Fractional reserve banking...recipe for disaster?

Discussion in 'Business & Economics' started by Eflex tha Vybe Scientist, Jan 28, 2011.

  1. Eflex tha Vybe Scientist Registered Senior Member

    Current limitations of Fed Audit:
    The Government Accounting Office does not have complete access to all aspects of the Federal Reserve System. The law excludes the following areas from GAO inspections (31 USCA §714):

    (1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;

    (2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, open market operations;

    (3) transactions made under the direction of the Federal Open Market Committee; or

    (4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to items.
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  3. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    As I said in post 76, it was easy for the banks to pay back TARP, just from the interest they were collecting on the treasure bonds, they bought with the essentially free money the FED gave them "under the table" that is just now being disclosed.

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    This $9E12 dollars lent, even if at 2% interest but invested at 3% in treasury bonds gives net of $9E10 each year so interest alone pays TARP's $7E11 back in less than eight years (An then the banks still have the 9 trillion loan principle, which they can use to pay off these until now hidden loans!) The FED also took most of the "toxic trash" off the bank's books at near face value.

    What does the tax payer have to show for this action by the FED? Answer: a still functioning financial system and some very rich bankers.
    Last edited by a moderator: Mar 10, 2011
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  5. Read-Only Valued Senior Member

    Yeah, right - and you totally misunderstand the purpose of what you just quoted.

    And I also find it hypocritical of you to conveniently leave out the following sections, part of which I quote here:

    (1) Except as provided in this subsection, an officer or employee of the Government Accountability Office may not disclose information identifying an open bank, an open bank holding company, or a customer of an open or closed bank or bank holding company. The Comptroller General may disclose information related to the affairs of a closed bank or closed bank holding company identifying a customer of the closed bank or closed bank holding company only if the Comptroller General believes the customer had a controlling influence in the management of the closed bank or closed bank holding company or was related to or affiliated with a person or group having a controlling influence.
    (2) An officer or employee of the Office may discuss a customer, bank, or bank holding company with an official of an agency and may report an apparent criminal violation to an appropriate law enforcement authority of the United States Government or a State.
    (3) Except as provided under paragraph (4), an officer or employee of the Government Accountability Office may not disclose to any person outside the Government Accountability Office information obtained in audits or examinations conducted under subsection (e) and maintained as confidential by the Board or the Federal reserve banks.
    (4) This subsection shall not—
    (A) authorize an officer or employee of an agency to withhold information from any committee or subcommittee of jurisdiction of Congress, or any member of such committee or subcommittee; or
    (B) limit any disclosure by the Government Accountability Office to any committee or subcommittee of jurisdiction of Congress, or any member of such committee or subcommittee.
    (1) To carry out this section, all records and property of or used by an agency, including samples of reports of examinations of a bank or bank holding company the Comptroller General considers statistically meaningful and workpapers and correspondence related to the reports shall be made available to the Comptroller General. The Comptroller General shall have access to the officers, employees, contractors, and other agents and representatives of an agency and any entity established by an agency at any reasonable time as the Comptroller General may request. The Comptroller General may make and retain copies of such books, accounts, and other records as the Comptroller General determines appropriate. The Comptroller General shall give an agency a current list of officers and employees to whom, with proper identification, records and property may be made available, and who may make notes or copies necessary to carry out an audit.
    (2) The Comptroller General shall prevent unauthorized access to records, copies of any record, or property of or used by an agency that the Comptroller General obtains during an audit.
    (A) For purposes of conducting audits and examinations under subsection (e), the Comptroller General shall have access, upon request, to any information, data, schedules, books, accounts, financial records, reports, files, electronic communications, or other papers, things or property belonging to or in use by—
    (i) any entity established by any action taken by the Board described under subsection (e);
    (ii) any entity receiving assistance from any action taken by the Board described under subsection (e), to the extent that the access and request relates to that assistance; and
    (iii) the officers, directors, employees, independent public accountants, financial advisors and any and all representatives of any entity described under clause (i) or (ii); to the extent that the access and request relates to that assistance;
    (B) The Comptroller General shall have access as provided under subparagraph (A) at such time as the Comptroller General may request.
    (C) Each contract, term sheet, or other agreement between the Board or any Federal reserve bank (or any entity established by the Board or any Federal reserve bank) and an entity receiving assistance from any action taken by the Board described under subsection (e) shall provide for access by the Comptroller General in accordance with this paragraph.
    (e) Notwithstanding subsection (b), the Comptroller General may conduct audits, including onsite examinations when the Comptroller General determines such audits and examinations are appropriate, of any action taken by the Board under the third undesignated paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 343); with respect to a single and specific partnership or corporation.
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  7. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    I finally got time to study your first post 72 link. It is a good one and your summary quoted here is too, but your summary is impossible to follow before a careful read of the link. The main carry away, for me who is concerned about how the FED can permanently pull most of the thin air money is has recently made out of existence (as it will need to if the economy is not growing but sinking to avoid probably worse than "StagFlation) was:

    Hell, at times its is hard for the FED to stimulate even via production of thin air money! Graph 7 reproduced after your text shows this, and with my comments below that graph may make some sense even for those not willing to study your very informative link and comments.

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    Total lending decreasing for more than a year may predict a depression. :shrug:

    Note the sharp down turn in extended total credit starts with the crisis that begin in the last quarter of 2008. The banks had few wanting to borrow as factories had idle capacity and home buying did not look very smart while prices were falling - better to wait, but few thought then that they would still be falling in 1Q11 so waiting a little longer may still be smart. The FED's QE1 was "pushing on a 700 billion dollar string" so the banks that got the money, just bought Treasury bonds to make 100% risk free profits (It is not so much that they would not lend as that they did not have credit worthy borrowers and had learned their lesson about lending to out of work winos they could "coffee up" enough to sign the loan forms.) Note the last data points of the chart show which compared to 7 months earlier lending, that the total lent is less, and that "7 months earlier" data point is also lower than14 month before the last data point. I.e. Lending fell out of the boat in late 2008 and is still headed down to the sea bottom, assuming there is a sea bottom. Obviously there is, but now it is no where in sight as Joe American also learned his lesson and is paying off his debts (in other words, the banks are in a net collecting, not net lending state STILL at end of the chart.)

    Perhaps instead of QE2, which may suffer the same ineffective fate as QE1, the FED should just pay off Joe's under water mortgage and take title to Joe's home with rent back to him? (Then we can depend on Joe to spend, stimulating the economy, as QE2 may be no better at that than QE1 was.)

    I.e. Rather than QE2, the government should do what I suggested in September 2008, before Congress even passed TARP. (Which ws called "Paulson's Plan" back then.) See details of my plan, which would have worked at:
    I felt so strongly (and correctly as it turned out) that Paulson's plan would fail and that mine would fix the US's economy, that I spamed the above OP into about 25 other threads, with request readers write the Congress man/woman, then I reported my self for spamming - got a three day ban.
    Last edited by a moderator: Mar 10, 2011
  8. AndrewH Guest

    I think the important thing to understand is that the current US financial system is:

    1. Broken, does not stimulate the real economy
    2. Benefit few at the expense of many.
    3. Cannot be changed. The goverenment is too invested in the current system to ever change it. There is just too much inertia to overcome.
    4. It will take major event to reset the system and provide the oppurtunity to create a new system based on sustainable growth.

    "Every man for himself" comes to mind now. Save your money, invest it wisely, take care of your family.
    Last edited by a moderator: Mar 11, 2011
  9. joepistole Deacon Blues Valued Senior Member

    I don't suppose you would have any proof to back up your claims Andrew?
  10. joepistole Deacon Blues Valued Senior Member

    There is no substitute for responsible fiscal policy.
  11. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Agreed, but unfortunately that is no-where to be seen in the US Congress.
    Last edited by a moderator: Mar 11, 2011
  12. joepistole Deacon Blues Valued Senior Member

    Unfortunately, you are correct.
  13. AndrewH Guest

    You can say this is just my personal take on the matter...formed over the past years.


    1. I just don't see the US govt. making any serious changes which are
    needed to adjust course.
    a. No real way to get budget under control.
    b. Still waging war, spending billions to blow up stuff...

    2. Meanwhile problems continue getting worse:
    a. Still losing jobs.
    b. Corporate Profits all time high.
    c. Record number of Americans on Food Stamps.
    d. State Governments bankrupt
    e. Housing prices still dropping.

    :shrug: I may be totally wrong, but better safe then sorry I always say...

    P.S. I can't post links for any of the above (not 20 post yet). If you want any sources I will be happy to PM them to you. Feel free to refute any claims made in those sources. Alternatively, you can just google it as I am sure they are easy enough to find.
    Last edited by a moderator: Mar 11, 2011
  14. joepistole Deacon Blues Valued Senior Member

    That is what I thought.
    There is a way to get the budget under control. The question is, does congress have the leadership ability and wisdom to act in the interests of the American people? The answer, especially with the control of the House now under Republican/Tea Party leadership, appears to be NO - a lot of will and no wisdom.
    You are wrong here. The nation added over a milion private sector jobs last year and continues to add jobs to the economy this year...about a half million thus far.

    Corporate profits are up but that is a good thing...not a bad thing. States are in deep fiscal trouble, some more than others. Housing prices are flat overall. I have not checked recently but I would expect the number of folk on food stamps to have moved down given that jobs have been added to the economy over the course of last year and appears to be picking up steam this year.

    The economic recovery is definately weak, but there is a recovery.
  15. AndrewH Guest

    By "no real way" I mean no realistic way it is going to happen in the current political climate. It's not going to happen this year. It won't happen next year, because as you say there is no leadership in Congress (or in the Adminstration, imo)

    I can't post links, but I've seen reports that indicate the jobs increase may not be true. Please search for the article by Paul Craig Roberts titled "The Jobs Mirage" for one such source.

    There is nothing wrong with Corporate Profits per say, but when coupled with the current economic problems faced by "Main Street" there seems to be the notion that what is good for Corporations is not neccessary good for the Country.

    Here are some quotes from the article mentioned above:

    Last edited by a moderator: Mar 11, 2011
  16. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    "Americans on food stamps in the month of December of 2010 was a record 44,082,324, up 13.1% from one year earlier and 1.1% from one month earlier. That is more than 14% of the total U.S. population!..." From: The National Inflation Association (A black cloud coming group, but normally very factual.)

    In some recent posts I pointed out that a very high percentage of food cost (~90%) is the cost of oil. Thus the rate food inflation, which is already rapid compared to general inflation, will increase more. In part this oil connection is due to the fact that the average item on US table has traveled 1500 miles to get there but fertilizer, pesticides, tractors plowing and harvesting machines are other oil users.

    Global stocks of sugar, cotton and of many important grains, like wheat and rice, are at all time lows and several countries which normally export them have banned exports. If the coming harvest is not above normal, food & fiber inflation will accelerated and many more will go hungry and in US food stamp users will be nearly 20% of the population (if free lunch school programs are included.) Prosperity, especially in China is part of the problem as they eat more protein now and fact US uses ~20% of the corn crop to make alcohol also has corn near all time high price, etc. Malthus may finnaly be correct.

    To make a slight tie to Fractional Reserve Banking I note that it and more importantly the FED are "exporting inflation". This with the food price inflation is one of the basic causes of the social unrest in North Africa & Mid East, which to the extent that this unrest drives up the price of oil, is positive feed back system, not to mention that the higher cost gas used to bring your groceries home is an added "food cost."

    Summary: As the average Chinese is eating better, the average American is eating more "franks and beans."
    Last edited by a moderator: Mar 11, 2011
  17. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Some data updating the graph in post 84 (showing that total credit is still decreasing):

    "... The consumer loan market, particularly housing, remains a challenge for borrowers. Total U.S. consumer credit outstanding was $2.4 trillion in January, or 6.6 percent below its July 2008 level, the Fed said in a March 7 report.

    Total housing debt has declined by $536 billion since 2008 to $10.1 trillion, Fed data show. The median price of an existing U.S. home has dropped 13 percent since June to $158,800, bringing its decline since July 2006 to 31 percent, according to the Chicago-based National Association of Realtors. About 10.8 million homes were worth less than the debt owed on them in the third quarter, research firm CoreLogic Inc. said in a Dec. 13 report. ..."


    It seems, to me, that the reduction of mortgage debt/ credit/ by $536 billion to 10.1 trillion is not included in the "total US consumer credit" (only 2.4 trillion) but refers to things like credit cards. Thus, Joe American is "de- leveraging" I.e. in July 2008 his consumer credit was 1.066x2400 billion an now only 2400 billion - a reduction of 158.4 billion. So Joe" total saving (debt reduction) is 536+158 = 694 billion. As US population is roughly 330 million this means that per capita "digging out of the debt hole" is a little more than $2000 or on the order of $8,000 for family of four.

    Unfortunately, Joe's main asset, his house has dropped in value too and by more than $8000, so in terms of net worth, Joe is slipping down. That never happened to Joe's parents.

    Fractional reserve banking had a lot to do with making the loans available for Joe to buy his home. So from Joe's experience, it does seem like disaster despite his recent "deleveraging" - but not for corporations or for Joe's banker.
    Last edited by a moderator: Mar 11, 2011
  18. quadraphonics Bloodthirsty Barbarian Valued Senior Member

    Basically, yeah. There is no standardized definition of "consumer credit," and so the operating definitions vary. Apparently in the UK, "consumer credit" is any kind of loans to individuals (mortgages included). But some economists make the point that the mortgage market is both so large and different in character than the rest of the consumer credit market that they should be accounted separately. So, the definition of "consumer credit" that the US Federal Reserve uses excludes mortgages.

    Right - bubbles (and specifically, real estate bubbles) are characterized by general over-leveraging. So de-leveraging is an inevitable part of the recovery.

    True, but the point is that this is a recovery from a housing bubble - that earlier house value was illusory, so the reduction represents a re-alignment with reality, and not the destruction of actual, real value.

    On a single year-on-year basis? I'm not so sure. Looks like the same thing happened after the dot-com crash:

    (note that you need to adjust for population growth and inflation to get the final answer - those years of near-zero increase in total net worth should amount to decrease in average net worth in real terms).

    Regardless, this analysis would be a lot more salient if you used a longer time scale. I.e., as you can see from the plots on the wiki link above, the lack of monotonicity in recent household wealth statistics also concides with steeper increases during the boom years. It's possible that the long-term average growth rate has stayed the same, and the only difference is more volatility (so it looks much more dire during crashes, but also much more rosy during booms).
  19. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    True, but Joe's mortgage debt is not illusionary. It must be paid and doing so will prevent Joe from making other investments than might add to his net wealth.
    No, I did not mean that Joe’s parents never had a “down year” in their net wealth. I was thinking more on the change in net wealth over a decade interval or more. Roughly comparing one generation’s experience to another’s. Thus, even if there was dip in net worth after the bust, that would not erase the gain in Joe’s parent’s generation. Also, on the time scale I am considering the decrease is counted in both Joe and his parents generation. - It was less than a decade ago (I think) and most Joes did not directly own any stocks (only via their retirement plans, etc.) Also, Joe's father saved and then put at least 20% down on the home he bought so he was never "under water" with a negative net worth "asset." I read just yesterday that 20% of US homes are now "under water."

    It is, I admit, a little premature to conclude that Joe’s generation will not be able to recover from the several years of decreasing net worth he has experienced. I assume that will be the case as I am convinced that a run on the dollar will come, terminating in a long-lasting, deep depression. But even if that is wrong, the fact that Joe is out of work more than his father was or his new job pays less than the one he lost, (a rare event for Joe's father) etc. indicates that his generation will not do as well as his parents did.
    I agree. In fact as stated above, I did intend more than a decade time scale. If Joe is 40 years old or less, he has many years yet to recover from recent losses, so my claim Joe is not going to be as well off as his parent were, is speculation, based on my assumption that these future years are not going to be good ones for Joe.

    I.e. his standard of living is going down and will continue downward, compared to his parents in part because his parents enjoyed cheap oil, in part because his parents were part of the generation when after WWII only the US was economically healthy and dominated global production and markets. In contrast Joe is burdened with a huge debt his parents living beyond their means created and is watching other nations generate wealth much faster than the US is and take away, literally*, Joe’s factories and information technology production capacity.

    Really all Joe has is some coal and fertile Mid West fields that those other nations need; but only a few percent of the “Joes” will benefit as coal and food are exported. Most Joes will get a “negative benefit” as food prices in their grocery must match the higher prices the rich Chinese are willing to pay, etc. Thus even if I am wrong that Joe will live thru the worst depression ever, Joe’s net wealth and living standard is going down below levels his parents enjoyed.
    *Yes literally. For example GM's break production factory was purchased by Chinese firm, dis assembled and shipped to China. Moving IBM's computer division to China, had less physical disassembly but was the same result for Joe. Chin Chan, now has Joe's old job turning out computers, and now iPad like tablets too.
    Last edited by a moderator: Mar 12, 2011
  20. Eflex tha Vybe Scientist Registered Senior Member

    Some good news about Federal Reserve transparency

    While Congress required the Fed in December to reveal details of assistance it provided through various emergency programs during the crisis, discount window loans were exempt. The central bank, which was created in 1913, has resisted transparency for the discount window, its oldest lending tool.
  21. joepistole Deacon Blues Valued Senior Member

    What deep dark secrets do you think will be revealed? The Fed today has never ever been more transparent. I predict that when the Fed releases this information no one will be suprised and the sun will continue to rise each morning.
  22. Eflex tha Vybe Scientist Registered Senior Member

    honestly Im not sure what will be revealed, but Im wondering why it took a lawsuit to disclose such information in the first place. :shrug:

    It is very good to know that there is a check on what appeared to be the Feds limitless power/secrecy;
  23. joepistole Deacon Blues Valued Senior Member

    The Fed does not have unlimited secrecy. It is audited internally and externally every year and is under the constant review of congress. The Fed does not make immediate disclosures of its open window activities as it does not want to encourage or add to the speculation related to the solvency of individual member banks. Such speculation serves no useful purpose.

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