patrick.net

All bubbles are ultimately created by the public. Different bubbles may have different contexts and catalysts buy in the end it is all down to crowd behavior.

bgamall4 says

How do you not know this after as long as you have been studying this?

oh yes, blame it on this or that... get over it! RE prices dont appreciate as the public wrongly believed regardless of Basel 2,3,4.. or 10 in the future.. The public lost their mind and their wallet!

bgamall4 says

No, all bubbles are created by the banks. It has been that way from the beginning of time because they control the supply of money and they control the markets.

Invest in a Beanie Baby lately! How about a couple of Lotto tickets! Any baseball cards you collect for big bucks! Banks have little control over the emotions of the pubic.

Thomas, surely you are right.

Like when someone like Eliot Spitzer got entrapped, well, he made the choice.

I think s/he meant the Bubbles are enabled by banking.

Peter P says

Different bubbles may have different contexts and catalysts buy in the end it is all down to crowd behavior.

Okay. But take away the catalyst of sub-prime loans, liar loans, etc, which were TOTALLY tied to deregulation and what is really large scale fraud, and we have no idea of how much smaller the boom would have been.

Would it have existed at all, under old fashioned mortgage lending practices ? How can we say it would have, considering that virtually all homes bought for residence are bought with a mortgage. Investment buying and "flipping" is gone without the upward trajectory, and when rents don't cover the mortgage payments.

thomaswong.1986 says

Banks have little control over the emotions of the pubic.

But they happen to finance virtually ALL home purchases.

Would it have existed at all, under old fashioned mortgage lending practices?

Actually, TPTB have been reducing the cost of living for some time. Look at the Core CPI: inflation at 2% or less, thanks to careful government/Fed marshaling of the economy. (Of course, this figure is reached by excluding "volatile" items such as food and gasoline.) Just look at how much cheaper housing has become in places like Lancaster, CA, or Homer, GA. Factor that in and, metaphorically, we are almost as well off as the 1%.

As I understand it, the BLS includes food & energy in its calculation of the CPI, but doesn't take into account product shrinkage (or package amplification). Get less, pay more, but the CPI is blessedly stable. There's a whole field called "Hedonics" which assures us that a person who is used to eating steak will, when confronted with higher beef prices, switch to chicken or tofu or fish sticks, so, BONUS! his grocery budget actually comes out ahead. I am not sure where you go when fish sticks become too expensive; I'm thinking the plan would involve trapping neighborhood pets and possum for protein, and this activity would show up in the CPI as "FREE MEAT ALLOWS UNGRATEFUL CITIZENS THE CHANCE TO SPLURGE ON MAC-N-CHEESE!"

Note also that the cost of coveted "toys" are parsed and prettified by experts who point out that your new TV or laptop is so much bigger or faster than what was available last year that it counts as an upgrade, even if it's the most stripped-down entry model and costs more than last year's equivalent. In my own household, we find that hand-me-down clothes and the box of leftovers from the neighbor's garage sale gives us a more extensive wardrobe than we could ever afford by shopping at Walmart. The scarecrow look and Shabby Chic are so popular now.

As you now can see, the CPI--against which wage adjustments or retiree's benefits are calculated-- has de facto reduced the cost of living! They calculate that there's no inflation, so you don't need a cost of living increase. You just need to recalibrate your personal hedonics.

marcus says

Okay. But take away the catalyst of sub-prime loans, liar loans, etc, which were TOTALLY tied to deregulation and what is really large scale fraud, and we have no idea of how much smaller the boom would have been.

Hmm... what about the South Sea Bubble and the Tulip Bubble?

bgamall4 says

Cautious1 says

has de facto reduced the cost of living!

No, the reduction is in the means to pay for the cost of living which is still elevated by speculation. But I get your point, that wage inflation is not to be feared. Still commodity inflation is pure stealing if you don't get a better wage!

Gary Anderson strategicdefaultbooks.com

How oil speculators jacked up oil price, which affects other basics like food.

http://www.mcclatchydc.com/2011/05/25/114759/wikileaks-saudis-often-warned.html

bgamall4 says

You need easy credit for oil and housing bubbles and the banks supply that.

There was no expansion of credit when it came to stock bubbles..that was all based on disposable incomes/savings.

Peter P says

Hmm... what about the South Sea Bubble and the Tulip Bubble?

Brain fart ?

I wasn't making a generalization about all bubbles.

And I don't know how familiar you are with logic, but the fact that public mania can cause a bubble in tulips or whatever without bank involvement is nothing like a proof that it is the only factor in all bubbles.

It's a chicken and egg question. It doesn't take a lot of capital to get the price trend going strong enough in something like tulips to then generate some crowd behavior buying mania.

But in the real estate boom, there were financing practices, which weren't necessarily a conspiracy, that allowed the buying to occur for several years with people bidding prices up up up, leading to more people doing the same, again often buying and bidding up prices when a huge percentage of these bidders/buyers would not have been able to even participate with lending practices of 30 years ago.

marcus says

Would it have existed at all, under old fashioned mortgage lending practices?

not that long ago... I, like many put down 20% with a fixed loan during more sober times. You will find more than 50% of homeowners today did the same.

Listen to Wrongwong's video of Schiller.

He talks about people in Los Angeles in 2006 on average thinking that RE was going to go up 23% per year.

Yes, this is buying mania public crownd behavior at it's finest. But it's based on the increases they saw in the 5 years before that. And that was based on a lot of buying and demand that was financed with liar loans and low down payment loans and a fraudulant mortgage securities market that was begging lenders to write more morgages.

The lenders said, oh, you want us to generate more fees and make more money ? Oh,...alright... I guess we can do that...

bgamall4 says

Tulip bubble was based upon a futures market and speculation that was forced to end, if Angry Bear has it right.

Gary Anderson strategicdefaultbooks.com

An unregulated futures market.

There is a distinction between regulated derivatives regulated by the CFTC and other regulated dervitives versus the so called "shadow banking" markets that trade unregulated derivatives.

bgamall4 says

Who has those, Marcus? :) Most of the damage comes from deregulation wouldn't you agree?

We have had them for a very long time. Futures markets in everything from metals, to oil, livestock, grain. They are well regulated.

There are regulated financial futures in such things stock indexes and treasury securities that have only been in existence about 30 years.

The Commodity Futures Trading Commission (CFTC) is the one who brought suit against Barclays in the recent Libor scandal, presumably because what was essentially massive insider trading of treasury security futures or euros was creating severe damage to the liquidity of these regulated markets.

marcus says

And that was based on a lot of buying and demand that was financed with liar loans and low down payment loans and a fraudulant mortgage securities market that was begging lenders to write more morgages.

Can you say the same back in 1989 - 92... yet prices went up and eventually fell.
Much was actually with cash.. not loans.

And fast forward to his NYC example.. not made with liar loans! Its all about valuations.

thomaswong.1986 says

Its all about valuations.

Which in turn are all about the market. I'm not making an absolute generalization one way or the other here.

marcus says

Okay. But take away the catalyst of sub-prime loans, liar loans, etc, which were TOTALLY tied to deregulation and what is really large scale fraud, and we have no idea of how much smaller the boom would have been.

Would it have existed at all, under old fashioned mortgage lending practices ? How can we say it would have, considering that virtually all homes bought for residence are bought with a mortgage.

I don't claim that the lending practices accounted for 30 or 40% of the boom, or that is was 80%. Just saying it's an obviously huge factor.

marcus says

There are regulated financial futures in such things stock indexes and treasury securities that have only been in existence about 30 years.

We had the 1933-34 SEC act for some 75 years.. A good set of regulations, but did little to prevent mania in many markets.. including commodities.. since reading the company and industry wide MDA would provide transparency to those markets.

marcus says

I don't claim that the lending practices accounted for 30 or 40% of the boom, or that is was 80%. Just saying it's an obviously huge factor.

bgamall4 says

Wrong, the amount of folks in those markets recently have gone berserk. The numbers are making the contracts scarce.

This makes no sense, and no offense but it's obvious you know very little about these markets. "the number of people in these markets ?"

Increasing the participants just increases liquidity and lowers the profit potential it doesn't cause the market to be priced wrong.

As for what caused the crazy prices of 2008, I don't know. If it was speculators, believe me, many of them got burned. For all we know it was the Saudis. What they say or what their spokesman says doesn't impress me.

I read about it back them. Whenever there is craziness in markets, traders and speculators are blamed. I don't buy it. PRicing of finite resources is tricky. Who knows, maybe prices of oil are being held artificially low now and really should be much higher. A good argument certainly could be made for that case.

B.A.C.A.H. says

Auntiegrav says

The "cost of being a consumer" on the other hand, is always more than we can afford.

Auntie, you sure got that right.

Thanks. Sometimes I get lucky when I spew out a thought that seems clear and logical, but it gets flamed by the Defenders of Right; that is the Right that Might made Right.

bgamall4 says

Peter P says

All bubbles are ultimately created by the public.

No, all bubbles are created by the banks. It has been that way from the beginning of time because they control the supply of money and they control the markets.

Gary Anderson strategicdefaultbooks.com

Bubbles are not "created". To be created implies something done intentionally. Bubbles are "allowed" and incidental in the process of seeking maximum economic harvests (whether they be profits or debt write-offs by government through weak dollar policies). The active process is the economic extraction process and the bust is a symptom of growth-based thinking (as opposed to utility-based thinking). Whether it is 'the' solution or not, a government should be basing its policy actions on the utility of its people's activities to the future of the nation, and nations should work toward the future of the world. This, however, is anathema to the concept of God-given rights, Might is Right, and Humanism (it would require humans to become subservient to their own future selves, rather than enslaving themselves with instant gratification debts). This would be called "leadership".
I know, I know,...an anachronistic idea in a world of Cash-based Deities.

david1 says

The fractional reserve argument is bogus, raindoctor. Investment is not lending. This liquidity trap is exactly waht is happening RIGHT NOW in our current fractional reserve banking system. The M2 & M3 multipliers have fallen greater than M0 has increased through quantitative easing. Hence QE hasn't spurred economic growth. Monetarists all over the world are scratching their heads while Keynesians know exectly what the problem is...

Liquidity trap doesn't explain. In fact, mainstream economists and Mish like austrians are wrong about how modern fiat money system works. I was disabused by Randall Wray's Modern Money Primer.

http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html

Here, Bill Mitchell of MMT (modern monetary theory) trashed Krugman's Liquidity CRAP!

http://bilbo.economicoutlook.net/blog/?p=6617

BTW, I was wrong about reserve requirements. Capital requirements are different from reserve requirements. What constrains lending is capital requirements.

bgamall4 says

It has been my thought that liquidity is not the problem, but rather, how the liquidity is used, to enable the TBTF banks to buy treasuries and to speculate in commodities and stocks.

Therefore, QE could only work if there were strict rules against speculation by these middlemen in oil and food, etc. That money has to somehow be filtered into the real economy. What do you think about that raindoctor?

bgamall4, we have swallowed many misconceptions sold by both Austrians (like mish) and mainstream economists about what money is, how it is created, how it flows, etc.

Banks can lend without any reserves (here, you need to study horizontal and vertical transactions). Banks are not lending not because of two reasons.

1. They are not finding creditworthy folks and firms. For instance, Google, Apple, etc, don't need any frigging money from banks to lend. And banks don't wanna take risk by lending out to Raindoctor, Inc, which wanna sell weight loss drugs in Oakland and East Palo Alto. If you read the evolution of Private Equity and/or LBO, it is a child of junkbonds (remember our Mitt Romney raised money through Junk bonds with help from Mike Milken). Junk bonds came into the picture because banks don't wanna lend to risky firms; however, healthy firms don't need banks since they can raise money in the market or since they can use their earnings to grow (in fact, 40 percent of firms expansion is funded by earning--thats the recent statistics). Venture Capital is for new firms; private equity for junk companies and for raiders.

2. They don't wanna take risk. They can risk by lending $5M to my company and ideas. They can even charge me 10 percent. But the problem is the chance of making profit is very slim: in fact, they will end up writing off the loan they give me. So, in this scenario, their capitals get depleted.

When banks lends you $100K, two things happen: (a) they add $100K to their assets; (b) they add $100K to their liabilities. +100K-100K = 0. They don't need any reserves. In fact, I heard, Canadian banks dont have any reserve requirements. Banks need to keep some capital for asset losses (like when they write off loans: here they use dirty tricks).

Read these:

http://bilbo.economicoutlook.net/blog/?p=332
http://bilbo.economicoutlook.net/blog/?p=352
http://bilbo.economicoutlook.net/blog/?p=381
http://bilbo.economicoutlook.net/blog/?p=20536

The other myth sold is: govt needs to sell bonds to finance its deficits. It is empirically false. I was fooled by mainstream economists (both left and right) and by Austrians like mish shedlock.

Read those four posts and this one as well
http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html

bgamall4 says

I am not an Austrian but I thought Mish agreed with what you say. I don't know if he is a true libertarian. Please advise.

Yeah, he is a true libertarian. He thinks that deficits are funded by borrowing. That's not how it really works. Treasury sales of bonds or open market operations--etc are meant to target interest rates (short term, ones). Fed can't control the aggregate demand, nor can it increase the lending. Treasury can spend without issuing long term t-bonds: in fact, one way to euthanize rentier class is to stop selling long-term t-notes and retire existing long-term t-notes. For more on this, you can read Bill Mitchell's works and blogs--I have just started unlearning the crap sold by mish about deficits.

European crisis has to do with Euro. If PIIGS countries, and France had their own currency like UK, they wound't be this situation. PIIGS are not sovereigns, anymore; banksters are bankrupting these countries. If they had sovereign currency, they woudn't be in this situaiton. Randall Wray's MMT primer has some posts that address this issue.

Money is IOU, it is not a commodity. Banks create both money and assets: the moment they financialize something, they do two things: (a) an asset; (b) a liability. That's why they create IOU's. Bank A IOU's is accepted by Bank B. Bank B's IOU is converted to Soverign's IOU through federal reserve. Read the MMT primer's debt pyramind of IOUs to get proper understanding.

Banks don't need reserves (for instance, Canadian banks dont have that reserve constainrs or they have 0 reserves). Whenever Treasury spends money, Banks' reserves are increased. Whenever people pay taxes, reserves are decreased.

Speculation has nothing to do with reserve requirements. It is because they are not able to generate profits in traditional banking. Google, Apples of this world dont need money from banks. So, Banks can do two things: (a) they can give loans to private individuals (like housing crisis); (b) they can gamble in stock markets, etc.

Regarding (a) When they lend money to risky ventures like housing, they gotta maintain capital reserves. Here, they use off balance sheet vehicles, securitization, and accounting practices like not marking to market.

Regarding (b), they can create new financial instuments (like futures, cds, swaps, etc). When they create these instruments, they are doing two things: (a) an asset (these instruments); (b) liability. Assets = liabilities. And maintain capital ration based on those assets. Here, they play the tricks to show that they have capital reserves.

BTW, I spent last 3 days to read Randall Wray's MMT primer. Many of my confusions, my questions, are solved by their theory.

bgamall4 says

Raindoctor, can't say I disagree with anything you say except that Mish would agree that reserves don't fund loans, but that loans are originated from scratch. Isn't that what you are saying?

It would be better if banks used the excess capital to fund real projects, or maybe have the government do it. Otherwise we have 147 dollar oil.

I enjoyed your post above.

Gary Anderson strategicdefaultbooks.com

With every loan, you are also creating an asset. So, they zero out.

You don't need banks to bail out the main street. If congress has balls, they can do it differently: budget $4 T for infrastructure projects. Here, treasury can act on it without selling any frigging t-notes for $4T. Treasury adds $4T to contractors/individuals accounts, the way social security checks are given. When you get a check from treasury for $2K, here how it works.

1. You get a check from treasury for $2K
2. You deposit $2K in your bank of america checking account
3. BofA adds $2K in your account; adds $2k on their liabilities side
4. BofA settles this treasury check with Federal reserve (here, fed adds $2k to BofA reserves at Fed reserve level)

No bonds required for uncle sam to give you $2k. Extend the same logic to $4T. Banks can add $4T to individual accounts; Treasury (by using Federal reserve) adds $4T to these private banks reserves.

Study "Employer of Last resort" or 'Job Guaratee" program, a policy recommendation by Modern Monteary theorists.

http://neweconomicperspectives.org/2012/03/mmp-blog-42-introduction-the-the-job-guarantee-or-employer-of-last-resort.html

Libertarians, Conservatives say that deficits cause inflation and that deficits needs be borrowed. That is not truth at all. And the leftist economists like Krugman don't know shit about how banking system and federal reserve operate. Nor do these mainstream leftist economists, who advise Democrats wanna learn the truth. It is a giant scam, the more I think about. They are spreading the same scam in China, India, Africa, elsewhere: financialize every aspect of life and then screw the population

So, stop blaming banks. We all know about republicans, who are honest about what they wanna do. Look at democrats, who are not honest about what they wanna do: these assoles don't know how money is created and functions. Those who know how it works (like lobbysists for banks and the existing wealthy) subvert the way MMT sketched ELS/JG by using fallcious arguments. They do that because they wanna keep the existing wealth.

Read Bill Mitchell's "Full Employment Abandoned: Shifting Sands and Policy Failures"

http://www.amazon.com/Full-Employment-Abandoned-Shifting-Failures/dp/1858985072/ref=la_B001JP83Q8_1_1?ie=UTF8&qid=1345183795&sr=1-1

Blame leftist economists, who are ignorant about treasury, federal reserve operations and the banking system

Blame democrats. Don't blame banks, since things can be done without banks' help.

What happens when techne replaces labor to the extent that it's no longer possible to employ most or all of the adults except for the 10% who own the production, or service the production directly?

marcus says

Yes, this is buying mania public crownd behavior at it's finest. But it's based on the increases they saw in the 5 years before that. And that was based on a lot of buying and demand that was financed with liar loans and low down payment loans and a fraudulant mortgage securities market that was begging lenders to write more morgages.

As for LA or NYC,,,it has become ingrained into their thinking on RE and wealth. As shiller pointed out, the upper end who paid cash also went ape-shit on over paying for RE expecting higher returns. Mortgages were not the issues, its all about prices.

bgamall4 says

Ryan wants a housing bubble and Mitt wants a bigger one than his dad blew. His dad was stopped by a sovereign USA, but now the banks are sovereign. It is the NWO.

Its pretty well know Mitt wants the RE market without government interference to find its own correction/bottom. He has said it many times over.

http://www.youtube.com/embed/FiFslD8QYg4

thunderlips11 says

What happens when techne replaces labor to the extent that it's no longer possible to employ most or all of the adults except for the 10% who own the production, or service the production directly?

Homo Economicus. A Legendary Creature, like Bigfoot, claimed to exist by Pseudoscientists.

The whole game of efficiency is misguided. Companies reduce the output, even if they are efficient to meet the demand, so that they can make money.

The problem is not so much about robots replacing humans. If robots replace humans in every work, isn't it good? After all, we can use the time to do whatever we want? Yes, it is good: but the problem is we have toll booths (rentiers) that collect toll from everything related to survival: food, shelter, health, etc. Here, a tax policy can be used to euthanize rentiers. The other problem is: even the robbed wanna be a robber! That's the irony. Today, we all complain about rentiers because we are not rentiers: we all believe that we can become rentiers one day, thats why we defend the logic of rentiers. For instance, Fannie Mae, Freddie Mac, Mortgage interest rate reduction, Prop 13 in California, FHA, etc--all these programs/entities increase the cost of living, yet every one wants to keep them!

Read this:

http://neweconomicperspectives.org/2012/06/mmp-blog-51-the-efficiency-fairy-and-inflation-goblins.html

This is great reading, thanks Raindoctor.

bgamall4 says

Then you see a lot of guys on the side of busy streets with a cardboard sign in their hands begging.

Exactly, unless we replace the way society functions.

While I enjoyed RD's link, I have this question

Can't "Efficency", instead of resulting in layoffs, instead translate into shorter hours at the same pay?

thunderlips11 says

Can't "Efficency", instead of resulting in layoffs, instead translate into shorter hours at the same pay?

It aint gonna happen, unless 70 percent of humans understand how modern fiat money system works. A sovereign nation with a sovereign currency (not like those EU members without their own currency) does not fund their spendings by issuing bonds--that has been the reality and the truth. But there are vested interests and the intellectual dishonesty from the intellectuals like Krugman--the latter will subvert everything.

Sensible way of dealing issues.

1. Campaign finance reform
2. Part time politicians (no fulltimers)
3. Stop selling long term treasury notes (why pay interest to the elite when you don't need any long term bonds to fund the sovereign deficits/spending. Short term bond sales are required to target the interest rates)
4. Tax rentiers (non-productive class): real estate/land; non-wages.

50% of US GDP is wages. In mexico, it is 25 percent!! If things go the way they are going now, wages to total GDP ratio will reach that of the third world.

The problem is not with the money, nor with the treasury, nor with the federal reserve. It is those folks, we all wanna become one day: who does not wanna become a billionaire and keep those billions for 20 generations? After all, we entertain those fantasies!

I like your thinking. Let me add:

5. 90% inheritance tax

6. Ban Trusts that pay to any individual person more than the Median Wage / year.

7. Tax religious institutions on revenue not spent on charity.

bgamall4 says

raindoctor says

A sovereign nation with a sovereign currency (not like those EU members without their own currency) does not fund their spendings by issuing bonds

Then why are the bonds issued? If America issued currency without the creation of bonds we would pay less interest don't you think? When the treasury sells bonds money is deposited with the treasury. But then we have to pay interest. If we just issued the money without bonds there would be no interest. Lincoln did that with the Greenbacks if I understand it correctly.

Gary Anderson strategicdefaultbooks.com

Short term treasury notes are needed to drain reserves from the banking system. The question is: why and when to drain reserves? To target the interest rate. When there is a lack of reservers, Federal reserve open market operations buy the bonds from the banks, to keep the flow going.

Interest rate = cost of money (IOUs).

Long term treasury notes are not needed. It is a free lunch for the wealthy. If long term t notes were to be abandoned, the wealthy would have find a different way to make money, instead of collecting rent on their money (interest).

Long term t-notes sale creates an illusion that deficits are funded by borrowings. Follow the Modern Monetary theory. It gives you a clear picture of everything.

There are two kinds of bond sales: when there are exessive reserves, open market operations drain these reserves. The other one is the illusory one: when treasury wanted to sell bonds for the deficit spending, they use primary dealers to sell them. Later, federal reserves buy the same bonds that primary dealers bought (a simple way of putting). In the same operation, pension funds, ordinary folks like us buy notes from treasury. If you understand how everything works (thats what MMT does), you can cut off this illusory nonsense. Just sell short term notes to target the interest rate; and let the gubmint spend. People think that if you let the gubmint spend, it can create hyperinflation. Nah, it hasn't happened in Japan. Two constraints for gubmint spending: inflation and unemployment.

Inflation occurs for two reasons: when there is a full employment, if the demand is more than the supply--we never had such a situation; private portfolio allocations and rentiers--the purpose of this discussion.

There is a myth, we have all swallowed: deficits are funded by borrowings. A sovereign nation with a sovereign currency doesn't need any borrowing, as long as such a sovereign nation is self-sufficient (as in creating aggregrate demand).

Many countries in Africa don't have a decent aggregate demand. They sell raw materials to other countries and buy clothes, foods, medicine from the latter countries. Even though these african nations are sovereigns with their own soverign currencies, they have to depend on the foreign exchange, since they don't have a circuit of internal production and consumption. The states does not have that problem.

bgamall4 says

Dems did not have the 60 votes in the senate to pass infrastructure bills. Republicans blocked the programs. Also Obama's stimulus in the beginning was small because they lacked the 60 votes.

Even if dems had 60 votes, they could not have done it. You got folks like Baucus, a pimp from Montana, and other folks. I prefer wolves (repubs) to wolves in sheep clothes (dems). At least the real wolves help bring a change quicker than wolves in sheep clothes. A quicker change--positive or negative--is what we need, so that people can act.

bgamall4 says

I wrote previously that the housing bubble was a scam from the start, at Basel 2 when they purposely adopted phony risk management in order to sell CDO's with low interest. That allowed the easy money to flow and that pushed up the prices of houses until the hot money left.

Read this post, which deals with basel I, II, III, and capital vs reserve requirements.

http://bilbo.economicoutlook.net/blog/?p=9075

My daily expenses are minimal compared to my income. My co-workers kid me about this and my very conservative lifestyle. They of course are driving expensive cars and have large credit card balances.

bgamall4 says

raindoctor says

The other one is the illusory one: when treasury wanted to sell bonds for the deficit spending, they use primary dealers to sell them. Later, federal reserves buy the same bonds that primary dealers bought (a simple way of putting).

I think the banks use the money on the spread they get for selling the treasuries to the Fed to gamble in futures markets. They all do it so it isn't much of a gamble, more, a relentless push upward in oil prices.

Gary Anderson strategicdefaultbooks.com

They don't need to worry about spread there. Imagine that these banks create a new instrument called 'Carson pass derivatives', CPD for short. That derivate worth is $1M. They sell that to another entity (hedgefund/fellow bank/calpers/norwegian retiree fund, etc). Here, they collect $1M from these entities and the latter get a piece of paper. Here, our issuer bank has taken risk because of this CPD contract. The regulatory framework demands that our issuer bank has to maintain certain capital for the risks they take. Here, they use some kind of weighted average: 0 for treasury notes, the riskier the asset, the weight goes up. This is where our rating agencies come in. They rate this CPD as AAA+; the bank benefits from this rating, as it reduces the capital requirement.

There is another way to reduce capital requirement. Create an off balance sheet vehicle (just like reinsurers in insurance industry). Lets call this fictitious company Ebetts Pass, Inc. Now Ebetts Pass, Inc, buys that CPD risk from our issuer. How does it buy it? By issuing another IOU, whose risk is better than CPD. This trick further reduces the capital requirement.

jvolstad says

My daily expenses are minimal compared to my income. My co-workers kid me about this and my very conservative lifestyle. They of course are driving expensive cars and have large credit card balances.

Well, you are bringing down the aggregate demand for the entire economy! They call it a paradox of thrift!!

Anyway, there is a way to protect the aggregate demand. How? of course, by providing safety nets. If there are no safety nets, people stop consuming; if consumption goes down, the production goes down as well. If the production goes down, the wages go down; if the wages down, the consumption goes down! Here, you can provide HELOCs, so that consumption doesn't go down.

Bismarck, an anti-socialist, fought socialists. He is considered to be the father of modern safety nets like social insurance. How come an anti-socialist introduced safety nets? Why anti-socialists of today (say, repubs) wanna gut safety nets like social security? Without safety nets, consumption goes down! That's what happening in China, which produces $8T a year and consumes $1T a year.

Safety nets are necessary for capitalism to thrive!

Those who are trying to gut safety nets are killing their golden goose!

raindoctor says

Anyway, there is a way to protect the aggregate demand. How? of course, by providing safety nets. If there are no safety nets, people stop consuming; if consumption goes down, the production goes down as well. If the production goes down, the wages go down; if the wages down, the consumption goes down! Here, you can provide HELOCs, so that consumption doesn't go down.

no, you need not reduce production due to lower domestic demand for goods and services you create. you expand beyond your borders and encourage exports.
.. have a Coke and a McDonalds Cheeseburger in China. Its American meat and wheat anyway.

raindoctor says

Why anti-socialists of today (say, repubs) wanna gut safety nets like social security?

Social Security started out in the 30s, but there have been many changes since.
Do you think a early 20th century "safety net" still applies in the 21st century.. almost 100 years later ?

Time to rethink and modernize.... example.. wouldnt a personal retirement account in the tax holders control and name with option of buying US govt savings bonds be a plausible alternative ?