply Will Always Lead To Inflation
Problem #2: Banks Do Not Suffer When They Make Bad Loans
Problem #3: The Government Does Not Use Double-Entry Bookkeeping
Problem #4: Contract Laws Are Not Routinely Applied To Monetary Transactions
Problem #5: The People of “We The People” Are Not Encouraged To Start Banks
Problem #6: The American Public Does Not Understand (a) Our Money System And (b) Fractional Reserve Banking
------------------------------------------------------------------------------------------------------------------
These six problems may look rather trivial at first glance, but it is our belief that they are crucially important: remember -- "for want of a nail, a kingdom was lost".
------------------------------------------------------------------------------------------------------------------
Problem #1: A Belief That An Increase In The Money Supply Will Always Lead To Inflation
Discussion: Lots of people have a deep-rooted belief that a significant increase in the money supply will always lead to inflation -- which is a devaluation of money. We think that is nonsense. If the newly created money is put into the system in such a way as to increase wealth (those things that we value and which lead to a better average life) -- the added money will not be inflationary.
Actions Needed: (1) Laws should be passed that will specify banks will primarily lend money to people and corporations who have (a) adequate collateral and (b) a good plan to create wealth with that money. (2) The Government should directly invest money in wealth producing national projects and related infrastructure.
Problem #2: Banks Do Not Suffer When They Make Bad Loans
Discussion: The “fractional reserve system” is often seen as being the main source of economic problems, because it “(a) creates debt-money out of thin air, (b) leads to an unhealthy increase in the money supply and (c), inevitably, inflation”. I believe these three negatives are always the result of (1) risky lending and (2) a lack of natural “Carrot & Stick” controls that guarantee banks suffer when their loans go bad. Under the present system -- the banks sell off most of their loans (to Freddy and Fannie) and escape what should be the bank's loss when loans go bad. They take the Carrot -- but avoid the Stick. That can easily be corrected by laws which forbid the selling-off of loans by the creator of those loans. The enormous natural downside leverage of fractional reserve banking will the insure that banks make reasonably safe loans. Scroll down to see a separate blog on the leverage built into competitive fractional reserve banking.
Action Needed: Laws should be passed that will mandate banks must not transfer ownership of the loans they create before the loan is paid back. The borrowers should know that they will deal with the known lender for the life of the loan. This wil stop bundling of loans into exotic debt instruments that nobody understands. It will also obviate the need for Freddy Mac and Fannie Mae.
Problem #3: The Government Does Not Use Transparent Double-Entry Bookkeeping
Discussion: The government should change to a double-entry bookkeeping system wherein all transactions involve (1) assets, (2) liabilities , (3) income and (4) expense. Such a system is universally recognized as being the only way to keep track of the financial status of any enterprise. The main advantage of doing this is that government “spending” on worthwhile infrastructure would not immediately be considered an “expense”. The money spent in this way would go into an “asset” account that would be counted as an expense in accordance with a dedicated depreciation schedule.
Action Needed: Laws should be passed that will mandate double-entry bookkeeping on all monetary transactions.
Problem #4: Contract Laws Are Not Routinely Applied To Monetary Transactions
Discussion: All monetary transactions should be considered contracts and should be analyzed in terms of contract law. Reasons and expected results follow.
(a) Contracts have a long legal history in English Common Law and an extraordinary written record in our law books -- both statutes and case law.
(b) Definitions for all words and principles used in contract law are well established in law books.
(c) If we establish that all paper money is essentially a contract between two human entities, it should be relatively easy to describe “paper money” in legal terms and perhaps accounting terms -- because the law is very familiar with accounting.
(d) It can be convincingly shown that barter was originally, and still is, simply a contract between two traders.
(e) The use of gold and silver to facilitate trading could also be shown to be a contract.
(f) The law generally and specifically prohibits the Federal or State governments from interfering with contracts unless the contracts violate existing laws.
(g) Consideration of the above naturally leads to a reasonable conclusion that traders can either use paper money or gold in their transactions as long as (a) they both agree that they understand the terms of the contact, and agree to those terms and (b) the contract does not violate any law
(h) Since the government may not interfere with private contracts under our laws, the government should not pass laws that would prohibit or mandate the use of paper money or the use of gold as money. Both should exist unhampered by government interference.
Action Needed: Laws should be passed that all monetary transactions should be covered by Federal Contract laws
Problem #5: The People of “We The People” Are Not Encouraged To Start Banks
Discussion: Congress should encourage the establishment of banks by common people and groups of people -- such as community organizations, Credit Unions, homeowner associations, charities and such. The Constitution gives that right to the people.
Action Needed: Congress should pass Federal Laws that will encourage The People and their institutions to start banks. That would practically guarantee a competitive banking market.
Problem #6: The American Public Does Not Understand (a) Our Money System and (b) Fractional Reserve Banking
Discussion: Congress should encourage the education of the American People on the principles of (a) and (b) above
Action Needed: Congress should pass Federal Laws that will encourage our educational system to address these issues. A well informed public is probably our best defense against inefficient and wasteful systems.
I invite your comments on all of the above. Help us refine our thoughts.
Martin R. Carbone / 5123 Don Rodolfo Drive / Carlsbad CA / 92010
martycarbone@yahoo.com
http://www.alphabeticalist.com
Saturday, September 13, 2008
My wife, Gladys, and I intend to make this material into a report and deliver copies to every member of both Congressional Banking Committees -- sometime in May of ‘09. Your advice is requested.
------------------------------------------------------------------------------------------------
Six Overlooked Minor Problems That Are Crippling The Banking System ... and ... The Simple Legislative Action Congress Can Take To Solve Those Problems
Problem #1: A Belief That An Increase In The Money Supply Will Always Lead To Inflation
Problem #2: Banks Do Not Suffer When They Make Bad Loans
Problem #3: The Government Does Not Use Double-Entry Bookkeeping
Problem #4: Contract Laws Are Not Routinely Applied To Monetary Transactions
Problem #5: The People of “We The People” Are Not Encouraged To Start Banks
Problem #6: The American Public Does Not Understand (a) Our Money System And (b) Fractional Reserve Banking
------------------------------------------------------------------------------------------------------------------
These six problems may look rather trivial at first glance, but it is our belief that they are crucially important: remember -- "for want of a nail, a kingdom was lost".
------------------------------------------------------------------------------------------------------------------
Problem #1: A Belief That An Increase In The Money Supply Will Always Lead To Inflation
Discussion: Lots of people have a deep-rooted belief that a significant increase in the money supply will always lead to inflation -- which is a devaluation of money. We think that is nonsense. If the newly created money is put into the system in such a way as to increase wealth (those things that we value and which lead to a better average life) -- the added money will not be inflationary.
Actions Needed: (1) Laws should be passed that will specify banks will primarily lend money to people and corporations who have (a) adequate collateral and (b) a good plan to create wealth with that money. (2) The Government should directly invest money in wealth producing national projects and related infrastructure.
Problem #2: Banks Do Not Suffer When They Make Bad Loans
Discussion: The “fractional reserve system” is often seen as being the main source of economic problems, because it “(a) creates debt-money out of thin air, (b) leads to an unhealthy increase in the money supply and (c), inevitably, inflation”. I believe these three negatives are always the result of (1) risky lending and (2) a lack of natural “Carrot & Stick” controls that guarantee banks suffer when their loans go bad. Under the present system -- the banks sell off most of their loans (to Freddy and Fannie) and escape what should be the bank's loss when loans go bad. They take the Carrot -- but avoid the Stick. That can easily be corrected by laws which forbid the selling-off of loans by the creator of those loans. The enormous natural downside leverage of fractional reserve banking will the insure that banks make reasonably safe loans. Scroll down to see a separate blog on the leverage built into competitive fractional reserve banking.
Action Needed: Laws should be passed that will mandate banks must not transfer ownership of the loans they create before the loan is paid back. The borrowers should know that they will deal with the known lender for the life of the loan. This wil stop bundling of loans into exotic debt instruments that nobody understands. It will also obviate the need for Freddy Mac and Fannie Mae.
Problem #3: The Government Does Not Use Transparent Double-Entry Bookkeeping
Discussion: The government should change to a double-entry bookkeeping system wherein all transactions involve (1) assets, (2) liabilities , (3) income and (4) expense. Such a system is universally recognized as being the only way to keep track of the financial status of any enterprise. The main advantage of doing this is that government “spending” on worthwhile infrastructure would not immediately be considered an “expense”. The money spent in this way would go into an “asset” account that would be counted as an expense in accordance with a dedicated depreciation schedule.
Action Needed: Laws should be passed that will mandate double-entry bookkeeping on all monetary transactions.
Problem #4: Contract Laws Are Not Routinely Applied To Monetary Transactions
Discussion: All monetary transactions should be considered contracts and should be analyzed in terms of contract law. Reasons and expected results follow.
(a) Contracts have a long legal history in English Common Law and an extraordinary written record in our law books -- both statutes and case law.
(b) Definitions for all words and principles used in contract law are well established in law books.
(c) If we establish that all paper money is essentially a contract between two human entities, it should be relatively easy to describe “paper money” in legal terms and perhaps accounting terms -- because the law is very familiar with accounting.
(d) It can be convincingly shown that barter was originally, and still is, simply a contract between two traders.
(e) The use of gold and silver to facilitate trading could also be shown to be a contract.
(f) The law generally and specifically prohibits the Federal or State governments from interfering with contracts unless the contracts violate existing laws.
(g) Consideration of the above naturally leads to a reasonable conclusion that traders can either use paper money or gold in their transactions as long as (a) they both agree that they understand the terms of the contact, and agree to those terms and (b) the contract does not violate any law
(h) Since the government may not interfere with private contracts under our laws, the government should not pass laws that would prohibit or mandate the use of paper money or the use of gold as money. Both should exist unhampered by government interference.
Action Needed: Laws should be passed that all monetary transactions should be covered by Federal Contract laws
Problem #5: The People of “We The People” Are Not Encouraged To Start Banks
Discussion: Congress should encourage the establishment of banks by common people and groups of people -- such as community organizations, Credit Unions, homeowner associations, charities and such. The Constitution gives that right to the people.
Action Needed: Congress should pass Federal Laws that will encourage The People and their institutions to start banks. That would practically guarantee a competitive banking market.
Problem #6: The American Public Does Not Understand (a) Our Money System and (b) Fractional Reserve Banking
Discussion: Congress should encourage the education of the American People on the principles of (a) and (b) above
Action Needed: Congress should pass Federal Laws that will encourage our educational system to address these issues. A well informed public is probably our best defense against inefficient and wasteful systems.
I invite your comments on all of the above. Help us refine our thoughts.
Martin R. Carbone / 5123 Don Rodolfo Drive / Carlsbad CA / 92010
martycarbone@yahoo.com
http://www.alphabeticalist.com
Monday, September 8, 2008
The Failure of Freddy and Fannie. The Fed outfoxed Congress.
It is simple:
1. The Federal Reserve Banks collected the fees for gazillions of dollars of mortgage loans.
2. Fannie and Freddy bought those loans and took all the risks of default by the buyers.
Q. Why would Freddy and Fannie buy those loans and the risk that went with them, while the Federal Reserve wanted to get rid of them?
A. The Fed is smarter than Freddy, Fannie and Congress.
Consider the following: One good but often overlooked thing about having the bankers run the money system is that if they lose money on bad loans -- that money theoretically comes out of the banker's pockets (because the bankers own the banks). If the government ran the system and owned the banks -- all losses would come out of the pockets of the taxpayers. Of course what happened in the financial and real estate price meltdown of 2008 shows that in any case -- the taxpayers will probably pay the bill for the losses caused by unpaid debts. In that 2008 case -- the government basically pumped taxpayer money into private banks and corporations, thus shielding them from losing money.
1. The Federal Reserve Banks collected the fees for gazillions of dollars of mortgage loans.
2. Fannie and Freddy bought those loans and took all the risks of default by the buyers.
Q. Why would Freddy and Fannie buy those loans and the risk that went with them, while the Federal Reserve wanted to get rid of them?
A. The Fed is smarter than Freddy, Fannie and Congress.
Consider the following: One good but often overlooked thing about having the bankers run the money system is that if they lose money on bad loans -- that money theoretically comes out of the banker's pockets (because the bankers own the banks). If the government ran the system and owned the banks -- all losses would come out of the pockets of the taxpayers. Of course what happened in the financial and real estate price meltdown of 2008 shows that in any case -- the taxpayers will probably pay the bill for the losses caused by unpaid debts. In that 2008 case -- the government basically pumped taxpayer money into private banks and corporations, thus shielding them from losing money.
Many people understand that the fractional reserve system (the underlying system we use now) gives the managing or owning institution -- whether the Fed or Congress -- a system that has enormous leverage built into it. For every dollar of capital invested by the owners of the system - those owners can make loans adding up to ten times (or much more) the amount of the invested capital. In other words -- if a Federal Bank opens its doors with one million dollars of invested capital -- it has the right to lend out $10 million at whatever interest is currently in vogue.
And they actually have much more leverage than that. If a depositor deposits another $1 million with the bank -- the bank can lend out another $10 million. It turns out that there is no limit to how much the entire system can lend out.
I know that sounds impossible -- but it is the way the system works as far as I know.
What is not so well understood is that "leverage" almost always works both ways -- In this case, it (a) magnifies the opportunity for profit -- but it (b) also magnifies the opportunity for loss if the loss goes bad. The (b) part is very good in my opinion.
Under the present system, The Fed has been able to escape the penalties for bad loans. The establishment of Freddy Mac and Fannie Mae (such cute, benign-sounding names) allows the Fed to sell off whatever loans they consider risky.
I don't think there is any hope of stopping the fractional reserve system -- but I do think it is possible to have it work for the common good -- by making sure that unpaid loans AUTOMATICALLY penalize the banks who are the original lenders. There should be a natural control built into the system. Such a control would almost guarantee that inefficient lenders would be driven out of the system. This control can be accomplished by passing laws that demand the banks hold onto all loans they make for the duration of each loan.
Originally, it was thought that the enormous leverage would work to keep the Bankers prudent, conservative and cautious because for every dollar of bad loans they made, they would have to call back TEN dollars of loans and they would therefor lose the continuing interest on that 10 dollars -- a worse fate can hardly be imagined.
Somewhere along the line, it appears that bankers forgot the downside of the leverage and thereby took chances that were not prudent.
Once Freddy and Fannie were established, that natural control was eliminated and banks basically did not have to worry about the soundness of the loans they issued. Thus, they made bad loans, sold them to Freddy and Fannie and watched them take the losses.
The Fed simply outfoxed Congress.
Freddy and Fannie should be abolished -- let the banks run the risk of bad loans. It will keep them on their toes.
Read the following from the NY Times -- Paulson must be the Fed's man in the White House
WHITE HOUSE MEMO
Rescue of Mortgage Giants Displays Paulson's Clout / By SHERYL GAY STOLBERG
Treasury Secretary Henry M. Paulson Jr. has led President Bush where he would not usually go: into government intervention in the markets.
http://www.nytimes.com/2008/09/09/business/09bush.html?th&emc=th
Martin R. Carbone
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