A Libertarian Story
I picked this up from Glen Browne’s Photos on Facebook.
SteveG’s Posts
The Fed Could Have Also Helped Main Street Instead of Just Wall Street
In this post I am going to perform a little magic trick. At the end, I will reveal how I did it.
The Federal Reserve Bank (FED) bailed out the banks with a program it called Quantitative Easing(QE). The QE progam bought toxic assets from the big banks to rescue them from insolvency. These toxic assets were Collateralized Debt Obligations (CDOs).
A CDO is a financial intrument that Banks sold to the public. It pays high rates of interest, which is why buyers wanted them so badly. The flow of interest payments to the investors was funded by the mortgage payments of the package of mortgages that comprised the CDO. They became toxic assets when enough of the mortgagees could no longer afford to make their payments.
The FED bought CDOs so that the Banks no longer had the obligation to pay the interest.
The Fed just created the money to buy these assets.
What if the FED had bought actual mortgages directly instead of buying packages of mortgages in the form of CDOs? They could have told the mortgagees that they wouldn’t hold them responsible for payments if they couldn’t make them. After all, some of the mortgagees aren’t paying anyway. The difference is that we wouldn’t have so many homeless people who were foreclosed upon, and we wouldn’t have vacant houses that are deteriorating before our very eyes as weather and vandalism take their toll.
As I tried to dig up references to justify what I wrote above, I came across a few surprises.
Forbes has the article Bernanke Admits To Congress: We Are Printing Money, Just ‘Not Literally’
“Where does the Fed get the money to buy [assets],” Congressman Keith Rothfus asked the Chairman. “Do you create the reserves,” he queried in a follow up, receiving a simple “yes” from Bernanke. And finally, the money shot: are you printing money? “Not literally,” the Fed Chairman surprisingly responded.
YouTube video of explanation of Bernanke’s Financing of the Asset Purchase
These securities purchases were financed by adding to the reserves held by the banks at the Fed; they did not significantly affect the amount of money in circulation. The Fed has multiple ways to unwind the large-scale asset purchaes (LSAPs) including selling the securities back into the market.
If I left it there, I can use that as proof that the Fed just created the money to buy the toxic assets. If you view the video, you will see some sleight of hand to prove that it did and it didn’t do what you think you just saw.
Then there is the New Economic Perspectives article Where Did the Federal Reserve Get All that Money?
John Carney just wrote a very nice piece, showing that not only was the Fed able to find buyers for its assets but that markets actually bought them back at a premium. Bernanke addresses the second objection in his remarks below – idle balances don’t chase any goods – but it’s the financing of the asset purchases that I want readers to understand, because this is fundamental to understanding Modern Monetary Theory (MMT).
This article refers to the Bernanke video above. The above link is to the relevant 5 minute excerpt of a lecture. The Board of Governors of the Federal Reserve System has links to the full lecture The Aftermath of the Crisis.
When I saw the 5 minute snippet of the lecture, I saw some amazing sleight of hand. As I was mulling that over, I came across the New Economic Perspectives article mentioned above, it looked like even experts whom I respect got taken in. I was pleased to see that in the comment thread that followed that article, there were a few who caught the trick that I saw.
Here is only a part of the conversation that gives you an insight to the sleight of hand.
That drew another possibly more interesting response, but I can’t go on forever quoting everything I have read.
The trick I played is using some of Bernanke’s words that I believe to be true to prove a point, while asking you to ignore Bernanke’s words that at best are trying to avoid revealing the truth. The meta-trick is that what I did is exactly what Ron Paul and Rand Paul do all the time. They do it to make a false point, but I do it to reveal the truth, if you believe me.
Maybe I will write another blog post trying to explain where are all the mirrors in this house of mirrors.
Draghi’s Doom Loop(s): More than just the euthanasia of the rentiers
New Economic Perspectives has the article Draghi’s Doom Loop(s): More than just the euthanasia of the rentiers.
Rather, the implementation of QE with a large and increasing share of the bond market displaying negative yields to maturity (NYTM) presents a number of serious challenges to financial stability in the eurozone.
To cut to the chase, the ECB’s QE and NDRP [negative deposit rate policy] measures may be setting investors up for a discontinuous price event, much like what was experienced in the equity market meltdown back in October 1987. Even if a disruptive yield spike is avoided, or even contained and reversed by ECB heroics, pursuing QE under NYTM market conditions may lead to a significant dampening down of bank and insurance company profitability. In the extreme, the solvency of key eurozone financial institutions could once again come under question. This could further complicate the ECB’s chances of achieving their 2% inflation goal, as it may dampen the bank lending channel as a key transmission mechanism for unconventional monetary policy.
As if you didn’t have enough to worry about here comes a game of musical chairs based on the greater fool theory. You don’t want to be the target greater fool in this scenario. This is one reason why I just do not understand how anybody could be invested in long duration bonds at the time that they are at a market peak. I know they keep climbing beyond any previous existing peak, you have to ask yourself how long can this go on. Well, it’s not really a question of how long it can go on, but more of a question of will you know to get out before the sudden large drop in bond prices.
Maybe if you watch your bonds like a hawk 24/7 365 days a year, you could be successful. I know that I do not follow my investments closely enough to play in this game.
Netanyahu slips, Reveals reason for Opposition to Iran Deal
Informed Comment has the article Netanyahu slips, Reveals reason for Opposition to Iran Deal.
US television news isn’t very good and it has clearly gotten worse over the past 20 years. In the aftermath of the Kerry-Zarif initial framework deal on nuclear energy in Iran, it seems obvious that an interview with Iranian Foreign Minister Mohammad Javad Zarif would be newsworthy. But to my knowledge none of the networks or major cable news shows had him on.
Or you could have talked to the British, French, German, Russian or Chinese foreign ministers, all of whom were principals and all of whom would have had interesting insights.
Instead, Israeli Prime Minister Binyamin Netanyahu was given repeated access to millions of Americans to talk trash about the deal over the weekend and to make mostly false allegations about its contours.
Have you ever wondered what television news is actually for? I mean besides making money for its owners. Education of the public isn’t even a distant second, it seems.
Sorry, you’ll actually have to read the article to see how Netanyahu slipped.
Highlights from Bernie Sander’ Western Swing
Bernie Sanders has Highlights from Bernie’s Western Swing on his web site. There are a lot of interesting picture, videos, and text there. You ought to follow the previous link if you are interested.
I have picked from the site one of the most fantastic videos I have seen so far about why we need Bernie Sanders as our President. If you haven’t seen this video, you probably don’t know all of what you are going to get if you elect Bernie Sanders. I didn’t know the full picture myself, even though I am a huge fan of Bernie Sanders and his run for the Presidency should he decide to do so.
Bernie films an episode of Overheard with Evan Smith for PBS in Austin, Texas.- Thursday, April 2
This interview and Q & A session is about 1 hour long. Whatever amount of time you can devote to this will be well worth your while.
Cruz abandons subtlety with theocentric pitch
The Rachel Maddow Show blog has the story Cruz abandons subtlety with theocentric pitch.
It stands to reason that far-right candidates running in a crowded GOP field are going to take every opportunity to appeal to far-right social conservatives, but if Cruz’s over-the-top commercial is the opening salvo, I shudder to think just how theocratic Republican messaging will become by, say, October, with several candidates trying to outdo each other.
I added the comment:
Instead of calling them “far-right social conservatives”, why not just call them what they are, “the American Taliban”?
Another comment started with:
Well, now the christianists have someone they can rally around and present a united front.
Some people worry about the imposition of Sharia law in the USA, see my previous post Mayor takes stand against Muslim Shariah courts. I am not worried that some people in the US would voluntarily submit to arbitration before a panel of Muslims or a panel of Jews, or even a panel of Priests. I am worried about having mandatory Christianist law in the USA.
Massachusetts Drivers Must Use Headlights When Their Windshield Wipers Are Needed
CBS Local has the story New Mass. Law: Turn On Headlights When Using Wipers.
Starting Tuesday, motorists will have to use their headlights “when the vehicle’s windshield wipers are needed.”
In case you missed the link above, here is the link to the law AN ACT RELATIVE TO THE USE OF HEADLIGHTS.
…headlights and taillights shall be turned on by the vehicle operator at all other times when, due to insufficient light or unfavorable atmospheric conditions, visibility is reduced such that persons or vehicles on the roadway are not clearly discernible at a distance of 500 feet or when the vehicle’s windshield wipers are needed;…
Now here is a law that probably sounded like a good idea at the time, and not a moment’s more thought was given to it. When you turn on the windshield washers to clear away some dirt, must you first turn on your headlights?
If, on a clear, sunny day, a truck drives by and splatters your windshield so that you cannot see where you are going, do you wash the windshield first so you don’t run over a pedestrian, or do you turn on tour headlights first so you don’t violate the law? What about birds splattering your windshield obstructing your view.
Actually, if you look at the words in the law that I bolded above, this law applies when the windshield wipers are needed. If you need your windshield wipers, but fail to turn them and your headlight on, you are still in violation of the law.
Do our legislators live in the same world we do?
Then there is the issue of daytime running light. Most modern cars will automatically turn on the daytime running lights (drl on my Toyota) if the ignition is on. My car automatically switches to headlights if there is not enough ambient light. You do have an option to turn off this feature and run with no lights, which most people seem to do. For those of us who understand why there is this drl feature in the first place, are we now violating the law if we do not override the drl option and turn on the headlights when we turn on the windshield wipers. I wonder if our amazing legislature thought to coordinate with the car manufacturers before they came up with this change in the law.
Modern Monetary Theory
New Economic Perspectives has published the poem Modern Monetary Theory by Pavlina R. Tcherneva. I quote just enough of the poem to whet your appetitie and to have something to discuss in this post.
Pondering here from my academic station
Why has never before such a simple observation
Caused more confusion and consternation
Amongst the general populationThat the government is the currency-issuing monopolist
Is not a radical idea, nor a hypothesis
It is a simple, nay, elementary fact
That is often so fervently attacked
A previous post When Will the White House and OMB Ever Learn About Sector Financial Balances? discussed another incontrovertible fact about MMT that people have a hard time accepting.
Now here is a fact that I have trouble with. We are currently living in an economic “system” where there is significant unemployment and underemployment, there is money sitting idly in the hands of the rich because they don’t want to invest it, we have resources going unused, we have factories that are shut down, we have lots of work to do on societal needs, we have people who would like to buy stuff, we have factories that could make the stuff people want to buy, we have people homeless on the streets, we have foreclosed houses sitting empty, and yet the “system” cannot manage to bring all these pieces together to boost the economy and our general standard of living. Why is it that we love this “system” so, but cannot tolerate the thought of an explanation of how this can all be fixed?
Would the cognitive dissonance explode our minds if we admitted that there is a solution in front of us to solve a lot of our problems, but we just don’t want to accept it? Have we fallen in love with our oppressive system that we just can’t bear to part with it no matter how much harm it does? Sometimes we see this behavior in other people and call it either “battered wife syndrome”, or the “Stockholm syndrome”.
Battered Woman Syndrome
According to Walker’s The Battered Woman Syndrome (p. 95-97, 1984), there are four general characteristics of the syndrome:
- The woman believes that the violence was or is her fault.
- The woman has an inability to place responsibility for the violence elsewhere.
- The woman fears for her life and/or her children’s lives.
- The woman has an irrational belief that the abuser is omnipresent and omniscient.
Stockholm syndrome
Stockholm syndrome, or capture-bonding, is a psychological phenomenon in which hostages express empathy and sympathy and have positive feelings toward their captors, sometimes to the point of defending and identifying with the captors. These feelings are generally considered irrational in light of the danger or risk endured by the victims, who essentially mistake a lack of abuse from their captors for an act of kindness. The FBI’s Hostage Barricade Database System shows that roughly 8% of victims show evidence of Stockholm syndrome.
Senator Elizabeth Warren Interview 1
The HuffPost Show has the terrific segment Senator Elizabeth Warren Interview. Below is the blurb for the show on YouTube.
The HuffPost Show is an irreverent look at the week’s top news stories. Watch live every Friday night at 9PM ET on huffingtonpost.com
How anyone can watch this interview, compare Elizabeth Warren to Hillary Clinton, and still think they want Hillary Clinton, is just beyond what I can understand. The only explanation that makes sense to me is that the Clinton fans have a phantasy about who Hillary Clinton is that is completely disconnected from her actual record. I know what the Clinton record is, and it is diametrically opposed to everything that Elizabeth Warren talked about in this interview.
The interview starts off with some of Warren’s life story. If you are as big a fan of Elizabeth Warren as I am, you’ve probably heard this a million times. Yet, she tells it so engagingly and with variations each time, that I never tire of hearing her tell it. Of course the story ties in with the important issues that she goes on to discuss. If you haven’t heard this, then you really need to watch this video.
By the end of the interview, Elizabeth Warren had the audience and me all fired up to fight for what we believe in.
In a previous post, Bill Black: HSBC Violates its Sweetheart Deal and Loretta Lynch Praises It, I wondered what Elizabeth Warren knew about this story and how she reacts to it. She answered that question in spades in the interview. She did not mention what she thinks of Loretta Lynch, though.
When she got to the discussion on Iran, it was the first time that I had some strong objection to her point of view. I made the following comment on the YouTube posting:
I am a huge fan of Elizabeth Warren, and I liked everything she had to say until she said that sanctions against Iran worked. Even the President said that continuing with sanctions would only harden the Iranians’ position. I have a blog post that puts the numbers to Obama’s assertion.
We could have gotten an even better deal than we just got, and we could have gotten it years ago, if President Bush had accepted an Iranian proposal instead of rejecting it in favor of imposing sanctions.
See my previous post Liberals Bernie Sanders And Al Franken Stand With Obama In Support Of Iran Nuclear Deal. That post has a quote from the President mentioning a third alternative to the negotiated settlement.
Third, we could pull out of negotiations, try to get other countries to go along and continue sanctions that are currently in place or add additional ones, and hope for the best — knowing that every time we have done so, Iran has not capitulated but instead has advanced its program.
I hope that Elizabeth Warren will fix her understanding on Iran sanctions, and I hope she will start talking openly about the nomination of Loretta Lynch for Attorney General.
Passphrases That You Can Memorize — But That Even the NSA Can’t Guess
First Look has the article Passphrases That You Can Memorize — But That Even the NSA Can’t Guess.
I’ll quote just enough of the article to give you a hint at how secure it is and how different it is from what you may be thinking.
In other words, if an attacker knows that you are using a seven-word Diceware passphrase, and they pick seven random words from the Diceware word list to guess, there is a one in 1,719,070,799,748,422,591,028,658,176 chance that they’ll pick your passphrase each try.
At one trillion guesses per second — per Edward Snowden’s January 2013 warning — it would take an average of 27 million years to guess this passphrase.
Not too bad for a passphrase like “bolt vat frisky fob land hazy rigid,” which is entirely possible for most people to memorize. Compare that to “d07;oj7MgLz’%v,” a random password that contains slightly less entropy than the seven-word Diceware passphrase but is significantly more difficult to memorize.
I am thinking about using this technique myself. Just remember, if you use the exact pass phrase quoted above, it will not be secure at all. You have to use the technique to generate your own random pass phrase.
Right. But those were risky assets, and I’m saying that this is not a full accounting.
Do we know what kind of losses the Fed has yet to realize?
Say you paid $2 trillion in risky assets with a face value of $2.5 trillion, which may pay 10% interest or may pay nothing and lose 50% of its value. Say it’s 50-50, but you’re levered 20:1– owing $1.9 trillion in debt. You’re either going to make $200 billion or lose $200 billion… on your $100 billion gamble.
Now the Fed buys the stuff off you for $2 trillion and you pay off your debt. You realize no gain, but you weren’t expecting to, anyway. You’re more liquid than before, with far less risk.
The Fed, however, realizes $125 billion in interest on $1 trillion in assets, which it dutifully turns over to Treasury. What’s not mentioned is the $125 billion loss on the rest. Sure, the $125 billion would have gone to the you, and is now at Treasury. But there’s a $125 billion loss at the Fed that also would have gone to you.
And that assumes the Fed pays you fair value for those assets, which is pretty unlikely. Suppose the market price for your assets was falling– maybe you would have only realized $1.8 trillion if you sold to anyone else. That doesn’t matter to the private sector, but that’s still another $200 billion subsidy to the private sector.
And so on.