One who intends to leave others better off for his having existed.

1/31/14

On Federal Reserve Intervention in what is supposed to be a free market capitalistic republic

"...when the Fed intervenes..., the members of the Fed become reverse Robin Hoods as they take from the poor (and unsophisticated)... [and] give to the... politically connected.

...The reason I had the money in [a large bank] was to keep it safe. However, the potential cost to keeping my money in [a large bank] is that the bank may be unwilling or unable to return my money.

They will not be able to return my money if:

•Many other depositors like you get in line before me. Banks today promise everyone that they can have their money back instantaneously, but the bank does not actually have enough money to pay everyone at once because they have lent most of it out to other people — 90 percent or more. Thus, banks are always at risk for runs where the depositors at the front of the line get their money back, but the depositors at the back of the line do not.

Because [a large bank] has loaned out the vast majority of depositors’ money, if even a small percentage of its loans go bust, the firm is at risk for bankruptcy. Leverage, combined with some bad investments, caused the failure of Lehman Brothers in 2008 and would have caused the failure of [a large bank], AIG, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, and many more institutions in 2008 had the government not bailed them out.

In recent days, the chances for trouble at [a large bank] have become more salient because of woes in the emerging markets, particularly Argentina, Turkey, Russia and China...

...turmoil reminded me that this particular trustee is simply not safe.

...Surely, you say, the federal government is going to keep its promises, at least on insured deposits. Yes, the Federal Government (via the FDIC) insures deposits in most institutions up to $250,000. But there is a problem with this insurance. The FDIC currently has far less money in its fund than it has insured deposits: as of Sept. 1, about $41 billion in reserve against $6 trillion in insured deposits. (There are over $9 trillion on deposit at U.S. banks, by the way, so more than $3 trillion in deposits is completely uninsured.)

It’s true, of course, that when the FDIC fund risks running dry, as it did in 2009, it can go back to other parts of the federal government for help.

...it might take some time to get approval.

Remember that Congress voted against the TARP bailout in 2008 before it relented and finally voted for the bailout.

...the Federal Reserve’s actions have myriad, unanticipated, negative consequences.

...The Fed had created $3 trillion of new money in the last five-plus years — three times more than in its entire prior history. A big chunk of that $3 trillion found its way, via private investors and institutions, into risky, emerging markets.

Now that the Fed is reducing (“tapering”) its new money creation (now down to $65 billion a month, or $780 billion a year, as of Wednesday’s announcement), investments are flowing out of risky areas. Some of these countries are facing absolute crises, with Argentina’s currency plummeting by more than 20 percent in under one month. That means investments in Argentina are worth 20 percent less in dollar terms than they were a month ago, even if they held their price in Pesos.

...Eventually, the absurd effort to create wealth through monetary policy will unravel in the U.S. as it has every other time it has been tried from Weimar Germany to Robert Mugabe’s Zimbabwe.

Even after the Fed created the housing problems, we would have been better of with a small 2009 depression rather than the larger depression that lies ahead.

...The trouble with trying to make the world safe for stupidity is that it creates fragility.

[a large bank] and other big banks are fragile — and vulnerable to bank runs — because the Fed has set interest rates to zero. If a run gathers momentum, the government will take steps to stem it.

...they have limited ammunition...

...I favor rules over intervention.

We don’t need a maestro conducting monetary policy; we need a system that promotes stability and allows people (not printing presses) to make us richer."

http://www.pbs.org/newshour/making-sense/is-your-money-safe-at-the-bank-an-economist-says-no-and-withdraws-his/

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