Thursday, September 6, 2012

Rewarding Risk Takers

Conservatives argue that most of the wealth produced in our country should go to the investors - after all, they are the ones who have "taken the risk."

What about the workers.  No risk?

A worker risks his entire livelihood on whether the managers will screw up.  And whether the managers will decide to ship the jobs overseas or to some other state that cuts 'em a tax deal.  On whether the managers will decide they don't like his haircut or sexual orientation or type of car he drives and fire him.

A worker risks his livelihood on whether a venture capitalist will invade and and gut his pension and milk the company of its assets and toss it, shriveled and gutted into the gutters lining the "free market" abattoir. 

The idea that the capitalists deserve most of the wealth produced in our nation because they are the one's who "take risks" ignores the cold bright light of waking reality.

Monday, September 3, 2012

Some History of The Fed

"Get rid of the Fed" some guy on youtube screams.

Let's look at history. Modern commercial banking developed pretty much in tandem with the industrial revolution.

In the industrialized nations, under the "free markets" practices which were followed, there were rounds of systemic banking crashes roughly every 15 years. (Krugman argues every 5, but it depends on what you consider as included as a systemic crash.)

The Fed was formed in the early 1900s, primarily as a clearing bank - helping banks in one area of the country clear checks deposited with them which are drawn on banks in other areas.

In the early 1930s, following the crash of 29, the Fed was given expanded powers to regulate banks. Their central mission was to support "the safety and soundness of the banking system." (When I worked on the legal aspects of banking projects involving new products or variations of old products - one key part of every submission to the Fed in support of the products was an analysis of how the new product and how we would handle it conformed to safety and soundness principles..)

Through this role of the Fed, American commercial banking was stabilized, and the periodic and regular rounds of crashes were eliminated. We had a stable banking system from the 30s to 2008. (BTW: in case your thinking about the S&L crisis: The S&L crisis didn't involve fed regulated banks - S&Ls were not and are not commercial banks - and the S&L crisis arose from congress giving S&Ls vastly expanded powers with no increase in regulatory oversight.)

In the mid 80s, Reagan appointed libertarian Alan Greenspan to head the Fed. Greenspan was and remains a libertarian who is opposed to government regulatory power. (He was a personal friend of and was mentored by Ayn Rand.)

Greenspan did not see his job as using a regulatory structure to assure bank system safety and soundness. He believed the banks would self-regulate, acting wisely to protect their own interests. (He did admit after 2008 that his belief was a mistake.) He reduced regulations and regulatory compliance. He actually saw his job as supporting the banks in whatever they wanted to do - not to pursue safety and soundness goals.

For up to 80 years the Fed provided us with the most stable banking system I have ever read about or experienced.

The "Libertarianized Fed" is the disaster - get rid of the libertarian influences and let the fed get back to promoting safety and soundness - and get away from supporting them whatever they do.

Getting rid of the Fed is essentially what Greenspan did - with disastrous consequences.

The Fed Audit Doesn't Say

The audit of the Fed is out, and there are some people screaming -becasue they don't understand the basics of banking.

I wrote this on FB in response to one who claimed "not one dollar of the 16 trillion was repaid.

?>>money not repaid

That is one thing he got completely wrong. I think, but don't know, because he doesn't actually give sufficient details, that he read the "outstanding balance" figures of 0 as meaning the debt were forgiven, or somehow not repaid.

The report is clear, though, that money's lent were repaid. Do a word search in the report [] for "repaid" and see the many specifications that monies were repaid. The youtube guy is just whacko on this point. (and it isn't the only thing he is whacko about.

And yeah, the interest rate charged thew banks sucks - as I said, there are many serious problems with the fed - largely, IMO, the result of Greenspan's running it.

But the guy who did the video is still an idiot

He mentions Table 8: as I suspected, the guy doesn't understand the concept of revolving credits. The lead-in to table 8 explains it, to a certain degree: 

"Table 8 aggregates total dollar transaction amounts by adding the total dollar amount of all loans butdoes not adjust these amounts to reflect differences across programs inthe term over which loans were outstanding. For example, an overnightPDCF loan of $10 billion that was renewed daily at the same level for 30business days would result in an aggregate amount borrowed of $300billion although the institution, in effect, borrowed only $10 billion over 30 days." See page 130

Under a revolving credit, a loan is made in a certain amount, repaid, remade, repaid, remade, etc.

If you have extended a $10 revolving line of credit to me, and I have drawn it down, repaid it the next day, drawn it down again, repaid it, 10 times - have I borrowed $10? (the maximum amount of the risk at any one time) or have I borrowed $100?

What if I borrowed that $10 for the full 10 days, instead of cleaning it up daily? You wouldn't say I've borrowed $100 dollars, right?

Requiring the periodic cleanup (in my example, and in the audit reports explanation, daily) is actually more restrictive and safer from the lender's point of view than letting run for a longer term.

Sunday, September 2, 2012

Paul 'Pheidippides' Ryan

The man we can all believe in....