FDIC May Need $150 Billion Bailout

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21

A difficult to follow example is pointless…

[quote]Nor does it provide for a central bank which can discount Joe’s debt
and issue more ten-dollar bills (whether in deposit form or as printed
currency is irrelevant, as they are interchangeable).
[/quote]

Joe picking up seashells is the exact equivalent of printing money. It also shows quite clearly that using this as a mechanism to ‘pay off debts’ is, in reality, exactly the same as declaring the debts null and void.

I’ll grant though, when you add 1,000,000 extra parties things become a ‘little’ more complex. :wink:

I[quote]
Murray Rothbard ("The Mystery of Banking") believed that bank lending creates fiat money from thin air.[/quote]

I would tend to say that Murray is then, a fool. However, it really depends on what exactly he meant by that. A banks lending can be construed as the creation of a new fiat monetary system – whose value can only be converted back to the ‘base currency’ over time as stipulated by the terms of the loan. It is not, however, in anyway the same as actually creating new dollars (or whatever the base currency being used is). However, even that analogy is weak and leads to deep misunderstandings of bank lending.

The reality is that intrinsic to real printed money is a complete lack of incentives to recollect it. Joe does not care one wit about getting back seashells he picked up off the beach and gave to Bob. He can always get more. This is expressly deviant to the nature of a loan, which by nature demands getting the money back.

Ben is a fool.

22

Martin Weiss reports:

"1. Disregard data based on the list of troubled banks maintained by the Federal Deposit Insurance Corporation (FDIC). The FDIC’s list currently has 117 institutions with $78 billion in assets. However, based on a broader analysis of recent FDIC call report data, we find that institutions at risk of failure include 1,479 FDIC member banks and 158 thrifts with total assets of $3.2 trillion, or 41 times the assets of banks on the FDIC’s list.

  1. Think twice before providing a broad bailout for U.S. debts given the wide diversity of mortgage holders and the great magnitude of the total debts outstanding in the United States. Just-released Federal Reserve Flow of Funds data show that, beyond mortgages, there are another $20.4 trillion in privatesector consumer and corporate debts, plus $2.7 trillion in municipal securities outstanding.

  2. Recognize that, among banks and thrifts with $5 billion or more in assets, there are 61 banks and 25 thrifts that are heavily exposed to nonperforming mortgages."

http://www.moneyandmarkets.com/files/documents/Final-Bailout-White-Paper.pdf

In other words, $700 billion is needed to shore up the FDIC. If the bailout money goes to the Wall Street criminals, it won’t be long afterwards when the FDIC comes begging for more money. There was no doubt in my mind that whatever the Beltway Crowd does, it will be wrong. It looks more that the reason for the hysteria has more to do with getting bailed out while the money is still there.

23

I think this is one of the great keys to Chris’ success in that is able to easily explain many quite complicated issues.

For the would be economists among us , perhaps we could write a guide to general banking practice, including exactly what the fractional reserve system is and why it isn’t a demon, and what could possibly be used to replace it, as well as general economic practice of central banks for laymen. It would help people a lot I think.

Every other comment I read on the forums has an economic ‘truth’ in it, which is normally either not true, true only under certain conditions, or true, but without a full explanation very misleading.

If we are any good at it, maybe Chris will pin it in forum. It would also help people to understand that while alot of things are going the pan, It is not all the fault of the FedRes and the fractional reserve banking system, but rather is down to multiple factors including the abuse of the aforementioned.

Alternatively, maybe Chris could do it :slight_smile:

24

gsti you are right we need explanations. i am an economic idiot. so explain to me if i have it right " it is not all the fault of the fed res and the fractional reserve banking system" have you read the creature from the island off the coast of a soon to be banana republic?

25

I am familiar with the book :wink:

The possibility of the USA becoming a banana republic is slim I hope, more a facist superstate is where my money would be.

Specifically there is somthing you want to know? If I can I will answer.

26

i would like to know why it is not all the fault of the fed res and banking system(one and the same)

maybe a mango republic is better but i guess i will eat whatever chairman mao’s kids will give me.

27

Hi Joe2baba,

The first thing we need to clear up is that the federal reserve bank is NOT the fractional reserve banking system (FRB). FRB has been around for a very long time, long before the FedRes, and will be after the FedRes has gone I would think. The FedRes is the lender of last resort, and in real terms that has and always will be YOU, the taxpayer, But if you scrapped the FedRes today, FRB would still exist, most likely with 0% reserve.

When we are thinking about this problem, we need to remember that it is actually several different problems. The temptation is always just to find someone to blame. Someone responsible for the whole lot. As you have seen from Chris’s crash course there are alot of factors involved here. But lets split up this economic one a bit.

I think the issue can be divided in to two main problem areas. Private banking and public finances.

Public Finance can be summed up pretty easily - spending more than you make. Here are a few things that have contributed to this.

  • USA running out of its own resources and needing to buy them abroad
  • Ambitious social spending plans
  • Workers refusing to take market rates of pay (the free market is very unforgiving of such things)
  • Erosion of the manufacturing base - not competitive - see the previous
  • The emergence of more competitive nations
  • War - This is very expensive and the USA has been at war along time now

Quite some time ago the government was unable to tax you enough to meet it’s debt and spending obligations, so it was forced into a cycle of borrowing that has never ended.

As you can see there are several reasons there already, and that is hardly an exhaustive list. I don’t think there was ever an option for the treasury to ask the fedres to print money without simply monetizing the debt, money always had to be borrowed. now that borrowing is becoming difficult if the treasury does turn on the printing press it will be a complete diaster for America. Everything was in a pretty bad way along time before the President volunteered your future to the private banks in the form of bailouts.

Simply put - America has borrowed money for a lifestyle it could not afford

Private Banking - Boy thats an even bigger mess, at least in terms of understanding it all. But still it is quite easy to point out that there are issues other than FRB that have contributed to this mess.

FRB is essentially an unstable system of banking. As I am sure you are aware; everyone asks for their money at the same time = unhappiness and banks going out of business. So ideally if FRB is in use, and there are quite a few good arguments why it should be, there ought to be very tight controls on the amount of reserve that a bank should keep. Sadly this has not been the case, in fact, it has been the otherway around.

For many many years now the reserve requirements have been reduced alot. This has led to SIV’s and other packages of mortgages being moved off the main books of banks. These reductions where allowed by government.

Now with most restictions on lending out the window, guess what happened? :wink: You cannot blame the fox for killing the chickens if you put it in the hen house. Lest we forget, Banks are essentially greedy, with relatively short term interests.

Banks began lending to anyone and everyone regardless of their position to pay the full term of the contract.

So , lets summarise some of those factors.

  • Reduction in regulation from the government
  • Greedy banking practices of lending to everyone/anyone
  • People entering agreements they could never meet or only meet in specific circumstances.

Lets put it this way, France has had FRB since before the USA existed, and they do not have this problem, the government would never let the banks be so irresonsible in france, and the populace probably has a better understanding of money, so simply do not borrow as much.

I am not claiming that FRB and the Federal Reserve did not play a part or do not have responsibility here, they do. But to lay the blame of all these ills at the door of the fedres and a system of banking is not useful or conducive of getting anything to change in a meaningful way.

Personnally I am against FRB, I simply think it is immoral, and I don’t see much point in a central bank either really, other than it makes it a little harder( not much) for the governement to manipulate the economic postion for political gain. I think when wishing to get rid of systems and institutions it is very important to come to the table with good arguments why and good alternatives. While Chris’ video on money and FRB is 100% correct, it does leave out alot of information about what FRB does and any of the reasons its good. To really argue against the use FRB you need to be armed with these too or the libetarians will chew you up and spit you out at the discussion table :slight_smile:

Even though this answer is longish, it is really only skimming the surface, hence my thought that a few guides would be very helpful for everyone.

I hope this helped.

regards

Gary

PS - It was never my intention that this explanation be exhaustive, or to explain the cause of what happened, simply to demonstate it was not all the fault of the FedRes and FRB.