Getting the numbers right: Banks and gold

[SWPIGWANG]

I keep on hearing all this "natural collapse of the system due to interest if no more money are printed" speech on this board, but lets figure out if the math makes sense.

Gold:
Gold has worked with fractional reserve systems and worked fine, showing that inflationary money creation is not necessary for the banking system. In comparison with fiat money, the main difference is that gold redeemability sets a "hard cap" on amount of currency. If fiat currency is subject to the same limitation somehow, where the amount of physical paper is fixed and no more printed, than it would not have inflationary results.

Now one can argue over the monetary policies of the fed and the rights to print money. However, the fact that the government established the fed is because directly managed currency by governments had a bad history of excessive printing. Fed, being a bank that needs to the continued functioning of the economy to survive, is considered more responsible than governments that survive on guns.

Fractional Reserve banking:
Its been shown above that money printing is not necessary for fractional reserve banking to work, but some folks might still be confused by the nature of money and not understand how it works.

Lets start with $100 dollars deposited into a bank where $80 is loaned out and so on. After a while $400 of "bank money" is created. So now the banks charge $40 dollar of interest and what happens? Lets assume that each borrower pays the money back, not having used them, so we end up with $100 back at the depositor's bank, and $40 of debt to the borrowers. But the borrowers can work!, so they can say, produce a TV and sell it to the original depositor, thus get $40 dollar from the depositor and repay his debts. In this end result, all debt is paid off and things are fine.

Now, the system does have vulnerabilities. For example, if the borrower is unemployed and resulting bad debt would bankrupt both him and do some damage to banks in the chain. However the basic vulnerability can not be removed without outlawing lending completely. You can very much reproduce the effect by lending a gold coin to a buddy as a bank could, only on a different scale. Hell, gold coin lending has 0% reserve rate and could end up generating trillions of dollars of debt if it goes far enough.

Note that only production is necessary for the system to work, and consider that humans need to grow food and drink water, that isn't a problem. The system, if jammed can be super-charged with regular injection of money and growth, but that is not strictly necessary.

Full reserve banking-it really isn't banking at all, at least not like modern banking. Full reserve banking is easy enough to do. Simply take the cash one has and bury it in your yard. (or buy gold and bury that)

Savings in a fractional reserve banking is buying debt while being insured by banks and governments while being paid interest for the risk of their failure. It is a investment and not a natural right, and not all that different from buying a bond.

-------------
Solution: One should learn when to save, when to borrow and when to invest.

The harm in the system comes when borrowing have become excessive, resulting in instability. This is not merely the responsibility of banks but of the loan takers. As long as bad debt exists, there would always be an element of insecurity in the system. If people stop self destructing by taking excessive loans, the system would work just fine. If people try to get loans anyways, the system would be unstable as long as they are still given them.

If you ask me, the fact that America have a savings rate of 0% while Europe had 10% and China has 30% is the real problem.

[garak]

If you ask me, the fact that America have a savings rate of 0% while Europe had 10% and China has 30% is the real problem.

I don't think that's even the real problem. All of this financial stuff in general is just a symptom of America being psychologically warped. We had it good for a while and it made us spoiled and arrogant. America itself has been one big bubble.

[jyakulis]

If you ask me, the fact that America have a savings rate of 0% while Europe had 10% and China has 30% is the real problem.

but the system is inflationary by nature and thus discourages savings.

if you can't see this then look at an extreme case like zimbabwe to provide more clarity. money essentially has an expiration date. saving is a complete waste.

[thod]

In a fractional reserve system you have the problem of determining what is a deposit.

Lets suppose I start a bank and need to keep 10% of depositors funds on hand to cover withdrawals. I start with a $100 deposit, meaning I can lend out $900 in new loans. I make the $900 loan to the wife which she places in the bank as a deposit. I now have $1000 total deposits, so I can loan out $9000, of which $900 is already loaned. So I make a loan of $8100 to the wife which she places on deposit with the bank, giving me $9100 in deposits.

As you can see in the above example, with just 2 iterations I have vastly increased my deposits even though there was only $100 entered into the system. Thus I am able to create infinite credit and am not restricted by the 10% rule at all.

Banking is a license to print money, it is a counterfeiting operation. You can start up a company to conduct some business for a few dollars. Yet if you name your business as banking, you are severely restricted since everyone would like the ability to print money.

[walfin]

Full reserve banking-it really isn't banking at all, at least not like modern banking. Full reserve banking is easy enough to do. Simply take the cash one has and bury it in your yard. (or buy gold and bury that)
Well, there's this thing called Islamic banking that's full reserve.

[jyakulis]

Well, there's this thing called Islamic banking that's full reserve.

yeah apparently the op has never heard of people lending money they actually have.

how can you defend someone lending out your deposits. that's not their money. it's yours. suddenly because they have the name bank they can commit massive fraud. if you don't understand this then i challenge you to listen to this audio book chapter called deposit banking.

http://mises.org/media.aspx?action=search&q=case%20against%20the%20fed

[SWPIGWANG]

Deposits in a fractional reserve banking is buying debt while being insured by banks and governments while being paid interest for the risk of their failure.

Ignorance is no excuse.


how can you defend someone lending out your deposits. that's not their money.
Semantics. If you don't want them to lend, just use an alternative method at storing value.

(bury your cash, buy gold, use foreign currency...etc)

No one is forcing the American people to keep their cash in banks that lends them out, except perhaps their own ignorance. (and perhaps the idea that US dollars should be the world's saving currency as opposed to just another currency used for transactions)


but the system is inflationary by nature and thus discourages savings.
The system is only inflationary if the fed prints more money, which is politically controlled. It can be argued that the fed has done just that with various money supply increasing policies in the past decade or more, but that does not make it a mathematically certainty, but a political decision. (gold standard itself is a political decision) Of course, gold standards people is really about denying the option of printing money to the government completely and not any magical property of the metal.

Gold can behave like fiat currency at times, like how Spanish plundering of new world gold resulted in massive inflation that ruined their economy and let the British overtake them with growth in the real economy as opposed to the gold mining one. Gold mining is just like printing money in its inflationary effects, but usually work slower than the presses.

If you ask me, the real foul play from the government is fudging inflation and unemployment statistics to look better. If given proper information, the market can self adjust and the proper macro-economic policy (eg. don't print more money when there is inflation!) would be self evident and intelligent voters can reasonably pressure them into it.


Lets suppose I start a bank and need to keep 10% of depositors funds on hand to cover withdrawals. I start with a $100 deposit, meaning I can lend out $900 in new loans.
No, you can lead out $90 dollars of $100 of deposits. It is only when a bank's lends out its own money that it is allowed 1:9 ratio, which drops back to 90% after the first iteration.

[Chunes]

In our economy, increased productivity is not rewarded, but punished.

That is seriously fucked up.

We still work forty-hour-weeks—the same as fifty years ago—except now twice as many of us are working.

Could it be that technology is not a tool, but a hindrance? Could it be that our economy is designed to siphon productivity from the general populace?

What on earth is going on here?

[jyakulis]

Deposits in a fractional reserve banking is buying debt while being insured by banks and governments while being paid interest for the risk of their failure.

Ignorance is no excuse.



man you lost me already. a deposit is buying debt. buying debt from whom. who is paying interest to whom. who is insuring whom. i'm not responding until i completely understand what you are saying.

[jyakulis]

Could it be that technology is not a tool, but a hindrance? Could it be that our economy is designed to siphon productivity from the general populace?



correct sir.

inflation is the increase in money supply. the fed goes off the cpi, which is increasing prices.

since the industrial revolution productivity gains have caused prices to go down. if you have sound money with productivity gains everyone will experience gradual deflation of all prices and thus all of society gets wealthier by seeing more purchasing power with their money. even if the fed perfectly controls the cpi to effectively be 0; you will still have wealth siphoned away because it won't account for productivity gains. now once you find out how the government calculates cpi it may enrage you even further. they fudge it in many ways. they may exclude housing or energy. then they use something called hedonics, which basically says even though the price of salmon has increased a consumer will choose hot dogs instead, and salmon will be excluded from the calculation.

under the current system the people that get to use the money first are the ones that benefit (the counterfeiters and their cronies) because they are getting extra goods and services before inflationary pressures are truly felt. and the people that get the money last or not at all gradually get their wealth siphoned away. and of course the banks greatly benefit because they are collecting fat interest payments off of loaned money that's not even theirs.

[jyakulis]

(bury your cash, buy gold, use foreign currency...etc)

No one is forcing the American people to keep their cash in banks that lends them out, except perhaps their own ignorance. (and perhaps the idea that US dollars should be the world's saving currency as opposed to just another currency used for transactions)


yes they are....ever hear of legal tender laws? their is no competition of currrency and no one is allowed to make receipts for deposited money except under the federal reserve system. it must be routed through them. ever hear of jonathan may and the hunt brothers? also, they make gold very undesirable because of capital gains taxes. it's considered as an investment, not a store of wealth.



The system is only inflationary if the fed prints more money, which is politically controlled.


c'mon you are honestly going to argue with me that it's not inflationary by nature. do i really have to pull up the value of the dollar since 1913 chart?




Gold can behave like fiat currency at times, like how Spanish plundering of new world gold resulted in massive inflation that ruined their economy and let the British overtake them with growth in the real economy as opposed to the gold mining one.



yeah and that is highly unlikely to happen again. most of the huge deposits of gold are mined. the biggest increase yearly you are going to see is maybe 2% maximum. i could care less if they use gold. i just believe in commodity money. if the market finds something better than gold or silver that's fine by me.

[Chunes]

Theoretically the Fed has the power to decrease the money supply as needed but have we ever seen that?

[Promethean]

SWPIGWANG the Fed is not politically controlled. It is controlled by whatever reasons the reserve bankers choose for themselves. They are not accountable to anyone for what they do and have no legitimate authority in the first place. The Federal Reserve is not Federal at all, it is entirely private and the supposed oversight the government has on it is only a farce. Where is the M-3 report and why can no one seem to compell them to give it? Who are the bankers? Where are the complete minutes of their meetings?

If the Fed wished to forclose on the whole country at this very moment and no one questioned their actual legitemacy, they could do just that and it would be legal. Or as legal as anything ever is in high crime like government or the FED. Not that I give a shit about law anyway lol.

[mancroft]

The Fed is the problem.

http://www.endthefed.us/

[thod]

The problem we are seeing atm is entirely down to the fed, allowing it to set interest rates. The inbuilt inflation hurts savers with the result that few people save anymore so when asset prices crash there is nobody there to stop it by buying them up on the cheap.

In a free market, interest rates are set by supply and demand for capital. If capital is currently in demand then savers should be able to demand a premium for the use of their savings. The high interest rates will encourage saving increasing the capital pool, and hence lowering interest rates until supply and demand for capital are in equilibrium.

Thus you can see how the fed is acting contrary to the market by lowering its interest rate. By supplying effectively infinite capital at what ever rate it chooses it prevents price discovery. What is worse, it exacerbates the problem in that the lower interest rates act as a disincentive to save, lowering the savings pool even further.

The whole problem was created by them. By inflating away savings they have discouraged it. Now that asset prices are falling there is nobody left with the savings to buy on the cheap and arrest the fall. What they are hoping for is that people will in debt themselves to new record levels and buy up the assets with the cheap loans.

The ponzi scheme they have created is coming crashing down as people do not wish to take on even more debt. Its a ponzi scheme because they rely on ever more people taking on ever more debt.

People generate savings by producing now and will use those savings for consumption in the future. Debtors consume now and produce in the future. There is balance. You cannot have a system of big debtors and bigger debtors, with ever growing debts. Both of these positions are consuming what has not been produced and this is inflationary.

We need to kick these criminals out and restore sound money.

[mancroft]

Couldn't have said it better myself, thod.


We need to kick these criminals out and restore sound money.

Personally, I'd put the lot in prison.

Useful film about the Fed:

http://www.fdrs.org/moneybankfedres.html

[Ferrus]

Ultimately though, it comes down to proper regulation, to prevent highly risky short-term lending, and to prevent the proliferation of arcane financial derivatives that have spun off from this. As for the real economy, it has become stuck in ruts created by oligarchic companies that have leveraged themselves to the hilt, and whose mass operation rely on an ever growing economy, And the funny thing is - it is the exact same mistake made in the late 20s.

[Promethean]

I don't think anyone should have to pay to imprison these criminals. That would just be adding insult to injury. I personally would have no compunction against pulling the leaver, or trigger on each one of them.

[Promethean]

The Fed is the problem.

http://www.endthefed.us/


Amen

[Ferrus]

Why blame the fed though? They have been doing what their profession demands they do.

The real criminals are the politicians who allowed the anarchic market conditions in both the real economy and the financial industry to come about, and yet, strangely they seem to avoid all animadversion. I suppose because it is much easier to blame centre-left bogeymen and bankers than it is to blame the pestilent right wing demagoges who have raped the world many times over the last 30 years.

Gah - THERE is the conspiracy, under the auspices of 'individual liberty', simple minded supply-side economics, all of which people are primed to respond to, these Neo-liberal ideologues have ensured that they and their friends in high places have become exceedingly rich! And yes, you are now free to toil for them 60 hours a week! Bravo!

[SWPIGWANG]

They only require you to use US dollars for specific kinds of transactions (loan repayments under US jurisdiction and taxes) and there is no need to actually HOLD US dollars. Everyone can maintain a foreign currency reserve if they have no trust in US dollars.

If people want to save, they can. It just takes a bit more effort and suffers some taxes. (then again, consumption is subjected to taxes too in this tax everything era)


man you lost me already. a deposit is buying debt. buying debt from whom. who is paying interest to whom. who is insuring whom. i'm not responding until i completely understand what you are saying.
It is buying debt from people that borrow from the banks. The borrowers pay interest to the bank which takes a middleman cut, and put some of it in your account. The bank also insure your account against loss (from bad debts) and thus you would be safe from loss until the bank fails.


i just believe in commodity money. if the market finds something better than gold or silver that's fine by me.
Commodity money removes the commodity from use and make it a transaction agent. Ideally, a inflation neutral fiat currency would work best in both being cheap and that the supply can be controlled to track inflation effectively.

Perhaps the US government and the Fed couldn't provide that, but at is the idea behind the system.


since the industrial revolution productivity gains have caused prices to go down. if you have sound money with productivity gains everyone will experience gradual deflation of all prices and thus all of society gets wealthier by seeing more purchasing power with their money.
Deflation is as dangerous to the stability and effectiveness of the system as inflation. The great depression saw something similar to hyper-deflation with great disruption to the economy as people with money stopped using them and speculated on the value of money. Why spend money investing in factories or workers when you can just sit on your cash and watch it grow? In this case, it is a bubble over value of currency as opposed to goods.


Theoretically the Fed has the power to decrease the money supply as needed but have we ever seen that?

It is controlled by whatever reasons the reserve bankers choose for themselves. They are not accountable to anyone for what they do and have no legitimate authority in the first place. The Federal Reserve is not Federal at all, it is entirely privite and the supposed oversight our government has on it is only a farce. Where is the M-3 report and why can no one seem to compell them to give it? Who are the bankers? Where are the complete minutes of their meetings?

The problem we are seeing atm is entirely down to the fed, allowing it to set interest rates. The inbuilt inflation hurts savers with the result that few people save anymore so when asset prices crash there is nobody there to stop it by buying them up on the cheap.
Those are good points, and it is clear that fed's inflationary policy have failed and had help generate the current bubble.

I do think it is a responsibility of the government to manage the money supply and they certainly have the power to do so. They could write a law that removes the fed overnight, so why don't they? I think the Fed is a "smoke screen" for government's mismanagement. Looking at he history of failed programs like Iraq or the laughably irresponsible budget and federal debt, this is not unexpected. Remember, the Fed is just one law away from nonexistence, it is under implicit pressure from the government for whatever they do. Whatever the fed is doing and has been doing is result of complicit government. This problem is far greater than just the Fed. If the same set of governmental monkeys are in charge of the economy, even if you moved the money printing rights back to the government, it wouldn't have helped much if they just resume their print happy ways. Even the gold standard got destroyed when the US inflated itself out of it.

I think educating voters about the nature of inflation/deflation so they stop supporting idiots is far more important than using the fed as a scapegoat. Sane monetary policy is what is desired. Who or what provides it is not important.

[Promethean]

Why blame the fed though? They have been doing what their profession demands they do.

The real criminals are the politicians who allowed the anarchic market conditions in both the real economy and the financial industry to come about, and yet, strangely they seem to avoid all animadversion. I suppose because it is much easier to blame centre-left bogeymen and bankers than it is to blame the pestilent right wing demagoges who have raped the world many times over the last 30 years.

Gah - THERE is the conspiracy, under the auspices of 'individual liberty', simple minded supply-side economics, all of which people are primed to respond to, these Neo-liberal ideologues have ensured that they and their friends in high places have become exceedingly rich! And yes, you are now free to toil for them 60 hours a week! Bravo!


You have bought into the dellusion of the hour if you think it was deregulation, or "anarchic market conditions" that caused any of this. The exact opposite is the case. Why is it that markent regulators including the Fed were saying everything was just fine right up until the recession was so obvious even fourth graders could spot it? Why were philosophical market anarchists and economists all over the web, in books, and in countless thousands of articles predicting every aspect of the current economic climate with complete accuracy for the last several years? Why is none of this even slightly suprising or shocking to any laissez fair, free market, Austrian or other such economist? In fact they have been railing against all of this for a very long time.

Also, could you actually point out any real, significant deregulation of the market that took place in the last few years? You'll probably have a much harder time finding any than you think.

Take the housing bubble as just one example. Too much deregulation right? The truth is, the Fed was sustaining artificially low interest rates into an already oversaturated market and the government passed new laws and regulations requiring lenders to give scads of loans to people who should never have had them. This was certainly more social engineering, equal opportunity bullshit, but deregulation?

In an unregulated market those loans would never have been given for a few reasons. Free markets don't have thugs just printing fiat crack whenever they want. Paper has no value and counterfitting is normally called crime. Therefore super low interest rates encouraging irresponsible lending would not exist. Secondly the government would have nothing to do with the economy and so social engineering projects also would not exist. Therefore no one would be obligated to give loans to people who are too high risk. Thirdly in a trully market economy, there are no bailouts. It kind of promotes responsibility. Fourthly there would be no such thing as lobbyists, because the government wouldn't have shit to do with anything other than defense of liberty and property.

[Promethean]

Those are good points, and it is clear that fed's inflationary policy have failed and had help generate the current bubble.

I do think it is a responsibility of the government to manage the money supply and they certainly have the power to do so. They could write a law that removes the fed overnight, so why don't they? I think the Fed is a "smoke screen" for government's mismanagement. Looking at he history of failed programs like Iraq or the laughably irresponsible budget and federal debt, this is not unexpected. Remember, the Fed is just one law away from nonexistence, it is under implicit pressure from the government for whatever they do. Whatever the fed is doing and has been doing is result of complicit government. This problem is far greater than just the Fed. If the same set of governmental monkeys are in charge of the economy, even if you moved the money printing rights back to the government, it wouldn't have helped much if they just resume their print happy ways. Even the gold standard got destroyed when the US inflated itself out of it.

I think educating voters about the nature of inflation/deflation so they stop supporting idiots is far more important than using the fed as a scapegoat. Sane monetary policy is what is desired. Who or what provides it is not important.


This is actually a really good discussion. I agree with most of what you are saying except that it is the government's responsibility to manage the money supply. I agree on legal grounds of couse. According to the Constitution they and only they have that responsibility. My disagreement comes from philosophy. No one has the right to tell me who I can trade with, or when, or what or how much I accept in exchange as long as I am not violating their rights. Since no one has this right, no government, especially one who claims to derive it's just powers from the people, can have that right. So regulation regardless of how beneficial it may seem is simply wrong and is just an extension of violent force.

For the record I'm an anarchist and see governemnt as nothing but a plague masquerading as it's own cure. I do not wish everyone to live in anarchy, as I do not believe most people are at all capable of freedom, I just wish to be left alone and not be forced to comply with the intrusive beliefs of others.

[SWPIGWANG]

Government currency itself is a regulation. In the 1800s, all sort of fiat currency was issued, and sometimes abused by overprinting.


In an unregulated market those loans would never have been given for a few reasons.
Hardly, speculative bubbles and overlending existed before modern regulation and many was the simple result of stupid investors. The invisible hand does not make human beings any more intelligent, only slaps them if they are. Frankly, assuming that stupid people that'd elect a stupid government would magically become intelligent if the government is removed is quite a funny view point. In the old days, being insolvent means being send to a jail in Australia and it didn't stop people from attempting financial voodoo that makes no sense.

Ponzi schemes existed before governments, and bubbles are just another expression of the same trick.

Hell, in the modern era with massive hedge and sovereign interest funds, they could speculate and destroy national economies via the sheer money they have. The Asian financial crisis was caused no small part by currency speculators that destroyed currencies and economies with their massive economic power. If you are short selling, you want to cause market collapse for your own end.

Consider your understanding of financial instruments like MBS, CDS, or even shorts, and remove government. Do you understand the system any better now that government is out of the way?
---------
For the current bubble, much of the the failing banks and pain comes from the fact that modern financial instruments have grown too complex to be understood:


Mortgage Backed Security
A Mortgage Backed Security is a type of asset backed security where the originator (often Fannie Mae, Freddie Mac, Lehman, Citi or one or two other major players) buys a bunch of “whole loans” (aka residential mortgages). The loans are placed in a big pool and payments on the loans (interest, capital, foreclosure recovery, etc) are pooled as the “income” part of the security. The MBS originators sell “shares” of the security to mutual funds, pension funds and other “buyers”.
Over the 00’s roughly 1 to 2 trillion dollars of MBS were created each year. However, an MBS is not as easy to price as other types of securities (such as commercial paper, munis or government bonds). The value of an MBS depends on the aggregate value of the loans. Each loan is valued based on:
• The size
• The interest rate
• The length of the loan
• The value of the property in the case of foreclosure
In addition, there are numerous costs for servicing the loans (actually gathering and tracking the payments), pushing for recovery in the case of default or foreclosure, selling the properties in the case of foreclosure and many others.
The risk on the security is also complicated because it depends on the individual risk of failure of each loan, plus aggregate risks. The risk factors include:
• The chance of default (borrower will simply stop paying)
• The chance of prepayment (borrower will pay early, reducing interest)
• The chance of delinquency (borrower will miss a payment)
• Average interest rate vs current interest rate (if interest rates go down, prepayment goes up as borrowers refinance. If interest rates go up, delinquency and default increase).
• Credit rating of the borrower
• Payment history of the borrower
The Lehman team, for example, had models that included upwards of 20 different variables which gave the risk of whether an individual loan, or pool of loans would fail. However, these models are only as good as the underlying data. Whole Loans were often bought based on just the size, rate and maturity. This created numerous opportunities for fraud and also more cost for “due diligence” in reviewing the loan packages. The feeling was that loan quality really didn’t matter all that much because the MBS market fed the CDO market and the CDO market was super hot. In other words, Lehman would turn over the loans so fast it wouldn’t matter how good or bad they were.

Credit Default Swap
A Credit Default Swap is a contract between two parties that can be thought of as insurance. The term insurance, however, has to be avoided because insurance is regulated whereas a CDS is a private contract and thus, unregulated. The seller of a CDS provides “insurance” against credit related default events on some particular object (security, company, whatever). The buyer pays the seller a premium and then only gets payment if a credit event occurs on the CDS object.

Take, for example, the numerous CDS contracts issued against Lehman. JP Morgan sold CDS protection to the Lehman customers who bought Lehman MBS and CDO products. If Lehman defaulted on payment, or went bankrupt, JP Morgan had to pay out the value of the CDS. Of course, a CDS is often much more complicated than this and can involve stock, debt or other considerations.
Most of the CDS’ that were called in over the fall were tied to either CDO or MBS products, or to the companies that issued the products. Imagine this chain of events, and you can see the leverage factor at play:
• Lehman issues an MBS for 10 Million.
• Lehman turns the MBS into a CDO and sells the first tranche to say… AIG. The second tranche goes to…call it “failed Euro Bank”.
• AIG buys a CDS from JP Morgan (counterparty to $58 trillion in swaps!) to protect against the CDO going bad.
• Failed Euro Bank buys a CDS from Citi (counterparty to $38 trillion in swaps!) to protect their part of the CDO.
• Hedge Fund “TBNL” buys a CDS against Lehman going bankrupt from BofA (counterparty to ANOTHER $38 trillion in swaps!).
We now have seven companies (Lehman, AIG, JP Morgan, Citi, Euro Bank, TBNL, BofA) all tied to the same underlying asset. Note that some of these companies (JP Morgan, Citi, BofA) are required to pay massive amounts if the MBS fails. AIG and Failed Euro Bank are also potentially in trouble, especially if JP Morgan, Citi or BofA can’t pay. Hedge Fund TBNL helps cause the problem because Hedge Fund TBNL has no exposure to the underlying asset and is simply betting that it will fail. Add a few dozen Hedge Funds doing the same thing and you suddenly have companies promising to pay 30 or 40 times (or more) of the underlying asset’s value if a credit event occurs.
Speculation exists that the government deal around Bear Sterns was actually to keep JP Morgan from having to pay out many trillions of dollars in CDS payments.

Housing bubble -> Mortgage -> MBS -> CDO -> CDS -> banks with MASSIVE, MASSIVE obligations to pay trillions -> failed banks and financial crisis.

Bank loans are nothing compared to the kind of damage CDS can do to balance sheets and such.

Warren Buffett famously described derivatives bought speculatively as "financial weapons of mass destruction." In Berkshire Hathaway's annual report to shareholders in 2002, he said, "Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses—often huge in amount—in their current earnings statements without so much as a penny changing hands. The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen)."

There are apparently enough madman willing to play in an unregulated sector with trillions only to watch it blow up. This crisis is not one of bank runs, but something far easier to trigger from a few defaults somewhere. Bank runs are elementary compared to this stuff.

=========

Secondly the government would have nothing to do with the economy and so social engineering projects also would not exist.
The purpose of the government is precisely social engineering. Otherwise why bother punish murders and fraudsters? It is precisely we want to engineer society to get rid of those people that we have a government.

How much social engineering should the government attempt on the economy is up for debate, but it should have the right to do so in times of need.


No one has the right to tell me who I can trade with, or when, or what or how much I accept in exchange as long as I am not violating their rights.
You do not define what rights you have, everyone else in society has a say in it. Otherwise can't someone say that no one has the right to stop me from detonating a nuke in your yard?

Your do have the right is to move somewhere where you are free to do whatever you want. How does joining a pirate outfit in somalia sound? That is anarchy at its finest.

[Promethean]

Government currency itself is a regulation. In the 1800s, all sort of fiat currency was issued, and sometimes abused by overprinting.


Hardly, speculative bubbles and overlending existed before modern regulation and many was the simple result of stupid investors. The invisible hand does not make human beings any more intelligent, only slaps them if they are. Frankly, assuming that stupid people that'd elect a stupid government would magically become intelligent if the government is removed is quite a funny view point. In the old days, being insolvent means being send to a jail in Australia and it didn't stop people from attempting financial voodoo that makes no sense.

Ponzi schemes existed before governments, and bubbles are just another expression of the same trick.

Ok, you make some very vallid points. Nonetheless as applies to this bubble I think my points also stand. I did not say that blame was not also to be shared with ingnorant home buyers or predatious lenders. But government interference is certainly the deciding factor in the severity of this occurance. I would argue that without government interference these things would happen a good deal less as lenders and lendees without protection would tend to be more responsible. Even stupid people can learn things.

Fiat currency is a problem in and of itself and I will neither defend it or say how it should be regulated. There is no point in conducting a train wreck. That plenty of these currencies existed prior to worthless dollars isn't really evidence that they would be tollerated in a free market for two reasons. We have very limited free market examples to point to. Only degrees of governement meddling. Second, I would argue that fiat currency destroys free markets as it is artificial and has no actual value. Markets are about exchange in value, any unregulated currency whose value is arbitray based on amount printed can hardly be called a market instrument.

As a last point even if all of these things happend with equal severity and frequency in and unregulated system, my philosophical point still remains quite strong. Regulating how people peacefully trade is wrong, no matter how you slice it. I'd rather have messed up economies and liberties than messed up economies without them.

[mancroft]

Interesting new bank:

http://press.freelakotabank.com/index.php

[Promethean]

The purpose of the government is precisely social engineering. Otherwise why bother punish murders and fraudsters? It is precisely we want to engineer society to get rid of those people that we have a government.

How much social engineering should the government attempt on the economy is up for debate, but it should have the right to do so in times of need.


You do not define what rights you have, everyone else in society has a say in it. Otherwise can't someone say that no one has the right to stop me from detonating a nuke in your yard?

Your do have the right is to move somewhere where you are free to do whatever you want. How does joining a pirate outfit in somalia sound? That is anarchy at its finest.

I'm responding to this seperately because here I'm in total disagreement with you. From my perspective I'd say you have a very poor understanding of the concept of rights and of anarchy. Let me give my perspective of each. You may still disagree, but at least you'll know what I mean when I use these words.

My concept of rights extends from the only piece of a priori knowledge that I know I possess; "I AM". To acknowledge and understand that I AM may not tell me what I am or why I am but it certainly does prove that indeed I AM. When I will it one body will move and speak and function and therefore I call it mine. No other body does so just because I will it, therefore I AM NOT those other bodies. They are not mine and seem to move and speak and act of a volition similar to mine, I choose to believe THEY ARE, but cannot prove it.

Also, I find I wish not to suffer pain, to eat, to breath, to live and to have my will unchecked. But another faculty comes to me, that facutly is reason. I reason that if I do whatever I wish to others to fulfill these needs and wants there is nothing to prevent them from responding in kind. I feel I have the "right', or unlimited capacity, to do whatever I wish, but also know through learning and reason that defying the rules that I percieve in nature and the "rights" of others exercising their will can result in the reduction or elimination of my ability to have anythign I desire.

Now logic is applied and an acceptable compromise is made. I have all rights I wish, but should not exercise any right which inflicts harm on another in an effort to avoid such harm to me. Thus I limit my own actions to those that do not defy my environment, destroy my means of sustained living or intrude upon the rights of others. These rules I must defend and enforce as the best means of survival. If I or others violate these, harm to myself or others is unavoidable. To do otherwise is to choose distruction.

Governments then do not have rights, they are fictitious in concept. There are only "I AMs", there is no collective. It has no body, it has no awareness of itself, it has no will. It is not real. I deny this God of government and the religion that surrounds it.

To say I can't determine my own rights is preposterous. No one owns my body or mind as I have explained so who else can rightfully determine it's use. How then could "everyone else in society" who I do not own and who do not own me be able to set for me what I apparently cannot set for myself. Then you suggest I do have a right to go elsewhere. So does everyone who would claim to make me their slave by supposing they own my person. I reserve the right to personaly send them to whetever heaven or hell they choose. I will not be trampled upon.

Furthermore anarchy is not somali pirates or violence. It is simply the absence of rulers. It is freedom, a feedom which any anarchist worth his salt will inform you is inseperable from an enormous responsibility to regulate oneself and to treat others as you would be treated. Please understand, I do not wish to impose freedom on anyone else. I know few are capable of even understanding it, much less accepting it's responsibilities. I simply want my freedom to be respected and to opt out of the coersion and violence of others. In an effort to achieve this I like to teach, discuss, and inform, that does not mean however that I would not destroy those who impose their will upon me if necessary and desirable.

In addition, when I said "Secondly the government would have nothing to do with the economy and so social engineering projects also would not exist." I was in fact acknowledging that government is all about social engineering which I oppose. What I meant by that is that without heavy handed thugs like governemnt (any other gang is all the same to me) social engineering would not be present in the market place. Any group you may imagine swooping in to do the same thing is merely replacing government in regard to my point.

I don't support punishing anyone either, so WE don't punish murderers and fraudsters. In a free world I would just do whatever I needed to protect myself from them. Punishment would not be a concern nor would the lives of the offenders be my concern. No engineering or atempt to change behavior would be made. I would simply defend myself in whatever fashion proved effective in eliminating their ability to harm me. Whether that was a lock on a door or killing them outright would make little difference to me. Of course I would always seek the minimum of action required in the interest of self preservation.

Keep in mind, any voluntary arangements as to rulers, punishments, slavery etc. are the business of those who make those agreements. It's the involuntary stuff I have a big problem with, and I have never agreed to be a citizen of any country, have never voted for or agreed to have leaders, or rulers order me how to live. Nor have I ever sought such power.

Sorry about the Empire State Building of Text.

[Promethean]

Interesting new bank:

http://press.freelakotabank.com/index.php

Yeah, read about that the other day. I'm very interested. If they can hold under pressure they are going to have as much business as they can handle in the near future, mine included.

[jyakulis]

It is buying debt from people that borrow from the banks. The borrowers pay interest to the bank which takes a middleman cut, and put some of it in your account. The bank also insure your account against loss (from bad debts) and thus you would be safe from loss until the bank fails.


it sounds like your talking about a cd. cd's are legitimate in my eyes because you voluntarily give your money to lend to someone that has expertise in lending, and they take interest off the top of what they give you back. i'm not talking about cd's though. i'm talking about deposits.




Commodity money removes the commodity from use and make it a transaction agent. Ideally, a inflation neutral fiat currency would work best in both being cheap and that the supply can be controlled to track inflation effectively.


yeah i don't know. there have been interesting ideas with fiat money. search the monetary reform act. i think it was spearheaded by milton friedman. anything is better than paying interest to bankers to use your nations money. from what i understand though, a national debt free fiat currency has been tried. i think US colonies had tried it with the continental dollar. they had massive run away inflation because the government couldn't control itself. that's why they were very anti-paper money.





Deflation is as dangerous to the stability and effectiveness of the system as inflation. The great depression saw something similar to hyper-deflation with great disruption to the economy as people with money stopped using them and speculated on the value of money. Why spend money investing in factories or workers when you can just sit on your cash and watch it grow? In this case, it is a bubble over value of currency as opposed to goods.



i feel you don't understand completely what i'm saying. deflation is not always bad. it gets a bad rap because it's generally associated with depressions/recession from decreasing demand. there is good and bad deflation though. with sound money everyone will experience GRADUAL deflation due to productivity gains from technology (mass production). this is the very mechanism that makes it more attractive to save.

[thod]

http://www.telegraph.co.uk/finance/economics/3546471/Chinese-economy-1930s-beggar-thy-neighbour-fears-as-China-devalues.html


Everyone country wants to devalue. It means a pay cut to your workers in terms of real world goods, whilst keeping them happy that they retain the same quantity of currency units. Likewise it destroys the value of cash savings. Your workers are now cheaper and so you get the factories whilst they close down in the other country. Off course assets cannot be devalued in this way, they simply rise to reflect the new currency value.

The Chinese must be hacked off that the government is going to take 30% of their savings and they get a pay cut too.

Those that own the assets are totally unaffected since their asset values will rise by 30%. The rich keep their wealth in assets. The cash base is made of the masses who save small sums in millions of bank accounts. Its a grab from the poor by the rich as usual. They will argue that the rich need to remain rich in order to keep employing the poor. The poor would like to exchange their savings for the rich mans assets and reverse the master servant relationship. The rich man is taking the poor mans savings, paying him less, and using the money to prop up his own asset values.

[SWPIGWANG]

there is good and bad deflation though. with sound money everyone will experience GRADUAL deflation due to productivity gains from technology (mass production). this is the very mechanism that makes it more attractive to save.
You don't want EVERYONE to save. There is a fundamental economics equation where:

Consumption = Production

This is always true in the long run. If everyone saves tons of money, than consumptions drops and production drops in response. Inflation is a tax on money, Deflation is a tax on physical assets and borrowers. Even in a more gradual situation, deflation is still a net drag on production growth. Savings exists to stabilize the (financial) economy but it doesn't do anything else as far as the "real" activity of buying, selling and production (which generates GDP).

In inflation, what happens is that consumption is fueled by monetary expansion and that stimulates production as well. The problem is that it tend to help bubbles that triggers a deflationary "bust" afterwards while damaging the financial system and trust in currency.

From the inflation dove point of view, the past few years aren't quite that harmful. While banks fail and such, A LOT of houses has been built out of the bubble and when all the dust clears, the houses are still there. From a production point of view, savings or spending or any of that is not as important as generating more physical stuff produced, while deflation means less consumption and production almost instantly. If it is possible to keep mild inflation without the bust, an economy can work just 'fine'.

Reading the above, you may wonder why governments use inflation to manipulate people into spending more then they naturally do and make them work harder (due to credit card debt or otherwise), but governmental performance in economics is judged almost solely on GDP growth with complete apathy to gini coefficient, environmental sustainability or perhaps choices of workers to work less.

[SWPIGWANG]

That plenty of these currencies existed prior to worthless dollars isn't really evidence that they would be tolerated in a free market for two reasons. We have very limited free market examples to point to. Only degrees of government meddling. Second, I would argue that fiat currency destroys free markets as it is artificial and has no actual value. Markets are about exchange in value, any unregulated currency whose value is arbitray based on amount printed can hardly be called a market instrument.

There is no value other than what humans assigns. Gold, paper, beads, houses, land, trees, who are to say that they have any value? God didn't fly out from the heavens and tell you that any object has value. Frankly, there is no natural reason some yellow-ish metal should be granted any value beyond that of any rock.

Economics is not a philosophical problem.

Everything in economics is artificial. Without men, there is nothing. Men proceed economics.


Governments then do not have rights, they are fictitious in concept. There are only "I AMs", there is no collective.
Government, as an organizational structure and idea, have power. This is a FACT where your philosophy can not deny.

While the government is merely constructed out of individuals backing it, it is no less real than the earth below you. Government is not a physical object, but a collective belief. Just because you do not believe does not render the belief any less existent. You may not believe in the moral justification, but it exists no less.


To say I can't determine my own rights is preposterous. No one owns my body or mind....
You may consider your rights in any way you want. However, you should at least realize that you have no power. Right or wrong, it is not you that controls the guns, tanks, and nukes.

---------------------------------------------------------------
I'm a existentialist. God, human, thoughts, logic, and all that can not generate a invariant and universal set of ethics. Your philosophy on individual rights are just such, your beliefs. They have not more truth or no more validity than someone that quotes out of the bible or made something up on the spot. You may be dazzled by the reductionist simplicity and elegance of your moral system, but they do not make it any less worthless for the rest of us. That is the reality. You can either deny the thoughts of everyone else or you can think about what the world is really like.

"What the world ought to be" is a meaningless, absurd question. The only valid question is "what I ought to do"

---
The thing about anarchists is that they don't realize that if somehow they managed to remove the intrusive parts of government, everyone else would be scrambling to rebuild them in zero time whatsoever. Perhaps some people should have the freedom to restrict themselves from it and not suffer anarchists that what to impose their model of society on them.

Anarchists can go and make their own nation, just leave the rest of us alone.

[Chunes]

"What the world ought to be" is a meaningless, absurd question. The only valid question is "what I ought to do"

Precisely. Hence, anarchy is the only way to allow everyone to decide what they ought to do.

[Promethean]

There is no value other than what humans assigns. Gold, paper, beads, houses, land, trees, who are to say that they have any value? God didn't fly out from the heavens and tell you that any object has value. Frankly, there is no natural reason some yellow-ish metal should be granted any value beyond that of any rock.

Economics is not a philosophical problem.

Everything in economics is artificial. Without men, there is nothing. Men proceed economics.

You make a very good point here. We do assign value as we see fit but I don't believe it's as arbitrary as you indicate. We need food to live, food has value to anything that wishes to live. I also think far more people would evaluate the value of gold higher than mass duplicated paper.

I can agree somewhat that economics is not in itself a philosophical problem. My question is why would you NOT apply philosophy to economics? Activities in the economic world have the potential to cause great harm and much violence and coersion take place in it's sphere. This begs for philosophical analysis.



Government, as an organizational structure and idea, have power. This is a FACT where your philosophy can not deny.

While the government is merely constructed out of individuals backing it, it is no less real than the earth below you. Government is not a physical object, but a collective belief. Just because you do not believe does not render the belief any less existent. You may not believe in the moral justification, but it exists no less.

My philosophy can deny it and it does. Where is a government's power? Can you point to it, can you show me what it is? Take a moment to realize every display of government power you're going to think up is composed at the end level of an indivual man or woman using force against me. These are what I fear, I care not one bit for anything people say come from x flying spagetti monster government. I care only who will hurt me for these absurd beliefs, like any other religion. As far as the idea of collective belief, I alone am proof enough that such ideas are invalid. When part of the collective doesn't agree, the mask is ripped off and a group of individuals is seen ruling over a smaller or less powerful group for their own disparate set of reasons.



You may consider your rights in any way you want. However, you should at least realize that you have no power. Right or wrong, it is not you that controls the guns, tanks, and nukes.

If I had no power then no government could have any power either. No revolutions would ever have occured. No tyrants would ever have been slain by heroic people. As a matter of fact as a self realized free man, I have far more power than most. I also have guns and a pen and I know how to use them. No tanks or nukes, but that isn't impossible you know. I may have to cooperate to get things like that, but cooperation wouldn't make me a collective.

---------------------------------------------------------------

I'm a existentialist. God, human, thoughts, logic, and all that can not generate a invariant and universal set of ethics. Your philosophy on individual rights are just such, your beliefs. They have not more truth or no more validity than someone that quotes out of the bible or made something up on the spot. You may be dazzled by the reductionist simplicity and elegance of your moral system, but they do not make it any less worthless for the rest of us. That is the reality. You can either deny the thoughts of everyone else or you can think about what the world is really like.

"What the world ought to be" is a meaningless, absurd question. The only valid question is "what I ought to do"

I hope you realize you're philosophizing here yourself. Existentialism never was logicaly consistant. Philosophy is the search for truth and a continuous evaluation of how to use that truth to benefit us. Many ideas are far more valid than others unless you have absolutely no care for the way in which you live. In which case, why discuss anything?

Also, I don't deny the thoughts of everyone else. I'm well aware of how dangerous the common prole or party hack is to me. I also don't deny my ability to change the world even if only in a small way. Why? Because others have changed it before me. Before I can change it, I do in fact constantly seek to see "what the world is really like".

---

The thing about anarchists is that they don't realize that if somehow they managed to remove the intrusive parts of government, everyone else would be scrambling to rebuild them in zero time whatsoever. Perhaps some people should have the freedom to restrict themselves from it and not suffer anarchists that what to impose their model of society on them.

Anarchists can go and make their own nation, just leave the rest of us alone.

The thing peope don't realize about anarchists is that all they have to do is leave us alone. We will benefit your world for you, just by letting us be. Most of us don't wish to eliminate your religions, governments included, we just want to be peacefully left out of your worship. Your last sentence is priceless. If you don't pay your forced slave fees, taxes, will it be anarchists, or statist who eventually come to your door with guns? Oh come on, you know the answer :)

[walfin]

There is no value other than what humans assigns. Gold, paper, beads, houses, land, trees, who are to say that they have any value?
All of them have some value in the sense that they can be used to make your life "better" in some sense. Without paper you couldn't make records (well we have computers now, but still).
The problem economics solves is measurement. Since nobody knows what value to assign (and preferably no one person should be given the power to unilaterally assert the value of something), we let things which people want the most have higher value, so prices are determined by demand and supply in the long run.
But you're right, gold isn't really that useful. Hence the failure of mercantilism.

[thod]

But you're right, gold isn't really that useful. Hence the failure of mercantilism.


The commodity value of gold is low, but not its monetary value. These are distinct properties. We may know the cross rate, or how many chickens its takes to buy a goat, but then how many to buy a cow. What if we have eggs instead of chickens. The advantage of money is that it allows all goods to be stated in terms of quantity of some common good.

There is nothing special about gold except it has all the properties we desire in money. It is all the same, infinitely divisible, does not decay, its rare and hard to get more. Most importantly it has thousands of years of cultural significance as money. This is apparent in childhood stories, Olympic medals, etc. So people are willing to except gold as in exchange for their goods knowing that they will able to pass it on for the same. I have more confidence in gold than I do federal notes. I know that they cannot just create more gold to cause it to lose value. Fiat money can be destroyed overnight and often is. I see China is talking of devaluing by 30%, there go 30% of your savings, or Iceland, your krona are now almost worthless. You get interest from currency but it never covers inflation, gold, being a thing cannot be inflated.

[Promethean]

Thod has got it. The commodity market is very disconected from physical gold right now. Go try to buy some non numistatic gold coins and see. Many poeple are paying as much as 20% over market price just to take reciept. In many instances you can't get it at all but get assigned to waiting lists.

Much of the recent decline in market price is not due to any change or fluctuation in the value of gold at all. It's due to the massive buying of short term US treasury bonds that have been going on all over the world. From mid summer the dollar has seen a historic rise in demand and value far beyond what has ever been whitnessed before due to this buying pressure. US bonds have long been known as a sanctuary in bad economic times and buyers have been flocking in even though for a brief time the one month yeild actually went negative. Think of that, people were willing to loose money up front, just to insure the wouldn't loose more by having their money elswhere. This is big money too, and may give some indication of just how serious things are about to get.