Where Have I Heard That Before?

I am still traveling, but caught up on some light reading in the RSS feed that  now looks like an atomic bomb went off in it (ie, there are thousands of unread articles).  This from Paul Krugman:

“We’re not at all like Greece; we have our own currency, and our debts are in that currency. So we can’t run out of cash, even if the bond vigilantes turn out to be real and lose faith in America.”

Where have we seen that before (besides the near verbatim here, I’ve written those words over 100 times in 100 differnt articles on this site). Maybe Paul Krugman is starting to catch the Monetary Realism bug? Of course, the next step is understanding that, even though bond vigilantes aren’t going to wreck the economy, it is indeed the bankers who rule the monetary system via the government’s outsourcing of money creation to them.

So yes, bond vigilantes might not be able to wreck the monetary system (as rates are a function of economic conditions leaving the Fed to guesstimate future proper rate conditions and for bond traders to try to front-run the Fed), but understanding the way our system works is primarily about understanding endogenous money and how banks “rule the monetary roost” and issue almost all of the money almost entirely independent of government controls. The government plays an important facilitating role here, but as is designed, the system is built by the banks and for the banks.  And understanding that system means mainstream economists need to start better understanding that money is issued by banks as debt.  Any model that doesn’t start with this foundation is likely to be flawed….


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • daver

    I agree, but with the Fed buying tens of billions of assets from the banks every month, isn’t true that the relationship between the banks and the govt is being skewed? Would these banks be going out of business otherwise?

  • Alex Gloy

    “Bond vigilantes wrecking the system”… um, I think it’s the other way round. It’s the profligate spending that wrecks the system. The way you argue would be a soccer team blaming the fans for repeatedly scoring own-goals.

  • GLG34

    You must be one of those people who assumes that private sector spending is always a good thing and never goes wrong? Except when millions of idiots decide they want to take out more debt than they could possibly afford so they can buy homes and cars they should have never owned. And then when they default the economy implodes and the government has to bailout the idiots running the banks who made the loans. And then idiots like you complain about how the government spending to bailout the system ruined everything.

    Yeah yeah yeah. Always the same crap from the small government people. You think the private sector can do no wrong and when it does do wrong you think it can just sort everything out by itself. Why don’t we just let cars drive around without speed limits or stop signs also. Then when there’s pure mayhem on the roads we can just let the drivers sort it all out themselves. Great thinking there.

  • W Gross
  • http://www.orcamgroup.com Cullen Roche

    Comments work better when you don’t call people names. Very little comes from denigrating someone else just because they disagree with you. You will NEVER build up your own argument by tearing someone else’s argument down through name calling. Keep that in mind.

  • Johnny Evers

    Sure, we can’t run out of money. We get that. We can always harness that primary dealers to finance deficit spending plus the Fed can use its endless balance sheet to buy debt on the secondary market, thus taking supply out of the market.
    We read that in here every single day.
    But is that a good model? What’s the end game to this? I don’t see this borrowing kick starting the economy — seems more like a path to a different kind of society. I hate to be cynical, but since I don’t see an end to it, I assume the powers that be have ulterior motives for their actions.

  • Anonymous

    Simply put, you’re wrong.

  • Anonymous

    “Having your debts denominated in your own currency is absolutely crucial.” This is true but is also one of the most overhyped facts cited here. The reality is much, much more complex.

  • Tom Brown

    When you contrast continued deficit spending / QE though with what the Market Monetartists want to do, I think it looks pretty good! They’d have the Fed do everything. Specifically their game plan is:

    1) Have the Fed threaten to do what ever it takes to get NGDP up to 5% (since GDP is so low, that means raise inflation much higher than it is currently, since NGDP rate = GDP rate + inflation rate)

    2) If 1) doesn’t do the trick, the Fed starts buying stuff, starting with Treasury Bonds, moving on to Agency debt, then MBSs, then corporate debt, … potentially, and I quote Sumner on this “buying the whole Earth” to reach their target!

    So if you think having the government deficit spend on Social Security, unemployment benefits, Medicare/Medicaid and Defense spending is bad… wait till the Fed starts purchasing what’s in the basket of goods making up the CPI! Talk about inefficient spending! What’s the Fed going to do with a bunch of groceries? The only advantage is that the government doesn’t have to pay interest on what the Fed buys… but that’s also the case when the Fed buys Treasuries resulting from deficit spending with QE.

    Of course Sumner says we’ll never get to the point of the Fed buying that kind of stuff (and thus he “opposes it”… to which I reply “What?”), and that traditional financial assets will be enough… but I wonder! We’ve already got excess reserves out there from QE, right? More purchasing by the Fed of these “traditional assets” will just result in more excess reserves. We currently have a lot of them on the banks’ balance sheets, and they aren’t doing anything to inflation… so will it really take some “non-traditional” purchases by the Fed to get inflation going?

    The reason I’m pointing out the MM alternative is because a lot of folks seems to be swayed by the NGDP targeting idea recently including Bernanke (at least to some extent) and Krugman, and now the Financial Times (I understand).

    Oh, I guess I should point out that MMers say that paying interest on those excess reserves is also causing problems, so supposedly they’d reduce that to 0%.

    I guess what I’m trying to say is that deficit spending where there’s at least in theory some congressional oversight and accountability to the voters sounds a lot better than unlimited Fed purchases of anything they think they need to reach their target inflation rate. Are those the only two options on the table? No… the Austrians would have us institute “Austerity” which I think would be a bigger disaster still. And then we’ve got the debt jubilee idea, and the “stay the course” idea, etc.

  • TruthNotProaganda


    You’re indeed incorrect.

    When the Federal Reserve buys assets of private banks, including but not limited Primary Dealers, and assets that range from bonds to real estate (check out the composition of Maiden Lane), they are often times the only buyer willing to buy such assets, or the buyer willing to pay the highest number of fiat dollars for such assets.

    This is because the Federal Reserve is indirectly creating the very fiat money (by purchasing treasury notes in the secondary market) that it is using to purchase such assets from private banks, and it is creating that fiat money at zero cost basis.

    Otherwise, many of the private banking entities, without the Federal Reserves intervention, would be forced to hold “fire sales” to liquidate the assets the Federal Reserve has and is purchasing, which would impair these institutions’ balance sheets, AND WHICH WOULD ACT AS A DEFLATIONARY FORCE, AS THEY WOULD RECEIVE LOWER PRICES FOR SUCH ASSETS AS A RESULT OF TRUE PRICE DISCOVERY & FREE MARKET FORCES.

    The Fed is not concerned with paying a price for these assets that would allow it to make a profit; in fact, the Fed intentionally has NOT imposed “haircuts” upon distressed (and non-distressed) banking entities when purchasing such assets, and it is known by all parties that the Fed is overpaying for these assets.

    The Fed simply creates the fiat money that it uses to purchase these assets, and then stuffs these assets on its balance sheet, where many of them sit…and sit….and sit…

  • Stephen


    Why do you not include shadow banking “credit money” as part of MR? In my reading of MR, I’ve seen bank deposits held at regulated depository institutions (consistent with broad monetary aggregates such as M2) discussed in great detail, but little mention of the liabilities of unregulated shadow banks or “credit money”.

    Credit money includes money market mutual funds, repurchase agreements, commercial paper, asset-backed securities, GSE/agency paper, etc.

    It seems to me that MR accurately describes the outsourcing of money creation to banks (regulated depository institutions) via loan creation, but ignores the capabilities of shadow banks to create “credit money” as described above, which is just as relevant.

  • casino implosion

    If I recall the Krugman/Keen debate correctly, PK has a lo-ong way to go before understanding how the bank system actually works.

    Maybe Cullen needs a Nobel.

  • http://www.orcamgroup.com Cullen Roche

    It’s actually something we’re working on. Stay tuned.

  • daver

    Thanks for your reply. I understand your points and don’t disagree.

    I guess I was thinking that by purchasing the MBS it frees up the banks to keep producing mortgages (loans) that they otherwise may not make. It seems that the banks are making enormous profits now, so if the loans they are making are legitimate business deals then they would make them anyway without the Fed buying them off their balance sheets.

    If the reserves are just sitting on the books with the Fed and the banks are making some interest from them that means that the banks can make more money from the Fed deal than they can make from the actual loan repayment. Otherwise they would keep the loans on their books. (Or sell them off and some other private entity would keep them on their books.)

    Isn’t this a huge giveaway to the banks? They make fees from risk-free loans and then make risk-free interest from the Fed.

    I see how this could help the economy, but it seems so…artificial. I guess as a stop-gap measure it’s sensible, but as a longer-term policy it seems unfair in so many ways.

    It very well may be deflationary as you suggest, but for the banks it must be super-profitable and very low risk.

    If the banks do indeed “rule the monetary roost”, why the need to help them out?

  • http://www.orcamgroup.com Cullen Roche

    The Fed is an entity that exists in large part to support private banking. So, what we have designed in the USA, is a system that delegates money issuance to the market (via competitive private banking) as opposed to the govt issuing all the money in some way. The downside to having the private sector issue all the money in search of a profit is that it’s inherently unstable. So, at times, it will require govt intervention and support (support it can provide because it is the only entity with unmatched revenue powers via taxation). The Fed was created in large part to act as a non-public/non-private support mechanism. So the Fed is a slave to the banks and will do anything in its power to ensure their stability (which will help stabilize the entire economy). The alternative to such a design is nationalization and state controlled money.

  • http://www.orcamgroup.com Cullen Roche

    I actually think the way the Fed intervenes in the markets in some of these programs is counterproductive. And spending is contingent on its effectiveness and efficiency. Lots of moving parts there, but we’ve covered it in the past. I would NEVER say all govt spending is good or that all Fed intervention is good….

  • Johnny Evers

    Cullen, there are times when you come across as somebody doing PR for the Fed.
    We don’t have to accept a Fed that works for individual banks. The Fed was set up by Congress and its officers are appointed by the president. Its mandate is employment and interest rates. Somehow it’s also morphed into an entity to fund deficit spending.
    The Fed could very easily have liquidated the banks that caused the crash and opened the door for new banks to come on line.
    Stating that the Fed is a slave to the banks — maybe, but why do you support that? And why do you say that if you oppose current Fed policy that you favor socialized banking.

  • Johnny Evers

    Too many big ideas. Too much faith in the all-knowing, all-powerful Fed, even though it’s effed up big-time in the past 10 years. Too many pundits who think that if we only press the right button the economy will do what they want.
    My solutions?
    Put civilians back in charge of the banking system. … Rescue the working class, not the financial elite. … Stop this nonsense that spending what you did the year before is ‘austerity.’ …. Stop hiring Goldman execs in the White House. Maybe put a couple in front of a firing squad. … If you really, really want to put debt on the Fed’s balance sheet, buy student debt and not AIG leveraged MBS plays. … Sometimes the best thing do is nothing.

  • http://www.deltafinancials.com delta financials

    Just a question for the MR bugs: would your view of QE suggest that currency in circulation should be rising at several times its historical rate. If so, why? Note, i’m talking currency – not the all too often cited monetary base graph.

  • http://www.deltafinancials.com delta financials

    My only response to this debate is quite simple. The fact that the fed can effectively control short term rates, while theoretically valid, is practically entirely meaningless. Only an idiot would want negative real rates when inflation starts rising. So this very benign view of debt is, in the long-run ha very dangerous view.

  • TruthNotPropaganda

    It’s worth emphasizing the fact that many banks, especially of the larger variety, were taking and are still taking massive risks, via reckless speculation and entering complex markets such as derivatives that they lack the expertise to understand (who does really understand derivatives?), while failing to implement prudent, rational and competent risk management practices, and at times when they’ve been woefully undercapitalized.

    The result was a meltdown whereby many of them (and all the alleged too-big-to-fails) were able to socialize their losses while retaining gains for their private use, all via the actions of the Federal Reserve & Treasury Department (with approval by Congress and both the Bush II & Obama Administrations).

    So, if the banks are going to be able to continue to socialize losses resulting from their incompetence, greed and recklessness, they should literally be regulated just as utilities are.

  • Tom Brown

    What precisely do you mean by “currency?” Physical paper notes and metal coins?

  • http://www.orcamgroup.com Cullen Roche

    I don’t use this platform to tell people how I think the system should be formed. I primarily use it to tell how HOW IT IS designed. I’ll leave it to other people to argue over the politics and proper set-up of the system. I tend to steer clear of that stuff. My description of the Fed as a facilitating entity for private banking is simply what it is. The fact of the matter is that the Fed achieves price stability and full employment by helping maintain a healthy banking system. That means its first priority is ALWAYS to ensure a healthy banking system. Its primary service is not to you or the voters. Do not mistake the Fed for being a purely public purpose based entity. It is not.

  • http://www.orcamgroup.com Cullen Roche

    Yes, important distinction.

  • daver

    Yes, but as you have stated, a healthy banking system is needed to facilitate the private sector’s payment system. However, it seems to me like it is being maintained in order to facillitate the PD’s buying of government paper.

    There is a lot of talk about the bond vigilantes not showing up. But isn’t it obvious that the bond vigilantes could only be the PD’s? Since the Fed swaps the bonds for reserves then pays interest on those reserves, the PDs will continue to buy govt paper. However, if there were no interest on reserves, you would imagine some revolt from the PD camp; you would have your bond vigilantes.

    So my question: Is the Fed propping up the banks to keep them from turning into bond vigilantes and destroying the govt’s ability to fund itself without outright printing and of course high inflation?

    If this makes sense, could we not be one banking crisis away from an extraordinary inflationary crisis?

  • Johnny Evers

    Cullen, that’s awfully cynical.
    Just because the Fed has seized power beyond its mandate does not mean that’s how it was designed.
    Trying to make an analogy here — the U.S. military is designed to protect and defend the nation, but if the Marines invaded Mexico on their own we wouldn’t say, ‘Oh, well, that’s how the system is designed.’
    The Fed *is* a public purpose institute. It’s designed to help the banking system only so the public will benefit. But people in the banking system have come to believe that if it benefits them, it benefits everybody. Maybe you’ve gotten so close to the Fed in analyzing it that you’ve absorbed that belief system.

  • Johnny Evers

    But how can they be scrutinized or regulated when we are told the Fed works for them and not for us?
    We need to either have a banking system that is either a public utility or a private entity in which banks pay for their losses — not the system which TNP describes.

  • http://www.orcamgroup.com Cullen Roche

    Yes, but the Fed can only achieve public purpose via a healthy banking system and the banking system is a privately owned for profit system (NOT a public purpose system). It’s like implanting an artificial back up heart that’s designed to kick in whenever your actual heart starts to fail. Of course, the artificial heart is designed to keep all your organs healthy and functioning, but it works by keeping your circulatory system working. The Fed is no different. It keeps the system working by keeping the banking system working. In theory, the govt could circumvent the circulatory system by injecting flows directly to the organs that need it, but it chooses to use the private bank based circulatory system and therefore renders the Fed a slave to this system.

  • hangemhi

    wow I find myself agreeing with Johnny Evers :)

    However, there will be no solutions, yours or anyone else’s, until the monetary system is understood. I think that’s why Cullen only focuses on what it is rather than how to fix it. Any therapist will tell you that “awareness” is ALWAYS the first step to fixing any problem. And the only people aware of how our system works frequent this site and a few others, so we are still few in number. Thankfully guys like Krugman are ever so slowly gaining some awareness as evidenced in his latest article.

    Once MR is understood, then sides will be formed about how best to run the economy and country. Personally I think we need to go back to crazy high tax rates on extremely high income while eliminating taxes for those in the bottom 80% or so. We can reduce the top rate and raise the bottom rate when we’re back to full employment and have more income and wealth equality.

    Allowing the kind of inequality we have today forces everyone below the top 1% to go deeper and deeper into debt to finance their lifestyle which just makes most of them poorer and poorer.

    The argument against this is that money will leave to tax haven areas – but lowering taxes is just a race to the bottom. If we get to zero taxes, everywhere else will be zero taxes and no society will function well. If we had 90% taxes then somewhere else wouldn’t need to go to zero, they could be a tax haven at 50%. There’s obviously no perfect system, and I hate taxes as much as the next guy, but in summary we need to put a stop to the ever increasing inequality because THAT is what is going to ruin the country.

  • Tom Brown

    Am I right to assume that the Fed chairman possesses extraordinary power over the Fed? Imagine a situation where we have a follow on banking crisis… and outrage runs high enough (and is directed enough in the banks’ direction… rightly or wrongly) that the president is able to successfully appoint a bank unfriendly Fed chairman and get him confirmed. That would shake things up. I’m not saying that would be the best situation, but Fed policy could certainly change on a dime in those circumstances, couldn’t they? Imagine Elizabeth Warren, Yves Smith, Bill Black, Ron Paul, David Stockman, Chris Whalen, Joseph Stiglitz, George Akerlof, Brooksley Born, Scott Sumner or even Sheila Bair (probably much more likely for Sheila since she was head of FDIC once). Think of how, for a few years anyway, different things would be! It seems we’ve had a long succession of extremely bank and Wall Street friendly heads of the Fed/Treasury/Regulator-agencies, which is understandable given the banks’ tremendous political influence, however, that could change quickly. A president Hillary Clinton or Christy or Rubio or Bush III or Biden probably wouldn’t shake things up much… but a president Warren or Rand Paul probably would! … for good or bad! Let’s see, how about a president Warren, White House press secretary Taibbi, Attorney General Black, Fed Chairwoman Bair, and Treasury Secretary Bernie Sanders… wow! That would REALLY be different don’t you think? The banks would do everything in their power to prevent that… so there’d have to be some white hot anger directed their way by the voting public for us to get there… but still… it seems it all hinges on a few key people.

    Isn’t that basically what happened in the 1930s? The public was so mad at the banks that bank robbers like Pretty Boy Floyd, Bonnie and Clyde, and Dilinger became folk heroes. And Glass-Steagall went into law, etc. I think it could definitely happen again.

  • Andrew P


    What do you think of this article that says that the Fed’s QE has primarily ended up in the reserves of the US subsidiaries of European banks, and is thus just a stealth bailout of the EU?


  • Tom Brown

    I’ve been trying to get David Glasner to answer that question, but I’m still not clear on what he means. The latest from him is that he’s defining it as “non-interest bearing” money… which to me seems like it includes only physical notes and coins outside of banks (held by the public) and 90% of non-bank demand deposit accounts (the other 10% requiring the banks hold interest bearing reserves).

  • Tom Brown

    … and even that 90% of deposit accounts bears interest, though not as much probably as the 0.25% the bank currently get’s for its reserves.

  • Johnny Evers

    What’s good for individual banks is not necessarily good for the banking system.

    Historically analogy.
    The newly formed German state after 1870 was dominated by the Prussian military elite. It was said that Germany wasn’t a country with an army, but an army with a country.
    You could say that we’re no longer a country with a banking system, but a banking system with a country.
    So Tom (below), not only is what you suggest possible, but I would argue that it would be for the best.
    Just as generals are subservient to the president, who may have no military experience, so why should the bankers make their own policy over the president and Congress (representing the people.)

  • Tom Brown

    Johnny, my “fantasy” admin line up there would be more along the pro-regulatory, TBTF-bank-skeptical political leaning. Actually a better substitute might be to put Cullen in there somewhere (for level headedness)… Treasury? FDIC chief? Ha! … of course he might not be able to get along w/ a William Black as Attorney General, although I think that’s the best place for Black. He’d be a dedicated (rabid?) prosecutor… with PLENTY of ideas about how things should be done at Justice and in the regulatory agencies…

    However, I think a libertarian / “Austrian” style admin would be just as disruptive to the status quo. E.g. a Rand/Ron Paul duo… Charles Murray, Mish Shedlock, Chris Whalen, David Stockman type deal. Or even an MM admin, with Sumner, Christensen, Glasner, Nunes, etc (the MMer’s would certainly get rid of interest on reserves and make a concerted effort to boost inflation when “needed”!).

    But I’m not sure if those latter two admins would be an improvement over what we have now! I’m not sure about the first one either really, but my personal political leanings would tend to favor that.

    So yes, I tend to agree that shaking things up in the “correct” way would hopefully be beneficial, but they could just as easily get worse!

    What’s certain is that the cozy status quo relationship with the banks could change quickly!

  • InvestorX

    CR: “The Fed is an entity that exists in large part to support private banking.”

    I have said that many times here before. I am glad you are joining me in that “insight”. It is cycnical, but actions speak better than words.

    JE: “Cullen, that’s awfully cynical. Just because the Fed has seized power beyond its mandate does not mean that’s how it was designed.”

    I agree, the existing system does not equate automatically to a good system and there is also “system drift” on top of it.

    CR: “Yes, but the Fed can only achieve public purpose via a healthy banking system.”

    Well yes, but the Fed’s constant parenting of the system has led to a very unhealthy system with very serious psychological deformations on top. The Fed currently maintains the simulacrum of a healthy banking system, while it is both physically sick and mentally deranged. If you believe that the current way is the right way to operate a “healthy” system, you are beyond cynical.

    The current system is nothing but a legalized and state enforced racket scheme for privatizing gains and socializing losses. It has all the traits of a fascist arrangement.

  • InvestorX

    CR “It’s like implanting an artificial back up heart that’s designed to kick in whenever your actual heart starts to fail. Of course, the artificial heart is designed to keep all your organs healthy and functioning, but it works by keeping your circulatory system working.”

    Two problems with this simplistic view:
    1. Because the body can rely on the artificial heart (which probably cannot work properly for the full life and also not properly for the daily routine either), the body has been postponing a life saving heart surgery for years now. Not healthy.
    2. The Fed picks and chooses winners (TBTF) and losers (the rest) while pretending to “save the system” under urgency (see 1 above) – not capitalistic, not democratic, not graceful, not necessay. (Check Hussman on the need to save TBTF in order to save the system or the “Swedish model”.)

  • Johnny Evers

    Plus 1 and 2.
    You’re on a roll.

  • Johnny Evers

    MR seems to describe a system in which financial institutions make loans to each other, creating deposits, which they use to purchase securities. When these newly minted exotic securities fail, the Fed buys them at par.
    As you note, very little of this newly created money is circulated to most Americans, thus aggravating inequality.
    Your solution of taxing high income earners doesn’t distribute money to the bottom 80 percent — it distributes money to the federal government. Most of us want to share in the expanding money supply via rising wages, not to become dependants of the federal government.

  • http://None Midas II

    Remember true dishonesty by real estate brokers raising prices to increase their commissions, banks allowing falsified buyers incomes, and then selling off their mortgages, avoiding responsibility. Then the new mortgage holders (investment banks) assemble bonds made up of these corrupt instruments to sell to trusting buyers. It was all crooked and requires justice. Does the Fed or Treasury have any responsibility in this? I don’t know.

  • http://None Midas II

    Sorry, I guess this off topic.

  • hangemhi

    my idea is to raise taxes on those who have oceans of money – estate taxes ought to go through the roof – it makes no sense that 6 Wal-Mart heirs alone have more wealth than the bottom 40% of Americans. They didn’t earn it, so why not tax that?

    Then the Gov needs to “redistribute it” (all tax/spend is redistribution) to where it is needed – like infrastructure, education, renewable energy, or just lower taxes to the bottom 80%. So no, I’m not saying the Gov should raise taxes to pad its own pockets (pay down the debt) I’m saying that money needs to be circulated out of of massive savings accounts of a handful of people so wealthy they couldn’t spend their money in 100 lifetimes, and into the economy where it will be most productive.

    To me this is no different that the atmosphere evaporating water from the oceans and raining on the mountain tops. The money/water flows down and adds water to streams and lakes creating lush vegetation and drinking water that sustains life…. and much of it ends up right back in the ocean – the Wal-Mart heirs could have had millions taxed away from them, but they’ve still got Wal-Mart and much of that money would flow right back to them

  • hangemhi

    What you don’t seen to get InvestorX is that Bernanke isn’t Congress. Your complaints about TBTF and the like are failures of Congress, not the Fed. MR doesn’t propose anything – it just describes the system. It describes what Bernanke is doing, and doesn’t endorse it – it just explains what things like QE really are, and what is does and doesn’t do.

    The Fed is like the heart surgeon, rescuing a sick patient and then sending him on his way. Now its time to eat healthy, exercise and stop doing the things that will inevitably cause the patient to end up on the Fed’s operating table again. That’s Congress’ job, and the job of the banks themselves. The banks think “gee, heart surgery worked last time, so no need for me to change anything”. Personally I like this analogy because this is literally how many Americans have allowed themselves to get obese – they think drugs and surgery can fix anything. So what are we supposed to do – take away drugs and surgery? Or educate the populace on the wonders of diet and exercise – ie, Congress on the wonders of understanding MR so they can make better decisions?

  • InvestorX

    Your thinking is too black and white. And twisting my analogy. I do not think the Fed is the surgeon (although many people expected it to be, but Timothy G said he never saw himself holding a scalpel). The Fed is not feeding the patient healthy food, but high grade sugar and cockaine.

    And moving the blame to Congress from the Fed is not a valid argument either. The Fed itself should close door if it is in an unethical business or truly intends to serve public purpose. Because it has proven itself uncapable of:
    – forecasting the economy or markets (at least in the devine manner they pretend to be able to)
    – properly regulating markets
    – steering markets through policy

    Anyway, my point is that only because the system is as it it, it does not mean that is either good, nor “healthy” for banks and the economy as a whole. It is only good for power grab, CEO bonuses and a loss of capitalism and democracy. Once people start compromising on the very foundational principles of things like capitalism, then the mission creep will lead to the total lack of capitalism. Being “pragmatic” about it only allows the mission creep to continue.

    There is value in showing how the system works. But there is more value in evaluating it.

  • Johnny Evers

    Diet and exercise?
    The principals of diet and exercise are moderation, personal discipline, restraint, making sacrifices today so you can be healthy tomorrow — in short, *austerity*.
    If you want to make the analogy that the Fed is a surgeon, best to describe him as the quack who kept an increasingly sick and demented Michael Jackson alive with all kinds of various stimulus, right until the point he killed him.

  • Bob Salsa

    There’s one aspect of the FED and private banking that seems often overlooked here – the bank examiner. It’s an aspect that greatly diminishes notions of the FED as slave to the banks yet takes nothing away from the notions that no human-managed system always gets it right (e.g. intervention are all good or all bad).

    Imagine the senior loan officer getting a call by the examiner to meet in the late AM and upon arrival suggesting lunch to discuss the general economy. Over the last several months, these lunches have gone pretty smoothly and the afternoon just a cursory look at some summary loan portfolio information. Result – lending continues at whatever pace the bank had in mind to begin with.

    Imagine instead, however, a call the late afternoon before with the examiner stating he’ll be at the door at 7am having in tow a gang of eager support staff wanting to do social good or at least make a name for themselves in a career of law enforcement. The examiner notes that a variety of data is raising considerable concern with the Regional FED to the point that DC has been made aware of the situation. Also the suggestion that should anyone still be physiological able to eat lunch, they should plan on ordering out. Result – lending at the bank comes to a complete and utter halt until such time the bank’s loan offices (existing or their replacements) are given the okay to grow new pairs again.

    If one has worked at a bank in such a capacity long enough to compare and contrast times when the govt was or wasn’t interested in the rate of banks’ lending activity, one would never confuse who is in the superior position. On the other hand, one would also not confuse that with any notion of superior position as always having the correct outlook.

    Again, this is a realism that is often overlooked in most theoretical construct of how our monetary system actually works.

  • Johnny Evers

    I’m not saying I wouldn’t support that, but really that wouldn’t se so much of a tax as outright confiscation. And as such, you could probably do it once or twice in a generation.
    And it would still leave the public dependent on the government to use that money for their benefit. Politically speaking, the best way to benefit Americans is to see that their wages rise faster than inflation.
    Why do six Wal-Mart heirs have so much money?
    Is it because Wal-Mart is 1 percent of the U.S. economy?
    Is it because the present system is designed to inflate asset prices like stocks?
    In nay case, wouldn’t it be better just to break up Wal-mart as an unhealthy trust.
    And, change the system so we don’t inflate the assets for the rich, but wages for the poor.

  • http://www.nowandfutures.com bart

    “So we can’t run out of cash…”

    Of course not, but implying even vaguely to the ‘great unwashed masses’ that debt doesn’t matter is unwise to an extreme. Amongst many other things, it makes even more debt much more than palatable and gives unedookated & free spending politicians etc. even more rein.

  • roger erickson

    rumor has it that “Namgurk Laup” phonetically translates to “Relsom Nerraw” in Hittite, and both were copied from a Sumerican scroll.

  • Aar bee

    You are right. It is indeed is an asset swap which most people don’t understand.