If you have "no place to go," come here!

Read this with your morning coffee

Yves says you'll need to be caffeinated, and she's right.

UPDATE On overnight consideration, you really should try take the time to read it.

The post connects a lot of dots, and in particular, it explains this chart, which Krugman does not**, and explains why, after the government dumped all our money into an enormous hole*, the banks still aren't lending.

NOTE * "The American people earned that money! They have a right to decide how that money should be destroyed!"

UPDATE ** I'm wrong. Krugman says it's the same liquidity trap the Japanese are in. But if our central bankers and financial decision makers are operating on the wrong theory of money entirely, then that's not so. Still learning!

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lizpolaris's picture
Submitted by lizpolaris on

But this from Krugman's blog explained to me why banks still aren't lending:

...the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized.

Highlighting is mine. This seemed so obvious before the great giveaway began and it's truly hilarious that our congresscritters didn't know that this actually happened already over in Japan. So it shouldn't be at all surprising that there's no lending going on. Because the best translation of the wordy wonkishness around all of this is: Those who receive TARP money are stealing it and we've made that legal too!

Love the Onion clip. One tweak would make it better. Have one side of the table arguing in favor of the money hole - and the other arguing that there's no money hole and there's never been a money hole. The moderator could show a clip of the money in the hole and the fires and ash billowing. And then the denier's side of the table could provide some really funny explanations of why that's not a hole, not money, and those really aren't fires we saw in the video.

Submitted by lambert on

Governments don't create money -- banks do. The post develops a model on that basis, and shows how it fits the facts we know better than, well, the theory that all of the banksters and most of the policy makers at least claim to beleive.

That means that Geithner has hold of the wrong end of the stick. It also means, and this is one of the pleasurable parts of the post, that all the libertarian loons who want to abolish the Fed and "fiat money" are, in the words of the old joke, "not even wrong."

It's an excellent post. Yves is giving us excellent analytical tools. I suggest you try again, with more caffeine.

connecticut man1's picture
Submitted by connecticut man1 on

NOTE * "The American people earned that money! They have a right to decide how that money should be destroyed!"

I am pretty darn certain nobody has (yet) earned the bulk of the some odd 4 trillion dollars they dumped in to the bankers and Wall Street retirement and bonus fund.

I like the circle jerk possibilities here if I am reading this correctly:

Basil’s essential point was quite simple. The standard money multiplier model’s assumption that banks wait passively for deposits before starting to lend is false. Rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend,

“In the real world, banks extend credit, creating deposits in the process, and look for reserves later”.[5]

Thus loans come first—simultaneously creating deposits—and at a later stage the reserves are found. The main mechanism behind this are the “lines of credit” that major corporations have arranged with banks that enable them to expand their loans from whatever they are now up to a specified limit.

You are a bank that has a customer that wants a $1000 loan but you don't have the needed $100 in reserves? No problem.

Write the loan to "justify" $150 in profit ($150 since stockholders want money too)... Take the profit (all on paper since it has not been payed to you yet but is very real in the world of Enron accounting) and use it as the reserve+++. Then as soon as you can cash out $100 of it in bonuses to all of your accomplices.

How long do you think they could perpetuate this money manufacturing scheme before someone notices?

Again: I ain't'n't too sure I read that too good like. But if I did, it reeks of scam-waiting-to-happen.

Submitted by lambert on

we need banks, always, as a third party, because they're the umps: They're calling the balls and strikes on when transactions are completed (so buyers and sellers don't have to do that with, say, shootouts in the streets).

And it's a scam waiting to happen, but only in the sense that every human activity is a scam waiting to happen -- at least a percentage of the time* -- human nature being what it is, as Miss Marple would say.

That's where checks and balances and accountability and transparency come in. Unfortunately, the Conservatives dismantled all that. And so, incentives being what they were, and human nature being what it is, the banks created more money than there is in the world, and charged fat fees for it. If the controls are there, it's a workable system -- probably been around since at least the Venetians, and maybe earlier.

NOTE * But I must review that John Nash stuff I saw floating around.

connecticut man1's picture
Submitted by connecticut man1 on

just commenting on that one part of the post that caught my eye as I read it.

I need to re-read the whole thing even if I think I think I might have the general idea of what Yves is talking about in the whole post.

I don't look at the banks as umps (umps are supposed to be impartial, these fraudsters were not) but in a less profit driven banking world they could be umps and would be facilitators of the free market. As it stands they are, clearly, just a tool to manufacture profit for CEOs and other higher ups in bonuses with a complete disregard for the well being of the company and stock holders.

Submitted by lambert on

on Yves's site; I should have made it clear. The guy is definitely a hippie, though.