$1200!!!

[pstraten]

"Hopefully"

Robert,

As they say in France, sans blague!

[rdamurphy]

You are effectively correct, remember, of course, that the reality is several magnitudes more complicated than that. It is also the same way stock works, in effect, you are purchasing part of the assets of a firm, and profiting by the increase of value of those assets. Hopefully.

Robert

[zzmikezz]

All this talk about currencies and barter goods and precious metals reminds me of something that my wife recalled yesterday ...

Maybe twenty years ago there was a car ad featuring the Lone Ranger talking with a car salesman. The salesman says "I want to put you in this new Toyota right over here."

"Yes" says the Lone Ranger. "But does it come in Si-l-l-l-ver?"

[pstraten]

Just to sweeten the pot, I've just been told I can offer you a really great, painless adjustable-rate loan on top of everything!

[pstraten]

One lawyer on emergency call said we'll probably need to call in some more outside experts tomorrow morning. Please don't sell the bridge! Give me until noon, OK? I mean, I can beat that other guy's offer for sure.

P.S. On some hasty legal advice: you sure you no like wampum? Me got plenty. And got axe heads and copper bracelets too!

[zzmikezz]

You tellum moneyfella lawfella bridge lead gold streets place me sellum you cheap but must act fast other buyer waiting. Me no wantum beads.

[pstraten]

Sounds good after reading three times, Mike!

But it's late at night. I'd better call my accountants and lawyers together tomorrow morning and get a concensus...

[zzmikezz]

Whatever happened to things you can understand? You'll have to go back to the 14th Century and ask the Medicis why they invented modern banking complete with double entry bookkeeping.

Now ... Me no likum carrots onions. But me do gottum plenty mammoth meat. Me wantum copy RailSim US edition. You send me RailSim. Then you go museum tellum give you mammoth belong me.

If you no like that, gottum bridge in brooklyn tradeum you railsim for.

[pstraten]

Hey,

Whatever happened to things I can understand?

Me got carrots and onions.
You got plenty big hunk of mammoth leg.
Me can trade you for some?

[zzmikezz]

rdaymurphy,

You wrote "true" about the Fed's open market operations. Well, the Fed does do those things but it is not all the Fed does, and those things are almost irrelevant for the next couple of days.

xxxxxxxxxxxxxxxxxxxxxx

The buying and selling of treasury securities is one of the Fed’s primary tool for influencing interest rates - - by expanding and contracting the money supply. However, it’s not the only way to regulate interest rates. Sometimes they simply do what they did this morning and that is to cut the rate at the discount window.

What does that mean? It’s the interest rate that the Fed charges banks - - who are coming to the Fed as the lender of last resort. You see, banks normally grant one another short term loans as a way of managing cash inventories, see below.

Now …

Folks, I wasn't talking about printing money, I was talking about creating money. Look at it this way ...

When a bank makes a loan, they don't bring out a printing press, nor do they run a Brink's truck to and back from the Bureau of Engraving and Printing.

What they do is to say to the customer, “Hey Presto!, we just increased the amount of money in your bank account by increasing the number you get told when you ask what your bank balance is.

xxxxxxxxxxxxxxxxxxxxx

That’s right - - money created out of thin air by the bank itself. That created balance is a bank liability. Because of the nature of double entry bookkeeping, an offsetting asset must have come into being at the same time. That asset is the loan. So the bank has the loan and the csutomer has the new money - - but it isn’t printed money.

Yes, the bank did this with the stroke of a pen, so to speak. The money didn’t exist before the loan, it exists after the loan. Now there are limits on the bank’s permission to make loans. Let’s say that a bank is permitted to make loans up to 95% of the value of the bank’s assets. If they’re up against the lending limit, the only way they can make another loan is if some other bank lends them the funds.

So they get a loan from another bank. Now they hold a new asset (the borrowed cash, which is not currency but a ledger entry and is money nevertheless) and a new liability (the obligation to repay the borrowed cash). This borrowed cash will once again put the bank below it’s lending limit. Don’t believe it?

Let’s say that the bank started with no assets and no liabilities. It then makes a loan for one million dollars. Now it has assets of one million (the loan) and liabilities of one million (the cash in the borrower’s account). But that loan of one million was one million over the bank’s ability to lend because the bank had no assets at all,

Now . . . Oversimplifying the actual machinery and the actual intermediaries, the bank goes to the Fed and borrows a billion dollars. Now it has liabilities of a billion, but it also has assets of a billion - - the cash (again, not currency). So now it can lend out 95% of one billion = 950 million dollars of brand new money that never existed before the bank borrowed from the Fed.

xxxxxxxxxxxxxxxxxx

I’m oversimplifying, but that is in fact another role of the Fed in the banking system. Now it hardly ever says “Guys, we the Fed are not making any loans.” What it says instead is “The interest rate we’re going to charge you will be so high that most of you won’t want to borrow from us.”

Conversely, the Fed may say the opposite, which we need it to do in this current crisis: “Guys, we want you to create more money by making more loans. Therefore we cutting our discount rate to such a ridiculously low level that most of you will want to borrow as much money as you can from us. That way you’ll have plenty of cash (not currency) to lend, and that way businesses and consumers will be able to borrow..”

Again, the Fed does not directly lend to the banks that make the business and consumer loans, and that write mortgages (another oversimplification). But the effect on the banking system is exactly the same as if the Fed were dealing with the individual banks. The Fed lowers the discount rate and the banks create the money, effectively the same thing as the Fed itself creating the money, for purposes of our discussion here.

Xxxxxxxxxxxxxxxxxxxxxxxxxxx

So what does all this have to do with the financial crisis? Let’s look at it.

Our example bank was able to lend $950M. But let’s say that it lent it out in the form of mortgages. This is another oversimplification at the bank level, but it will not be an oversimplification at the level of the banking system overall. Still, we’ll look at our example bank.

It has $950M worth of assets. It can’t lend anything more because it’s at it’s lending limit. Now it discovers that, say, $100M of those mortgages are suddenly seen to be in default. (Subprime mortgages.) There are three theoretical outcomes here.

1 – The bank fails, because its assets have dried up but its liabilities haven’t. It owes more than it has, and by definition that’s insolvency. An insolvent bank must either shut down or be bailed out.

2 – The bank says to itself “We don’t want to fail so we’ll sell off enough assets to cover the $100M writeoff of the bad loans.” Now the bank is of size $900M instead of $1000M
It can’t lend any money - - it’s already fully loaned out - - but at least it didn’t fail. However, it may be that the marketplace has decided that this particular bank’s assets are not worth what the bank’s books says they are. So maybe they’re going to have to sell $150M worth of assets valued the old way to raise the $100M. So once again the bank is over the limit.

3 – The bank borrows $100M instead of selling off assets. It writes off $100M in bad debt, the stockholders are mad as hell, but again the bank stays in business. However, unless another bank is willing to lend it more than $100M, the bank will not be able to make any new loans.

So in the end, as the subprime mortgages go into default and the problems surface, the book value of the banks’ assets declines, and they can’t make loans unless . . . unless the Fed steps in and lends massive amounts of money to the banking system. Which particular major banks get the loans is a separate story.

[Paul1953]

All I know is on a number of websites visited in the last while, there is mention every week of 30 billion here, 40billion there, all being pumped by the Fed. The LSM doesnt post the same reports, as they are too busy trying to distact the public yet again, only this time about primaries.

The thing that suprises me is that the right wing wasnt all over this weeks ago, seeing as how you spent time in economy class ,and all.

BarkingMoonBat not running a financial section?

Can you say Amero?

[rdamurphy]

Never have before, why expect to now?

Robert

[kevarc]

Well, I am still waiting for Kenny's documentation af the collusion between Auto Dealers and State Governments. So you really think you are going to get anything useful out of him?

[rdamurphy]

True.

Robert

[pstraten]

In truth, guys, the only thing the Fed can do is increase or decrease the federal funds rate (on money lent overnight between banks), which tends to be analogous to "loosening" or "tightening" the money supply. Not in any way equivalent to printing money.

This certainly can do a great job of smoothing out market fluctuations and avoiding a disastrous spiral, but the danger lies in not knowing when to cut it off and have things swing precipitously in the other direction.

Kinda like trying to pull out of a skid on an icy road, skill is helpful, but so is luck!