More AIG
Fabius Maximus thinks you should read this Rolling Stone piece and get mad. I agree with him:
As complex as all the finances are, the politics aren’t hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.
The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.
“But wait a minute,” you say to them. “No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what’s left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?”
But before you even finish saying that, they’re rolling their eyes, because You Don’t Get It. These people were never about anything except turning money into money, in order to get more money; valueswise they’re on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.
Good luck with that, America. And enjoy tax season.
Read the whole thing. Seriously. Get a cup of coffee, settle in, and read it. All of it.
“These people were never about anything except turning money into money, in order to get more money; valueswise they’re on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.”
Change money to power, and you have a description of the politicians who took their money and looked the other way.
Then read the AIG resignation letter: http://radioviceonline.com/dear-aig-i-quit/
=================
DEAR Mr. Liddy,
It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:
I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.
After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.
I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.
You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.
I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.
The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.
I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.
But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.
My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.
That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”
That may also be why you authorized the balance of the payments on March 13.
At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.
I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.
You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.
As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.
Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.
The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.
So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.
That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.
On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.
This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.
Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”
Sincerely,
Jake DeSantis
=================================
Best be careful, now, Gregg. That Taibbi piece has already been well hashed out at all the liberal sites. Amazingly, lefties are as outraged, for the very same reasons, as FM desires that we be. You wouldn’t want to be seen as a lefty, now would ya?
Craig, you’ve been told before that posting full articles or letters in the comments of websites is spamming. We’ve all seen Jake’s sob story by now. If you have a relevant point to make, make it, and quit spamming … please.
Or, you could do the brave thing and GYOBFW. That way you can violate copyright on your own dime.
Rob Kailey, if DeSantis’ letter troubles you so, then avert you eyes. And “No,” posting it here does not constitute spamming since I have not posted it elsewhere. And “No,” it is not copywrited either.
So more losers join the left. What else is new?
Wulfgar, as I have stated recently, I think I have a lot more in common with you lefties out here in the middle of nowhere than many ‘righties’ in Washington. This isn’t about left/right anymore, it’s about us/them.
Tell me, though, how can Pres. Obama be aligning himself with this stuff?
Kevin, let’s see…Geithner got tangled up in his rhetorical underwear over his comments about China and the dollar. Apparently he missed Obama’s speech last night.
Craig, when it covers 4/5ths of a comments page to a website not yours, it’s spam. And I can easily link to comments in which you have blatantly violated copyright (I even bookmarked them.) As I’ve indicated, I’ve already read the letter. And unlike you, I’ve even said my opinion of it. But if you want to keep being a jackass on Gregg’s site, go right ahead. I can’t stop ya, but I’ll certainly point and laugh.
And since you seem to have missed the point,
GYOBFW
Gregg, there are many things in the article that are factually correct but misleading – especially much of what was said about the Goldman influence. (just one example, Ed Liddy did at one time work for GS, but he made his bones as CEO of Allstate.) I won’t address them inasmuch as I think it’s a fools errand. Suffice it to say that, and I’ve said this many times, that there are legions of people to blame in this fiasco.
But that doesn’t negate my argument that we should have let AIG, Citi, and other failed businesses go through the bankruptcy process. We should have. And to the extent that we have and are increasing corporatism there is no doubt. But that’s what we get for allowing the government to be so large that it can save those that are “too big to fail.”
Of course, now that there is (healthy) distrust in the financial system the reach to over-regulate will be destructive to healthy institutions. The investor class, who has lost $trillions on this caper will, without government intervention, engage in a great deal more due diligence before buying “crap” that the street has to sell. In other words, in the swath of destruction there is healthy market correction – if the government has the political stones to allow it to work. Markets are self-correcting. Painfully self-correcting at times.
Every politician that accepted one red cent from any of these bailed out companies needs to repay the taxpayers x 10. Hypocrites
Rob Kailey, what is really funny is watching your meltdowns.
No offense meant by the harshness of this response, but how the hell do I know? One of the things Taibbi mentions is that we don’t speak the language of these people. I can only presume that the President does. That means he knows things I don’t. But right now, simply put, I don’t think Obama is really in anyway the problem. Congress is. They speak the language of concentrated power, not behind a party but for their own continued greed.
I’ve written before and I will write here again; I want more than anything for Republicans to run a challenge against Harry Reid. But they fail, because they keep thinking that they’re playing the same game that he has mastered. They accept that a position in the Senate is a holy ordination and they just can’t get somebody blessed enough to that lofty order. Bull. Congress continues on the same path because they feel they’re privilege. And all us weak folk near the bottom can do is point and shout at those who aren’t running the show, as if we really want the power to stay where it is. Jon Tester bad, Max Baucus good.
Obama ain’t the problem. Timmeh Geithner ain;t the problem, though he is a real dink. You want to do something? Get rid of Denny Richy McRich Rehburg. Get rid of Nancy P. Help get rid of those so convinced of their own superiority (*cough Sarah Palin cough*) that we might actually get our country back without the use of the guillotine.
That’s right, Craig, I’m the problem and your idiotic obsession. Which proves, quite clearly, that you really are part of the problem. You really are an idiot without the brains or wherewithal to deal with larger issues than some guy on a website who shows how idiotic you really are.
Rob Bailey, above you admit that you are bookmarking my comments. Now who is the one with the obsession? Look at the first comment between us here and notice who cast the first stone. You are one of the few here that seems to think that your personal derogatory remarks advance any discussion, a recurring pattern with you on almost any topic. There is a problem all right. Now, care to raise your game and get off the nonsense?
s/b Rob Kailey. sorry for the error.
Uhh, Craig, you still haven’t clarified what in the hell little Jakie’s letter had to do with the topic at hand. The first holy and apostolic stone was a request that you get to the fracking point. Would you please do so, stalker?
Otherwise, you’re spamming. As has been evidenced …
Rob Kailey, just for you. From the RR piece:
===========
The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.
================
When I read it I didn’t see the effort to separate the guilty from the innocent. DeSantis’ letter describes what its like on the inside by those who had nothing to do with creating the problem, but yet he and many others are the whipping boys for the pols and the lightning rods for all the wrath. They had a job on behalf of the owners (80% public ownership) to clean up the mess that may have been precipitated by Goldman Sachs and their CDS positions and then shorting AIG. See: http://www.businessinsider.com/goldman-sachs-made-billions-shorting-aig-2009-3 I believe GS paid out billions in bonuses in 2008. Now do we hear righteous wrath over this? GS is a heavy hitter in Dem cirles. The RR piece is an abstraction. As Budge has pointed when AIG execs go to new employment with AIG counterparties, they will be less concerned with a system they feel unfairly screwed them. I thought this was obvious and did not need detailed explanation.
“We might actually get our country back without the use of the guillotine.”
Whoops! You dropped the mask there for a moment, Wulfgar.
(Got your pitchforks ready, folks? Wulfgar is ready to lead! Ha ha ha.)
Everybody who b*tches about the bonuses at AIG should take a second and review this graph.
It compares the 167 million in compensation to the error in Obama’s budget. 167M X 13,800=2.3T. Meaning of course, his mistake, is 13,800 times larger.
http://www.theamericansentinel.com/twp/2009/3/21/tallest-gif-file-ive-ever-made.html
Get some perspective, people.
Let our noble rath
Seeth like the waves
The national war is going
The Sacred War
Sing alone with Wulfgar here:
http://www.youtube.com/watch?v=P5YDk1kCrMU
Even understanding the author’s perspective, Dave, there are still real reasons for concern. There are incredible sums of money flying out the door here, and the accountability for where it is going is very low.
Little people like us don’t know if the same people who are crabbing at the CEO’s on CSPAN are later having lunch with them behind closed doors. I have been saying similar things since last fall about Paulson and Goldman Sachs, and it sure sounds like it could be true.
Uh, er, welcome to the 1860’s? All that has happened is that the veil has been temporarily lifted.
This is black, black humor. The underlying mindset behind that statement is that markets have to be left free to create mayhem, and then we restore order. It never occurs to him that we can avoid the mayhem in the first place by regulation. He’s saying that there is order in chaos. There is not.
If it were to be true the second time around, it would have been true the first. That’s the weakest excuse for deregulation I’ve ever heard. And …. the $trillions they lost were an illusion anyway. That is kind of like the problem? You know — bubble?
Looks like the “little people” are picking up the lunch tab for George Soros and his ilk herd who are having a very good crisis. http://www.dailymail.co.uk/news/worldnews/article-1164771/Im-having-good-crisis-says-hedge-fund-manager-1billion-world-plunged-recession.html
Then there is this from the Financial Times: http://www.ft.com/cms/s/0/b3e99880-1991-11de-9d34-0000779fd2ac.html?nclick_check=1
=======================
Obama’s bank plan could rob the taxpayer
By Jeffrey Sachs
Published: March 25 2009
The Geithner-Summers plan, officially called the public/private investment programme, is a thinly veiled attempt to transfer up to hundreds of billions of dollars of US taxpayer funds to the commercial banks, by buying toxic assets from the banks at far above their market value. It is dressed up as a market transaction but that is a fig-leaf, since the government will put in 90 per cent or more of the funds and the “price discovery” process is not genuine. It is no surprise that stock market capitalisation of the banks has risen about 50 per cent from the lows of two weeks ago. Taxpayers are the losers, even as they stand on the sidelines cheering the rise of the stock market. It is their money fuelling the rally, yet the banks are the beneficiaries…
==========================
Craig – what?!? Lucy pulled the football again?
If you don’t let the capitalists take their lumps, the you will have to take them instead. It’s that simple. All regulation does is transfer the losses from the private sector to the public sector.
Somebody needs to ask Mark T why he wants the working people of this country to suffer.
Mark, Linus is doing a double backflip through the air as I write this.
Kevin – you need to think it through a little more. Seriously. You’ve made a completely vaporous and unsupportable statement.
Mark T: Regulations can not prevent economic crisis because it is the regulations that allow the problem to exist in the first place. The Federal Reserve and fractional reserve lending is the underlying problem. And the fact the whole system is run by private bankers who do not have to answer to congress, the president, the supreme court or us, in any way.
You can not regulate the risk out of life. Look at the depth and extent of CFR’s and then look at the ever growing list of wrongs done to society by those greedy SOB’s. The creation of mortgage backed securities was encouraged because it effectively spread risk to a broader market, the entire world. Thus allowing our lending institutions to lend more money to those who shouldn’t get a loan. The gov’t regulated this part of the business (underlying mortgages) but the collapse still happened. The securities didn’t cause the crash, they multiplied the effect and spread it across the globe. The natural risk of the market was removed by gov’t regulations guaranteeing deposits and loan balances (FDIC, FMac, FMae, FHA, etc).
And, by the way, all this paper profit chasing (derivatives, spiders, ETF’s etc) created by those greedy SOBs and run to our detriment has been paying for the federal govt’s spending habits….for years. Mr. Clinton’s supposed budget surplus was actually created by unexpected revenue increases due to capital gains taxes on dot com boom and then bust, after 1994.
If regulations were so necessary then why are their so many banks and financial firms who did not get got in the trap and are solvent today??? Because they exercised sound business judgment. By the way did you see the bank back east that was chastized by FDIC because they didn’t have enough high risk loans on their books—-LAST WEEK. Seems they weren’t in compliance with federal regulations regarding low income loans.
I would like just once for those who scream for regulation to be specific about what regulations were not followed, which ones are needed, and then actually analyze the comprehensive impact of those regulations. I used to write these things and believe me, they can have a lot of unintended effects.
JAC
Mark T:
No, Mark, I’m the guy who makes the money. You’re the guy who losses it.
You’re living in a child’s world. Like a child you want to think there’s some adult who can protect you from the bogeyman. You’re oblivious to the history of capitalism and completely ignorant of modern global financial markets.
Put your childish faith in Tiny Tim and Bonnie Frank if you want. The capitalists will clean you and your regulators out every time.
Gregg, your concerns are quite valid given the little prima facie evidence we have. And by no means to I contend that there isn’t a corporatist cabal involved in world record setting monkey business.
I think, however, that the fix is to restrict the government from engaging in the behavior that allows this form of fascists economics. Perhaps we have been hoodwinked (I suggest we have one way or another) but the only fix is to get them to stop.
Somehow we have to get the message across – No Mo More Bailouts! The risk takers have to realize their risk. The argument of to-big-to fail is summarily stupid. The Fed and the Treasury have now invested or guaranteed something like $10 trillion dollars. That’s more than the net exposure we have to AIG, C, BAC, JPM, and GE. So if bailouts are necessary – and I think that’s specious – we should be bailing out the bystanders of this mess. Producing unlimited deposit guarantees and providing a market for commercial paper would have been much less expensive. But instead we have a government made up of Wall Street deal-makers that shifting risk is an acceptable plan. When all you know how to use is a hammer everything looks like a nail.
I’m 100% with you that this problem is caused by the nexus of powerful money and government. But to reduce the power of money we have to reduce the power of government first. I’m just not inclined at this point to blame it on GS in some conspiratorial trope. Why is GS exploiting the government? In the words of Willy Sutton “because that’s where the money is.”
I don’t see how having the government in charge of the currency is less regulation.
It’s a rigged game. Just like its association with AIG look how Goldman Sachs profited on another company http://www.forbes.com/forbes/2009/0413/096-sachs-semgroup-goldman-goose-oil.html
Remember last summer with oil? Goldman Sachs again. http://www.engdahl.oilgeopolitics.net/Financial_Tsunami/Oil_Speculation/oil_speculation.HTM
It appears that Kevin K. is another pseudonym for our friend Max Bucks. I guess business is slow at the local gas station that he works at.
Mark T: Your not proposing private coinage are you?
The coining of money seems an appropriate govt function to me, unless there is no need to collect any taxes for anything what so ever. That is not regulation in the sense that was discussed here earlier. It is setting standards for money created. The only other appropriate questions are how much is needed and in what denominations. The amount should be dictated by the size of the economy, not Fed or Treasury policy based on floating debt or trying to stop downturns in the economy. Using you words from earlier, it is our money in the sense that it is usefull to have one money for use in a single country. We tried the everyone prints their own and it wasn’t quite efficient enought for our modern economy. Far to many exchange rates to keep track of on a daily basis.
We only need one rule to solve this mess forever. You may not sell any paper promise or other paper or electronic version that is not supported by a hard asset with a definable value. No more selling financial products backed by nothing but air. That goes for CO2 as well. You think derivatives were messy just wait until the Trade part of Cap and Trade really gets going, under our current system. If you sell something that is not real you go to jail (liers, cheats, and thieves). If you buy something that is real but pay to much…..to bad.
JAC
What’s being overlooked in this discussion is that banks are the wholesalers and retailers of money. The government is the manufacturer. You wouldn’t expect a manufacturing company to kill its wholesalers and retailers would you?
All money in circulation regardless of its form was produced by the government either directly by minting or printing it, by bookkeeping entries, or by laws allowing banks to multiply money (fractional reserve banking). That vast pile of cash and credit out there came from the government. You need to get that straight first.
Once you understand that then you can understand why the government is trying to keep these outfits afloat. When they hit the wall the government hits the wall. This is what happens when a single entity is allowed to control the money supply by issuing fiat money (money backed by nothing).
I don’t buy the “goods” analogy. Money isn’t a “good” it’s a medium. They want to control the money supply because they’re academic theorists who think they’re right. The only incentive they have for not allowing big banks to fail is their self-styled reputation that they’re economic gods. Power corrupts yada, yada.
Kevin K:
Mr. Budge has it right but only scratched the surface. The gov’t actually does have an incentive to let big banks fail. They get the assets at cents on the dollar. They have one other incentive to prop them up, besides as Mr. Budge indicates—EGO.
Inflation, which results from printing the money to bail out the banks, allows the Govt to pay off its debt with cheaper money.
Money is a method used to store the wealth of our efforts, in a sense it buys us time. It allows us to trade without carrying around cows and chickens for barter.
I would propose that monetary policy has had more to do with fear of political repurcussions of an angry population than the fact the govt makes and circulates the money. If you buy into the philosophy that the state is the cure all, the last thing you can allow to happen is for the market to work. You must intervene, it is in your DNA. Don’t let the people suffer. But why not??? Because they might revolt.
The conversation was headed towards who what caused the problem with the usual deregulation no it was the government thing when Kevin mentioned that part of the solution was to have the government manage the currency. I don’t think it much matters who manages the currency, as the same temptations abound. I just thought that a minimum government guy would like the idea that private bankers control the currency.
Mark T:
The key is that I am a “minimum” govt guy, not a “no govt” guy.
The odd fact is that private bankers do control the currency, once the Treasury, which is also run by bankers/investors, decides how much to print. The rest is up to the Fed., a privately held system of banks run by govt appointed bankers who are not accountable to the citizens.
There is a proposal, theory, out there suggesting that the Treasury Dept take back all control of our monetary policy. That we pay off all debts with Fiat then use required bank deposits to keep total money supply limited to about GDP with growth pegged at price index and population growth. The historical rate would be between 2.5 and 3.5% annual growth. In essence this is the real price increase or unadjusted real rate of economic growth. The idea is that there only needs to be enough money to allow trade to occur. I am not an expert in monetary policy so I don’t know if you need enough cash to equal GDP or if a smaller amount is OK with some loans that are not fully collateralized. Thus lend 9 times whats on your books as assets. Under this scheme the Fed would be relegated to storing cash in the Fed banks for distribution to branch banks as needed.
This would eliminate Fed Debt, if we could balance our budgets. Govt deficits could not exceed the 2.5 to 3.5% rate as this is the full limit of money growth. Of course then there wouldn’t be enough cash in circulation to allow unrestricted trade.
My son, who is an economist, puts more faith in the Fed bankers than I do and he puts less faith in Federal Agency bureaucrats or elected officials, who would control monetary policy if this new system were used. I have a hard time arguing this point against him. This leaves a monetary system backed by gold. The gold being the anchor that eliminates inflation, as long as gov’t doesn’t reset price artificially, like Mr. FDR did.
My key point is this: A solid monetary system and strict policy on money growth would reduce the wild swings caused by the FED and would stop draining our personal wealth to pay off debts with interest to banks we own or that are part of the Federal system. We would still see economic contractions but they should not be caused by large scale financial schemes that artificially expand money supply to meet purely political goals, like affordable homes. Ironically, the FED was created to stop the wild swings, but they have been more numerous and severe since we handed over our money to them. Yes Mark T, it is a conundrum.
JAC, I’m with your son – sort of. The reason the Fed exists is to isolate the monetary policy from politics. No, it hasn’t worked out very well. But giving monetary policy to a partisan agency seems far more dangerous in the long run. If we are to keep the Fed, and that’s debatable on a number of levels, we should return their mission to the stability of the money supply only and restrict their charter from doing things like smoothing out the business cycle. What they’re doing now is an abomination.
Dave Budge says he doesn’t believe money is a commodity (a “good”). Yikes! It’s a commodity like any other commodity, subject to the law of supply and demand, no different than soybeans or pork bellies. The difference is money is *also* a medium of exchange. Soybeans or pork bellies aren’t. Not yet anyways.
Second point that everybody’s missing—the government can’t control the economy without controlling the banks. In a free banking system based on gold the government would be reduced to the role of any other borrower. It would have an extremely limited ability to implement its economic policies because its ability to go into hock (deficit spending) would be controlled by the banks (its creditors). The way things are now the government is its own creditor which always leads to no good.
Only other countries holding dollars (such as China) can impose discipline on the US government by threatening to dump those dollars and use another currency or gold.
No “conundrum” folks. Get rid of the Federal Reserve.
Sorry, fiat money isn’t a commodity – unless it gets so worthless that we can use it for toilet paper. It’s only a medium of exchange. Does it have any other purpose?
BTW, I’m not against getting rid of the Fed. I’d just like to know for what we would be getting rid of it first. You want a gold standard, fine (although it’s not likely until or if the whole system comes down.)
One more point about fiat money being a commodity. Theoretically it has unlimited supply so, without a governing authority – like a fixed standard – the laws of supply and demand are manufactured out of thin air.
You got me there fella with that switcheroo! There’s *money* and there’s *fiat money.” The first is a commodity with intrinsic value whose price (interest) is subject to supply and demand. The second is just ink and paper. But it still doesn’t have “unlimited supply.” In Zimbabwe they had to stop issuing fiat money because the German engravers wanted real money to pay for the printing costs (paper, ink, labor, etc.).
Are there any currencies that aren’t fiat money any more?
Gold coins.
Craig, try spending one at Safeway or exchanging it at the bank.
“Are there any currencies that aren’t fiat money any more?
US gold and silver coins are real money.
“try spending one at Safeway or exchanging it at the bank.”
You can spend or exchange US gold and silver coins anywhere becuase they’re “legal tender” and people have to take them.
The $20 US Gold Eagle is worth almost $1000 in paper money so you wouldn’t want to spend it at Safeway and get only $20 worth of groceries. That would be the minimum the store would have to give you for the coin. They could give you $500 worth of groceries if they wanted but they’re not legally required to.
What you do is hold the Eagle until you need the paper and convert it at the last minute then go spend the paper immediately.
My bad. The one ounce Gold Eagle has a face value (legal tender) of $50 not $20. I was thinking of the Saint-Gaudens $20 gold coin (1907 to 1933).
I think it is hard to insulate money from politics. The Fed and the politicians have interbred. But I do see the wisdom behind having a Fed. I wonder if there is any system, short of gold, that takes it beyond political control. But gold allows for no expansion of the currency during crisis. It is not without its problems.
Mark T: During gold standard and other gold based currencies there was never a “crisis” that I am aware of that required expanding the currency. That is the Keynesian theory that has run us in the ground. Let me correct that. It is half the theory, as he also recognized the need to balance the budget after a down turn. Something his disciples have forgotten. But he never addressed how to deal with the inflation caused by the “expansion of currency”. I agree that right now would be impossible to separate money and politics. It was done before but that was because the intent of the constitution was still fresh in the minds of the elected and electorate. We need to amend the constitution to fix this problem. But then that opens up a whole new can of worms as I expect the changes you might like are not the ones I would like. Although you might find us right wingers agree with you on more than you realize.
Kevin K: The Govt can and does control the economy without the banks. Remember our discussions regarding Federal Regulations???? How about Tax Law??? And, they don’t need to control the banks to distribute freshly printed currency, by the Trillions. Gold is not immune to manipulation and thus a gold backed currency is not immune either, just not as vulnerable. Again, remember FDR changed the value of gold backing a dollar, thus inflating our currency overnight. One modern day problem I see with a gold standard is the commercial use for gold that did not exist 100 years ago. How do you regulate the value of a gold based currency when the commodity is sold on the world market with a price changing all the time. And, Russia holds massive quantities of the stuff, at least they did.
Mr. Budge: I tend to agree with you and my son at this point in time. While I want money policy removed from the hands of the elected and non-elected officials, I also want a restricted mission and accountability for the FED. I do agree with those who have been calling for an audit of the FED. My first question would be where did the Treasury Notes go that the FED purchased the past week (2 trillion worth)??? I am just guessing but I bet the FED is holding those notes so that they may sell them another day. If so then our debt is being transfered from private and other govt hands to a quasi-governmental corporation, the FED.
I’ve probably rode this horse long enough so reckon I’ll turn in and let everyone get some rest. Until Then
Best Regards
JAC
JAC, first, the Feds didn’t buy $2 trillion in treasuries last week. They announced a $1 trillion dollar expansion of their balance sheet with the intent of buying $300 billion in long term T Bonds – quantitative easing is what they call it.
But the Fed buys T-bills all the time through their Open Market operations. They buy T-bills from banks when they want to increase the money supply and they sell those same bills when the want to reduce the money supply. They also buy other debt obligations – for the same reason – under what called the “repo” program. A repo aka a repurchase agreement is where a bank (and now other non-banks) place as collateral some debt security with the Fed and make s a cash advance against it. At the term of the agreement – usually 1 to 90 days the original seller buys the debt obligation back. It used to be that only Treasuries or Agency bonds would be taken under repo agreements but since the “crises” the Fed will take almost any pile of dung that has an borrower attached to it. But it’s the same concept as their Open Market Operations.
The Fed, having the power to create money can theoretically do this endlessly. In other words, the Fed can’t run out of money and can run up its balance sheet as far as it deems necessary simply by creating money. What has been interesting is that banks have been pledging sub-standard collateral, getting money and turing right around and depositing it on reserve with the Fed. In normal times they would use it to either meet short term cash needs and/or lend it out.
There’s not much need to audit the Fed insofar as they can create money any way they see fit. But knowing what I know about banking is that their books are in order. That, however, doesn’t mean that what they are doing is good policy.
When the economy returns to normal the fedd will have to sell huge amounts of Treasuries in order to reduce the money supply. Otherwise we’ll feel hyper-inflation at some point. The fear is that, considering the Fed plans to take its balance sheet from roughly $400 billion a year ago to over $3 trillion by this summer they won;t be able to contract the money supply fast enough to stop high levels of inflation. I’m mean, who’s going to buy it all. The worry is increased by the fact that the U.S. government is demanding so much borrowing to fund its deficit that the market will be crowded out and the Fed will have to purposely monetize the debt to pay off the governments obligations with inflationary money. Then we get into a period of stagflation and the Fed will be forced to put us in another recession to stop the inflationary cycle. That’s what Paul Volker in the ’80s and it was ugly.
Maybe they will be able to soak up all that cash, but history tells us that is unlikely.
In other words, we’re screwed. The only thing that can save us is to reduce spending as a percentage of GDP. But for at least the next two years that ain’t gunna happen.
Well, you’ve been right so far.
Hey! Wait a minute here …
Mr. Budge:
I got a little sloppy with my reference to the 2 trillion in order to make a point. Your comment is a good reminder to not fall into the same style as those I try and debate on the facts. Thank You for catching my laziness.
It was and is my understanding that the Fed actually purchased the first 300 billion of T-Bonds and announced their intent to purchase the remaining 700 billion. They then announced their intent to commit another 1 trillion to the effort. You may be correct on whether the purchase happended, I did not look at the actual transactions so can’t confirm. My point is that it is my understanding that this adjustment to the Fed’s balance sheet was an increase in available Cash made possible by the Treasury printing new money. At least that is my understanding of what has happened. If you have better information on this it would be very useful.
I understand how the Fed uses treasuries to manipulate the money supply in the market. It is my understanding that the Fed can not increase the total amount of money, in the form of currency, without Treasury making the order and printing the paper. The Fed can manipulate the amount on the open market but not the overall quantity. Is this true??
An Audit does much more than look at the books for balanced accounts. It should expose how the transactions are done and who is involved, how money is being made and where it is going. There is a building distrust in the Fed that may quickly begin to support the conspiracy theories surrounding central banking. Anything that would make their dealings transparent would be very helpful right now. There is enough distrust in the system and the last thing we need is for the public to lose complete faith in the Fed. I think it is beginning to smell but has not rotted completely. If there are some bad things going on then get it out there and clean it up.
The only other mechanism I have read about that might help reduce inflationary pressure is if the Fed drastically increases the Cash Reserve reguirments and then reduces the allowable loan to asset ratios, thus taking cash out of the open market and locking it up in Fed banks. What are your thoughts on this idea??
Could you please explain the Feds Balance Sheet for everyone. For example, how can they simply announce an adjustment? I think it would be useful to those who visit this site regularly. I am guessing you have a better handle on the Fed banking aspect than I. My strength is private business accounting and general economics. Although, I do have 12 years experience in govt accounting and I know the gov’t doesn’t maintain a true balance sheet. That is something I wish they would produce so the citizens could see just what the situation is.
[...] who knows the future? Well, one person does – here’s the tail end of a blog comment by Dave Budge at Electric City Web Log, 3/26/09 11:49am: In other words, we’re screwed. The only thing that can save us is to reduce spending as a [...]
Mark, tell me what I’ve been wrong about. Really. Did I ever endorse deficit spending? Did I ever propose that the Laffer curve was appropriate within the contxt of the last 10 years? Did I say above that I thought the GOP would act responsibly as to deficit spending? Did I ever say they have?
Show me once in your writings where you ever even hinted that deregulation was a bad policy. And I’m talking before the crisis. There’s a whole lotta wisdom after the fact everywhere.
Show me once in any of your writings where you ever even hinted that tax cuts for the wealthy were not a great policy. Anywhere.
You supported Bush in those key aspects of his policy (and Clinton’s) that led us to the current crisis. You were wrong. You’ve been wrong all along. Wronger than wrong. Dead wrong.
Now you’re preaching solutions as if you were not part of the problem, surethat hair of the dog will cure us. GFG.
As I mention elsewhere,you’re also skilled in the art of sophistry.
Nope, I’m right about deregulation. So there! And just because
youI say it’s true it has to be.Then again, by your own admission, your ignorance of economics is what makes you an expert.
Mark T:
Since deficits have nothing to do with our current economic situation could you please explain how tax cuts for the supposed rich contributed to our “crisis”?
And don’t jump to conclusions. The deficits do matter and will matter even more pretty soon. They just didn’t cause the problems we have right now. And furthermore, there is absolutely no evidence that keeping the tax rates pre Bush would have even balanced the budget, let alone reduced the deficit.
I also ask you once again, what exactly was “deregulated”? What regulation was eliminated, or not followed, or should have been implemented? Right now there are a lot of people screaming about various things that don’t get to the real issues. They just support some political or social agenda—all sides do this. It is part of the desire to keep us at each other’s throats over insignificant Bull Shit!
We should be discussing the proper role of govt and how to free up our capitalist system to maximize its efficiency and productivity. That means moving toward a free market system not farther into a state controlled system. At the same time, are there more effective and efficient ways to protect us from bad people than the onerous Code of Federal Regulations we now operate under, let alone the tax code. What are the key fundamental principles we can all agree on? But nooooooo– instead we are fighting over “Bush Tax Cuts” and “executive bonuses” , abortion v. right to life, gay rights v traditional marriage, and etc etc!!!! If we don’t get the holes plugged in the hull of our ship of state then all this other stuff won’t matter, GET IT!!!!!!!!!!!
Dave B:
I would like you to respond to the questions I raised in my last comment to you. I was not being sarcastic or petty, as some others are here. I would appreciate your insights and explanations.
Thank You
JAC
JAC, the Fed’s balance is made up of nothing more than a huge slush fund of assets bought with fiat money that they can create at will in any amount.
In all seriousness, however, it’s a bit too complex to address right now. I’ll get back to you. But the fed can make an “adjustment” simply by creating the money to buy assets with a few key-strokes on a computer. Simple as that. They don’t need any additional governmental authority to do so. The only sway taxpayers have over the Fed is the right of Congress to “Advise and consent” to the executive’s pick for its management. That’s why the Fed doesn’t have to tell Congress who have been the recipients of it recent largess. And there’s nothing anyone can do about it – unless we repeal the Federal Reserve Act of 1913.
There is a video by the ultra-libertarian Von Mises Institute that is 100% factually correct and discusses the history of money and Fed. Many economists have significant theoretical differences with the writings of Murry Rothbard. But I think it might answer some of your questions.
http://www.youtube.com/watch?v=iYZM58dulPE&feature=player_embedded
D. Budge:
Watched the video, a good primer but nothing new for me there. I hope some others watched it as I guess from their comments they could use the info.
You, and the video, claimed the Fed could print money without any other authority. That was the key point to my comments and then question. Somewhere, I was led to believe that the actual printing of money had to be authorized by Treasury as does the printing of new Govt securities, ie. Bond, Tbills, notes. Treasury prints and approves then the Fed gets to sell, buy or otherwise distribute. If the Fed can print money without Treasury OK then my anger is even greater and I change my opinion to one of getting rid of the Fed.
The key point is that by purchasing long term T-notes the Fed in effect eliminates Federal Debt, if it were acting on behalf of the govt. Much the same as when I purchased by own mortgage debt (notes) from the bank back in the 80’s. Once I bought it back I tore it up, thus no more debt. I was able to purchase the debt for a 20% discount. The Fed is now buying our debt at a discount due to devaluation and reduced interest rates. But unlike my example, they don’t tear up the note. They keep it so they can resell it on the open market at a later time. Thus we have printed money to pay off debt which is not paid off but held by a govt approved entity (Fed) to be sold later, thus reissuing the debt.
So, the only way to reduce the money supply is to reissue our debt (sell the same notes) in the same amount as the money supply created in excess of our needs. In short, print 2 trillion buy notes then resell notes for 2 trillion. Fed balance is zero, but the US balance is a liability of 2 trillion, to be paid off with increased taxes or the sale of other Federal assets.
Mark T: I hope you are beginning to understand why the Bush deficit has little to do with our problems. If we spend what has been committed to save the financial system it will cost us upwards of 10 trillion, as of today. The impact to our future economy if exponential not linear. Our very future as a Republic is in jeopardy. If that is what you want just keep harping on Bush and other meaningless B.S.. If it is not then start seriously listening to what you call “the right” is saying. Your liberty and prosperity may depend on it.
P.S. I have a good DVD called the Money Changers which also has good history of central banking and includes the theory I explained earlier regarding control of Fiat without a gold standard. If you or any others are interested you can leave a mailing address with my email account at:
iamjustacitizen@gmail.com.
I’ll mail anyone a copy who contacts me.
Until Later, I hope everyone has a great evening.
JAC
JAC, I get the impression that you think the Fed sells Treasuries for the Treasury. That’s typically not true. The Treasury sells to debt directly to the public. The Fed historically trades in Treasuries in the secondary market.
Secondly, since the Fed is actually not part of the government – the Fed is a private institution owned by its member banks – when it buys Treasury debt it does not have the effect of paying off our own debt. The U.S. government owes the Fed the money until and unless the Fed sells the debt back to the open market. The debt is continuously outstanding regardless if the Fed is in possession of it or some other party.
Next, you’re correct that the Treasury is the only body empowered to “mint” legal tender. That is to say that the Treasury has the responsibility of issuing paper money and coins (aka currency.) But the amount of currency in circulation is a very small percentage of the money stock – roughly 8% of the M1. Of that currency only about 10% of that is held by the Fed. The rest of it is in the possession of individuals and in bank vaults.
But currency is only one part of money. The Fed has unlimited authority to create money. From an accounting standpoint it does so by buying assets from member banks (and now others) and simply crediting the member banks’ reserve accounts. The member banks then withdraw those funds (electronically) to employ in their businesses. Hence, the Fed is not technically “printing” money which is how the Fed can exist and not be (entirely) unconstitutional. Only the Treasury can mint currency according to the Constitution. That’s why the currency stock is only $800 billion and the M2 is $8 trillion – and that doesn’t include money held by banks with the Fed. The reserve accounts which are now about $7 trillion. You can see the data at
http://research.stlouisfed.org/fred2/data/TRARR.txt
That, BTW, is an increase of almost $6.5 trillion since August of last year.
Now, here’s the kicker and what has changed. The Fed announced recently that it would begin, if necessary, buying debt directly from the Treasury. In economic parlance that is known as “monetizing” the debt. The Fed creates the money out of thin air to fund the Treasury. That can be highly inflationary and it’s just bad monetary policy in my opinion. That’s what countries like Zimbabwe do when no one else will lend them money. That’s the reason that other central banks are pissed at the U.S – since the dollar is the international reserve currency – and there’s all this talk about creating a different international reserve. That’s why the U.S. dollar index took about an 8% pounding over last few weeks.
This is a dangerous game with untold unintended consequences. But the real problem is not as much the Fed as it’s the National Debt. If the U.S. cannot find buyers for it sTreasuries then the Fed will monetize all new borrowings. If that happens we will see very high inflation levels. Secondly, and more importantly, such huge borrowings have a high probability of “crowding out” capital that should be employed in the private sector. That crowding out will cause interest rates on business to be higher thereby slowing the growth of the economy. And yet the so-called Keynesians dismiss that Keynes insisted that stimulus money spent at a deficit had to be repaid in order for the economy to normalize after it’s stimulated. But not even Brad Delong or Paul Krugman address that issue.
We have to reduce the deficit and begin paying down the national debt or we’re going to be just like any other banana republic – only 1,000 times larger.
Now, the reason we haven’t seen any inflation yet is that there is massive debt destruction happening now caused by real asset deflation. In normal times there is the money multiplier effect due to fractional reserve banking. But the velocity of money is so low right now that the money multiplier is, in fact, less than one. So the Fed has to introduce about $1.20 into the system for the money supply to stay the same. Because of the anomaly the Fed’s balance sheet has to grow exponentially. This can be seen in the huge increase in bank reserves held at the Fed. The Fed is buying assets from the banks and they, in turn, are putting those monies right back in their Fed reserve accounts. I showed it graphically on my site:
http://davebudge.com/?p=1814
I hope this clears things up.
Sophists were never demeaned in their own time. Their power was to make sense of nonsense. They were very good at it. They made very cogent arguments. They were hightly respected, and supported power in place, made it all seem right. They were the intellectuals of their age. And they were wrong. But damned if they weren’t good.
Dave B:
Back in the day when I purchased new Treasuries direct I had to submit bid to the Fed address. That fact combinded with a book I had read (many, many years ago) did lead me to believe that the Fed handled the sale of new issues. I also understood they got to keep a small fee for conducting the sale. Somewhere I had read that part of the recent 2 trillion announcement was to monetize debt and a larger part was to purchase existing long term notes. Sounds like my source was faulty.
The most of the rest I already understood although I must say your explanation was far better than one I could have constructed. And, thank you for the site referecne to Fed data.
I realize the Fed doesn’t retire the debt it purchases on the open market. My point is that it should. Every dollar the Fed creates is an obligation to the Fed Treasury. I agree the Fed in itself is not the problem, it is our “Debt” based system, my term. My other problem with our system is the interest and fees accrued on the debt held by the Fed goes to the Fed and not the Treasury. I know that is the way it was set up. My point is that it shouldn’t be that way. But that leads us back to who we trust to put in charge of monetary policy.
By the way, you will find I made the same comment regarding Keyns to Mark T in prior comments. I have always been amazed how politicos think they can pick pieces from theories or various equations that they like and discard the rest, and then wonder why they don’t get the predicted results. It is an affliction not restricted to economics.
Perhaps some here would like to know the Fed announced the direct purchase of Treasuries shortly after Treasury didn’t have enough buyers at recent auctions. The choice then available, as I understand it, is for Treasury to raise the rates or for the Fed to buy the notes. Raising the rates would have a negative impact on borrowing and thus economy. This is the option I believe we should have taken as monetizing the debt has led to destruction in all its prior attempts.
Dave, I thank you for your time and look forward to further discussions. I will check out your site. Perhaps that would be a better place for some of this as I get the feeling we may be the only two here interested in the factual and practical aspects of this subject.
Best Wishes
JAC
JAC, Just to make things clear. The Office of Public Debt accepts bids from from several sources. The Fed facilitates some of the auction offers made by member banks but not all. In any case the ownership title of any Treasury debt goes directly to the winning bidders.
Mark, are you now an expert on classical philosophy? I look forward to your interpretation of Plato’s Republic. I can tell you’re an expert in Socratic argument.
Dave Budge: You’re wasting your time with that Mark guy. He might be one of those people who had a skiing accident and refused medical treatment.
JAC: As Dave Budge mentioned all Treasury securities are sold at open auction. The Treasury *does not* set interest rates on its securities—the market does. All they can do is refuse to sell their debt at the offered rate which is pretty much unheard of.
The Fed influences Treasury rates by buying or selling Treasuries in the open market. But it buys or sells Treasuries from/to *primary dealers* not from/to the Treasury. This is existing Treasury debt. When the Fed buys new Treasuries from the Treasury it credits the Treasury x-billions of dollars directly. This is called *quantitative easing,” printing money or debt monetization. It also tends to lower the rate on the targeted Treasuries. (Remember buying Treasuries drives the price up but the yield—interest rate–goes down.)