patrick.net

scottporter1212 says

where do these resources come from? How did they purchase these toxic assets? 1.2 trillion or so…at least that’s the valuation from the banks’ balance sheet…who knows what they’re really worth…or how much the Fed actually paid…but again, the Fed derives its power from the government….the money comes from thin air

Not from thin air. I guess I left out one piece, but there is new debt, in the form of T-Bill or Bonds that financed the purchase or mortgage backed securities. What I said before was a little misleading. The mortgage backed securities I was describing as a debt, are actually Assets on the Feds books, but offset by Treasury securities (a wash to them really). Ultimately they borrowed money, to buy the mortgage securities from the banks. What you call the "printing of money" can always be traced back to the issuance or some treasury securities.
This is money that will be repaid.

I'm just not convinced that the Federal Reserve is evil. And my opinion is that usually those who argue against it the strongest, are the ones who understand it the least. By the way, I do not mean to suggest that it's easy to understand.

scottporter1212 - BRAVO !!! Well said. The Fed depends on the "Open Market Committee" to determine interest rates, not the open market. Thats complete double-speak. And the Fed gets the interest rate wrong every time. Rather than allow lenders and borrowers to decide for themselves what rate they would accept, the Fed decides for them. Artifically low rates are a false stimulus - a fraud. It gives the illusion that there is more money available than actually is. Consumers "feel" like they have more money than they actually have and producers sense a demand that isn't really there. The Fed misleads everyone.

Marcus - the point you missed is that the producers and manufactures borrow money while it is available, produce a vast inventory of product...and THEN THE MARKET GOES SIDEWAYS. Consumers stop buying but the producers and manufactures are now stuck with lots of inventory but no buyers. Or buyers purchase a home at an inflated rate based on false signals and then when people stop buying, the price declines. Millions of people suffer some, some people suffer $Millions.

What should happen is simple. The economy should be allowed to produce based on real, not false demand. Artifically low rates cause production to be based on a level of demand that doesn't exist. This type of decieption can go on for a long time. Eventually however, a free market adjustment will take place to erase the fraud. Its called a recession. And the pain of the recession is generally equal to the deception and fraud which preceeded it. I hope that helps.

The supply of money increases...that new debt you refer to...which has to be repaid....that is the new money. It matters little how the Fed "logs it"...anyway, I think its safe to say that the Federal Reserve has the power to increase the supply of money. Increases in the supply of money are the root causes of economic depressions.

If you read Krugman, Galbraith, Keynes, you wouldn't understand this though.

Read some Hayek, Mises, Rothbard...you know, the guys that called it all right...perhaps we should finally start giving credit where credit is due.

Hahaha - the "nonsense" of fiscal conservatives. So tell me - Mr. Smarty Pants - how does the fiscal irresponsibility help our society ?????????

First off...your table from Milton and Schwartz merely illustrates M0 and M1...it comes nowhere close to detailing the total change in the supply of money between 1921 through 1929.

It is generally acknowledged that the great boom of the 1920s began around July 1921, after a year or more of sharp recession...and ended about July, 1929. Production and commerce activity began to decline in July 1929--though the famous stock market crash came in October.

The total supply of money in the country...including money substitutes...was right around $45.3 billion in July of 1921. Over the entire period of the boom the supply of money increased by $28 billion...some 61%. This is an annual increase of 7.7 percent...a very sizeable degree of inflation. Total bank deposits increased by 51 percent, savings and loan shares by 224 percent, and net life insurance policy reserves by 113 percent. The major increases took place in 1922-1923, late 1924, late 1925, and late 1927. The abrupt leveling off occurred in the first half of 1929, when bank deposits declined and the total money supply remained almost constant. You are right though--no expansion took place in currency in circulation, which totaled 3.68 billion at the beginning of the boom, and $3.64 billion at the end of the period. The entire monetary expansion took place in money-substitutes...which escapes your chart. These money substitutes are products of credit expansion. Only a negligible amount of this expansion resulted from purchases of government securities--the vast bulk represented private loans and investments.

Inflation is not the rise of prices...this is just a symptom. Prices were largely stable throughout the boom period...and even fell slightly in some cases. But we must also realize that two great forces were at work...the monetary inflation which propelled prices upward and the increase in producitivty which lowered costs and prices...this is a general example of monetary inflation robbing the natural benefit conferred to society through free markets...which increases the supply of goods, making things more abundant for all...raising the standard of living.

So we see that total money supply increased during the period...currency outside banks demand deposits, time deposits, savings and loan capital life insurance net policy reserves...all of these money subsitutes utilized during the 1920s...constituted a 60% increase...

It was this increase in the supply of money which--not consisting in or not covered by, an increase in gold, the standard commodity money. Actually, the increase in total gold in Federal and Treasury reserves during the period was only $1.16 billion from 1921-1929...a negligible portion of the total monetary expansion...

The factors responsible for this boom period inflation? One of the more important elements in the money supply is the commercial bank credit base. For while the savings banks, saving and loan associations, and life insurance companies can swell the money supply, they can only do so upon the foundation provided by the deposits of the commericial banking system. We saw in the 1920s a significant shift in the relative importance of demand and time deposits: demand deposits were some 51% in 1921 but had declined to 44 percent by 1929. The relative expansion though of time deposits signified an important lowering of effective reserve requirements for American banks...for demand deposits required roughly 10 percent reserve backing, while time deposits needed only 3 percent reserve backing. The relative shift from demand to time depostitts was an important factor in permitting the great monetary inflation of the 1920s. While demand deposits only increased 30 percent from 1921 to 1929, time deposits increased by over 70%.

The Federal Reserve Act cut the required reserve ration...by 1917, it cut the reserve requirement to 3% against time deposits...(before the Act, banks had been required to keep the same minimum reserve against demand and time deposits...this was basically an invitation for banks to shift from demand deposits to time deposits). Also...during the 1920s, time deposits increased most in precisely those areas where they were most active and least likely to be misconstrued as idle "savings". The most active banks..."the non-savings banks"--from commercial banks all the way up to member banks through central reserve city banks are exactly the banking types which saw the most time deposit increases during the period.

In essence, the supply of money DID increase over the Booming 20s...but displaying one chart to show otherwise is the fallacy of your empirical evidence approach. Too much cherry picking and not enough logic.

And I notice you don't even mentioned the Great Depression that Never Was...the recession of 1920-21...hmmm, how did we get out of that one? Oh thats right, the Harding Administration did NOTHING but cut the federal budget and cut federal taxes. The country recovered in one year...not a decade or more of Keynesian suffering.

and ellimae I suppose does not wish to engage in anything remotely close to meaningful debate. tatamu is still being a panzy...by the way...the first line of this article is completely accurate. I dont know where you get your info...but Medicare + Medicaid + Social Security + Interest on National Debt = Deficit for this fiscal year. All these things we cannot eliminate unless we default on our obligations, which is becoming increasingly likely--either through inflation or otherwise.

Everything the author tried to point out was that any spending cuts that were proposed are absolutely meaningless...like the spending freeze proposed by the Obama Administration for next year...McGeehan obviously tried to convey in a short and to the point way that even if every federal agency, bureau, and department was eliminated, we are still stuck with the mounting interest on the debt (a theme he points out later in the article) and entitlement programs which are soaring in cost...duh.

are you joking? Did you not see the entire post detailing how the supply of money increased during the '20s? no response at all? that is what is incredible.

No kidding I pulled it from sources...you think I just made it up off the top of my head? The expansion of credit is completely made possible by government-sponsored sources which could not exist without forceful, protected government intervention...fractional reserve banking, the fraudulent "gold-exchange standard" of the 1920s, and the government legislated central bank...

marcus: What we DO know is that bailing out the banking industry, the automotive industry, trying to sustain overvalued housing prices, fighting the depressionary bust caused by artificially low interest rates with more artificially low interest rates, expanding the supply of money further, and record deficit spending (stimulus included), made and will make things much worse than what they otherwise would be.

You are wrong.

"The M3 grew at a slower rate than the economy did. This is the nail in the coffin for your theory as far as I’m concerned. The money supply clearly DECLINED preceding the Great Depression against the growth in the GDP. The growth in bank credit (what you call “money” but no one else in the world does) grew at a faster rate, but that is indeed a symptom and cannot be considered a cause."

Bank credit is not money? As far as I know, bank credit works as a media of exchange...what do you consider money, haha.

I'd really enjoy hearing your explanation for economic depressions, or boom / bust cycles...answer this question.

Market entrepreneurs and businesses are continually tested. They must serve the consumer...whichever does so the best is rewarded with profits, and command more capital-- those who fail to satisfy consumer tastes and preferences suffer losses, and perhaps fail altogether. This is the typical market process..those entrepreneurs or market actors which emerge as the best forecasters of supply and demand, of consumer preference...they succeed. Nothing incredibly controversial here.

Now here's the question. Why do so many entrepreneurs and businesses on the market--who have already demonstrated their successful forecasting abilities--why do so many FAIL all at once, why do so many suffer unexpected losses, all at the same time? the so-called cluster of errors? Can you explain this?

Well, I've already refuted your nonsense charts...no sense in debating a fool...but I sometimes find it amusing to hear people step all over plain economic logic...looking for more false answers to back up their intellectually defunct ideas. It normally winds up back at "I dont know, people just behave wildly sometimes"...or "well, all of a sudden people just stopped consuming" or "the central bank needed to do this better or tweak this a bit more"...it always winds up being that somehow the government needed to steal more...either through deficits, tax consuption, or inflation...You're a fool.

The definition of inflation is simply the increase of the supply of money.

The majority of people...the majority of the time...have been wrong.

And regarding your new M3 chart...umm, look back to my original post...I already cited and took this into account in the entire argument I laid out before you. Here's what I already stated: "You are right though–no expansion took place in currency in circulation, which totaled 3.68 billion at the beginning of the boom, and $3.64 billion at the end of the period. The entire monetary expansion took place in money-substitutes…which escapes your chart."

And as far as the gold supply went, I stated that gold reserves did go up through the boom period of the '20s...but only by a nominal amount, relative to the total increase in the supply of money during the period. I did NOT say that gold reserves shrank, as you wrongly asserted earlier.

Wow...and it finally comes out. What a prosperous society needs is a giant criminal cartel going around stealing from everyone who produces anything of value, and then to top it off, awarding part of the loot to those who produce nothing. And you call this logic?

The reason why we see the cluster of errors is because the increase in the supply of money--which iniates the boom--discombobulates economic calculation on the market. Businesses and entrepreneurs believe more wealth exists than what actually does. Typically, the prices of capital goods are bid up, as the new "high powered" money enters the market (credit expansion). Resources are stripped away from their former market roles...increasing prices further in the capital goods sector. As the rate of credit expansion dwindles (and markets realize the supply of money has merely increased), prices fall (this is the deflation you are talking about....). But all of the new investments which were initiated across the spectrum during the boom...they were calculated using the inflationary prices...multiple industries or businesses begin to suffer losses as prices try to correct themselves from their former artificial high. Unemployment is created because of the bust...it is not the cause of the bust. Its not like everyone begins to fire people all at once just because....again, thats where your logic falters...we wind up at the beginning of your "cause and effect" model...which is essentially "wealthy people all of a sudden get real greedy all at the same time and just start firing everybody..." Again, logic.

"Inflation is a function of money supply AND velocity. You can increase the money supply all you want, but if it doesn’t change hands it has no effect."

Duh. No one ever debated this. I can print up a trillion dollars and stick it under my pillow. I increased the supply of money. The SYMPTOM of rising prices however has not taken hold yet until I go down and blow it at wal mart. Sometimes people like to increase their cash holdings...especially when uncertainty is the prevailing attitude throughout markets.

No one ever was claiming that the symptoms immediately take effect. This is the whole premise of the Hayekian / Mises business cycle. The increase in the supply of money enters at different points on the market...and the symptoms vary, in different "orders of production" stages (normally the stages of production furthest from the consumer).... and in respect with time.

The link I shared above, didn't work because of a ".". I changed it, but here it is again.

http://mises.org/daily/4602

Also, I reread it. The author is actually William Anderson, quoting Rothbard, who died 15 years ago. It's Anderson who magically knows that allowing deflation to have occurred, and for "the market" to sort everything out would have been better than the course we are on now. Another objection I have is his replacing the word stimulus spending with inflation. He say's Krugman constantly advocates inflation
(rather than spending/investment).

Marcus, the economic world is easy to understand. I'll repeat - the Fed is a fraud. It's allowed to "price fix" interest rates. What should happen is the economy be allowed to produce based on real, not false demand. Artifically low rates (price fixing) cause production to be based on a level of demand that doesn't exist. This fraud can go on for a long time. Eventually a free market correction (not government mandated) will take place to erase the fraud. It called a recession. The pain of the recession is generally equal to the deception and fraud that preceeded it.

Its the "invisible hand" at work. And no government edict can stop it. Thats not hard to understand, right?

marcus: today's economic world is complex...that's why it is dangerous to begin taking these mass statistics and supposed empirical evidence to back hypotheses...the way a scientist would perform some sort of isolated laboratory experiment.

also this is for ipod or whatever: the work I cited on the supply of money throughout the booming twenties came from Rothbard and Mises indepth deductions on the causes of the Great Depression...Mises was one of the only notable economists in the late '20s who was writing about the coming collapse....the Austrian School rejects the over-use of empirical evidence for a reason...because of exactly what you are accusing me of doing...manipulating data to fit your economic conclusion. By the way, you still have not came up with any logical cause for economic depressions...(the boom / bust cycle)....haha. Still believe all these employers coordinate a massive lay-off scheme all at the same time? haha. Or maybe the progressive tax rates weren't tweaked enough to distribute income appropriately...too many individuals getting rich out there...we can't have that.

Honest Abe says

I’ll repeat - the Fed is a fraud. It’s allowed to “price fix” interest rates.

The fed sets the fed funds rate and the discount rate. Other short term rates are "discovered" in a market and depend on what investors will pay for T-Bills. Yes these rates are very correlated and fed can impact them, but not control them.

Then there are medium term and long term interest rates which are (usually) less dependent on fed action and more dependent on the market for these securities ( see the "yield curve") That is the market sets the price and therefore the interest rates. Mortgage rates are then tied to these interest rates. You may recall a time under Fed chairman Volker when short term interest rates were being raised in an effort to get the market to lower long term rates (that is the market's perception of future inflation).

I say usually, because only during this crisis has the Fed actually become involved in the mortgage market, and that is part of the intervention that I assume we were debating above.

If only I was able to see the forest more clearly than all the trees, then I could have the kind of "I feel it in my gut" intelligence that you and GW Bush had.

I still say it's very complicated. But maybe you're right. Since I can't (or won't) understand it, I should just believe what I want to believe. That would definitely be easier, and maybe more emotionally pleasing. (no that wouldn't work, because I know when I am lying to myself).

Honest Abe says

Artifically low rates (price fixing) cause production to be based on a level of demand that doesn’t exist.

What about all the money being generated by expanding economies, especially China, and their demand for dollar denominated securities ? Do you think that might have effected interest rates ? Yes when real interest rates (the difference between inflation and interest rates) get too low, it can if we're not careful cause "malinvestment." Maybe the fed was in error for not spotting the situation, or of (a guess) being too concerned about a "buy the rumor sell the fact" crash in the new millennium. I'm not defending the Fed to the point of saying they are perfect or that they don't make mistakes. But you oversimplify things and put to much blame on them. And the fed doesn't control interest rates as much as you think.

Here's an excellent article written about the money supply debate during the 20s, if you care to read it. Marcus--I liked the article post from the Mises Institute. Solid.

http://www.thefreemanonline.org/featured/money-and-gold-in-the-1920s-and-1930s-an-austrian-view/#

And for nomo-homo...nice picture of Forest Gump...you must share his IQ.

Inflation is the increase in the supply of money. This definition was widely accepted up through the early parts of the 20th century...the British Currency School was a large proponent of this definition, as well as of course the early Austrians (Carl Menger, Bohm Bawerk) and later Mises and Hayek (who is also a Nobel Prize winner I might add, before they started de-basing this award). It wasn't until central banking began to predominate the political landscape in the 1920s that you began to see a shift away from this definition to the focus on the symptoms (prices)...to the point that we now have such a massaged and manipulated indicator for inflation in the CPI.

scottporter1212 says

Marcus–I liked the article post from the Mises Institute. Solid

I had major problems with it. Just wanted you to know that I do consider the austrian point of view, before rejecting it.

Have you learned anything today about how interest rates are determined ? Or what causes inflation ?

How the rate of interest is determined? The natural rate of interest is determined by consumer time-preferences...individual valuations of future goods over present. See my earlier posts about inflation. A higher time-preference places more emphasis on present goods...and vice-versa. Future media of exchange always commands a premium. Interference...or as Honest Abe points out..."price-fixing" causes the chaotic fall out we so often see. Even without the Fed price-fixing, any inflation in the supply of money, via fiduiciary media--unbacked by voluntary savings--causes rates of interest to appear lower than what it actually is. This help?

Abe and Scott, not only do you two not know what you don't know, you don't read my comments. But Scott at least you are aware of your ignorance enough to cut and paste your answers. Abe would do the same, but only if there was an extreme right wing source. Maybe the extreme right wing should come up with it's own special version of Wikipedia for you guys.

By the way....in regards to the drug comment...the Austrian school offers good analysis on the failures of the so-called drug war and prohibition...hardly "right wing".

And from most of the comments on here against: It doesn't look like too many of the nays have a broad background throughout these aformentioned economic works...

marcus says

I often wonder whether the fundamentalist branch of the republican party actually think that if Jesus was here today that he would be a republican ?

They probably do. Just like Moslems believe that God is on their side. But when it comes to Jesus, if he were here today I would expect he would be hated by both the religious leaders and the government because he routinely broke man's rules to follow God's. The people who would hate him the most though would be the pastors and other religious types who think they are the moral authorities.

marcus says

Maybe most people start with what they want to believe, and come up with their best arguments to support those beliefs.

Sounds like climate "science."

What is your answer Scott, the Fed ?

I agree about the lack of regulation. I thought this was one of the most interesting looks at the financial crisis, probably it was a link that Patrick shared.

http://www.theatlantic.com/business/archive/2009/09/a-grand-unified-theory-of-the-financial-crash/26939/

read this Scott , if you want a peek at the "shadow banking system." The question is, how did sub-prime junk get transformed in to securities that could somehow be sold to conservative investors ?

And what is the benefit to society of fiscal irresponsibility?

I can't help but notice all you progressive, liberal, moderate, socialist leaning, leftie's continue to duck and dodge this question. What are you waiting for?

I don't know Abe, why can't you tell me what the benefit to society is of Fascism ? Get it ? I'm implying you want fascism sort of like you are implying liberals want fiscal irresponsibility.

See what I did there ?

bob2356 says

Yes, that was my point exactly. Banks didn’t care what they wrote since it was passed on to the unregulated market.

That's mostly true--but remember banks lost a LOT of money too. They were more than just middlemen.

Oh darn, I keep forgetting, I'm debating people with psychopathological "issues". That explains a lot about the abusrdity of your responses. Now I understand.

Is that what they call irony ?

Marcus, with all due respect, did you read the insane post by Nomo, above @ 5:27pm? If you don't agree that his post is psychopathlogical, then you may be suffering from the same affliction.