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19246Re: [LeftLibertarian2] Re: Nothing new to see here

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  • MikeHolmesTX@cs.com
    May 14, 2008
      In a message dated 5/14/2008 1:04:59 PM Central Daylight Time, Richard_Garner2000@... writes:

      Its obvious, really. One Austrian point against monetarists was that increases in money supply aren't uniform throughout the economy, but occur by money suppliers giving money to one group, and the new money gradually working its way through. For that first group, it is plain that they benefit from the increase in money without immediately feeling the effects of inflation. For the last, they get only the inflation. So it could be easy to suggest that the immediate recipients of new money get it at a lower interest rate than the latter.


      It also appears that at times there is a "futures market" in the Fed money supply, wherein lenders and other middlemen can create asset bubbles, such as the housing market/real estate boom, by lending money way over underlying asset values.

      These banks/lenders/middlemen make commissions and upfront fees while often passing along most of the downstream credit risk. This has been a major industry in nearly every part of the credit market. Housing loans in particular were sliced and diced and packaged for sale to ultimate creditors, who were told (or naively believed) that the underlying loans were properly collateralized and that borrowers were credit worthy.

      The Fed happily fed this bubble but didn't really create it.

      Then, when the bubble burst, the Fed comes along and basically bails out the biggest lenders and financial institutions, some of which did actually end up holding billions in inflated assets. The money spigot opened (as in the Morgan Stanley bailout) to "guarantee" the underlying inflated value of corporate housing bond portfolios.

      So in this case the insider Fed futures market recklessly lent and were subsequently able to plead "necessity" to get cheap or interest free money to bail out their own greedy mistakes. Wall St. financiers correctly predicted that the consequences of their bad decisions would still be seen as "too big to fail" and hence would be bailed out by Fed low interest money. The fact that the NYC money center is almost completely dominated by elected Democrats guarantees that the political muscle to pressure the Fed is bipartisan, and thus sold to the public as "stability" rather than a plutocratic rip off.

      Instead of getting the money first and then lending it out at a mark up, financial institutions first lent money on bogus collateral and made money on the fees; when things soured they then relied on the cheap Fed money to keep them afloat.

      A lot of hedge fund and financial institution leaders have personally suffered however, being fired or merged out of jobs, but not before they made huge bonuses on the earlier lending frenzy.

      So ultimately access to government money creation works in any number of ways, sometimes in a round about manner. But any time financiers figure they can stick someone else with the tab (taxpayers, ultimately) they will work overtime to make a monopoly profit.

      There are predictions that the next bubble to be burst is the credit card debt bubble, since once again easy access by banks to credit has mushroomed this area into a sea of poor lending and looming write offs. Like housing debt, much of this is not held by originators but sold in bulk to ultimate creditors including pension funds and private investors.

      When credit card lenders get money at about 3% and charge from 10%-28% interest on card balances, and still lose money, you get the idea that the amount of bad debt here must be a huge percentage of the underlying debt.

      (These bad loans, as with housing, only become a problem when the secondary market for such debt disappears in the wake of realization that the bubble has burst. Banks have to "mark to market" their loans every quarter and if the market isn't buying any -- quite sensibly since they know the bust is here -- these assets for banks drop in value to near zero. This in turn wipes out a big chunk of their reserve capital -- since they can lend up to 20 to 1 based on reserves -- and thus can quickly jeopardize even the largest banks which hold such bad debt.)

      If the recession really hits individuals hard, you will see much of this debt unsaleable and more begging by finance houses to have the Fed bail them out by essentially guaranteeing bad credit card debt by the Fed or with outright low interest loans to keep capital requirements (by banks) for reserves at legal levels.

      So it isn't always the first Fed borrowers who profit. Sometimes it is those who can pull off the politically delicate task of getting the Fed to bail them out after they have profited from bad lending policies but before the bad paper comes home to roost. Hence there is sort of a "futures" market in access to Fed capital, betting that today's asset bubble lending practices will ultimately be bailed out by friendly politicians and compliant Fed bankers.

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