Wednesday, March 19, 2008

The Fed As Bank

The Federal Reserve may be a central bank with special rights and obligations, but in the end it, too, is a bank and has to be very careful who it lends to and what kind of collateral it accepts in exchange.

From a bank analyst perspective, during the last few months the Fed has become increasingly more lax in its lending practices. It is financing highly leveraged investment banks and brokers and accepting a wide range of illiquid securities as collateral, particularly MBSs.

Let's look at the Fed's consolidated balance sheet (click to enlarge):

As of March 12, 2008 the Fed had almost $900 billion in assets, of which $700 billion were in Treasury bills and notes and the rest in an assortment of repos, the TAF facility, etc. The most recently announced programs like the TSLF ($200 billion), the open-ended discount window facility for investment banks/brokers and the $30 billion loan to Morgan (i.e. Bear's toxic assets) are not shown yet.

When those hit the books in the next few weeks, the asset mix will change drastically. The Treasury holdings will go down and be replaced by an assortment of GSE and private label securities. The Fed's risk exposure will jump higher, and significantly so.

Like any other bank, the Fed does not have an unlimited amount of money to lend - all it has is about $700 billion in Treasurys that it can exchange for other, less marketable securities (and it has already announced programs for a big part of that). In contrast, US home mortgages alone amount to $10.5 trillion; if things keep unraveling, the Fed's balance sheet will prove very small for the role it has now chosen for itself.

As for the liability side, the Fed has issued about $800 billion of its own Federal Reserve Notes, i.e. dollars. Our currency is thus increasingly going to be backed by lower quality, riskier assets that no one else wishes to buy or lend against, instead of Treasurys. In effect, Mr. Bernanke is betting the farm on a quick real estate/mortgage turnaround and a very shallow recession. Worse still, instead of charging a higher interest rate for the loans made against the riskier collateral, the Fed keeps cutting rates.

And just how sound is Mr. Bernanke's "bet the farm" wager on a quick turnaround of the US real estate market? Judging from the following chart, not very sound at all. Unlike previous real estate boom cycles that lasted 2 to 4 years and peaked at 700-800.000 new homes sold per year, the one now busting lasted 13 years and peaked in 2005 at 1.300.000 units. There has been a lot of housing demand satisfied for many years to come and the downturn will not likely end soon.

Without Greenspan's negative real interest rates after 2000, the cycle would have probably turned down (red line), avoiding the bubble of 2002-06. Based on this hypothesis, there have been almost 3 million "extra" homes sold (black line minus red line), creating a fundamental housing demand deficit that won't go away even if credit becomes cheap again.

Let's summarize: riskier borrowers, low quality collateral concentrated on real estate, questionable appraisals for market prices and "low, low rates". Is the Fed turning itself into a sub-prime lender? If I were a bank examiner, I would want to have a quiet word with Mr. Chairman about his lending practices.

And if I were a shareholder or creditor of the Federal Reserve Bank (remember what its liabilities are), I would be worried. As, indeed, so many already are - they are those who are exchanging their dollars for other currencies and commodities.


Sir Arthur C. Clarke passed away today. He was 90 years old and his writings inspired millions, including this blogger.


  1. The belief is that the financial world as we know it will end, if the Fed does not absorb the toxic stuff unto itself.

    Hence, it's a move by the farmer to save himself, as much as it is to save the pigs.

    "...Abolish the Fed...", Jim Rogers.

  2. Kinda makes you want to buy a ranch in South America, gas up the jet, and forget you ever heard about this place.

    Isn't the collapse of the dollar going to amount to the same thing as letting the banks collapse under their bad debt? If debt = money you can't let one slide without causing the other to slide. Worthless debt = worthless dollar, worthless dollar = worthless debt.

    Any examples of modern central bank failures? How would such a thing go down?

  3. I thought this comment hit the nail on the head:

    I think we all overlook the obvious, and the impact is chilling. By opening the discount window to non-banks, the Fed has declared themselves one of the boyz, a playa in the big game...The Fed has just become the world’s largest hedge fund with a neverending supply of capital...The problem for the Fed has been an inability to impact the shadlow banking system - Ben and the boyz came up with an ingenious solution - simply make the Fed a part of the shadow banking system. Opening the discount window to non-banks has in effect made the Fed a partner...Have SIVs under the gun? No problemo - turn the paper over to the Fed and get treasuries in exchange. Your hedge fund is shaky? No worries, mate, the Fed will take that paper...The broker-dealer PDs are now free to buy any type of ABCP they want - as long as it isn’t on negative watch and is AAA - and dump it on the Fed in exchange for U.S. treasuries - at a value the PDs determine (can you say level 3, marked to myth?) - if there are losses on the paper, the Fed simply restocks by monetizing new treasuries...This happened Friday. Beware the Ides of March.

  4. Excellent article once more!

    The Fed becoming the ultimate subprime lender is about the right ending of this insane financial experiment.

    A comment I made on Roubini blog on mar, 11th:

    "The assets in the balance sheet of the FED are the counterpart of all the US dollars in circulation ($760bn currently) that appear on the FED balance sheet as a liability.

    Under the gold standard the FED assets were mainly onces of gold. So US dollars were backed by gold.

    Under the old-school fiat regime the FED assets were mainly various forms of government debt. So US dollars were backed by the full faith and credit of the United States.

    Within a few days half of the US dollars will be backed by subprime mortgages.


  5. If you own "the printing press" the only thing you really have to worry about is that one day your dollar notes might not be welcome anymore. It already started with the Taj Mahal, some Brazilien model and small currency exchanges in Amsterdam rejecting the US dollar. Once China and oil exporters follow suit things could get interesting. We still have ways to go until this happens but we're on a very slippery slope.

  6. How about the Fed's leverage? Based on the $11B in gold (i.e. the only "real" asset on their balance sheet), they are essentially levered over $81x. They make hedge funds look conservative.

  7. Sorry to hear of Sir Arthur's passing, 2001 was a great book which took the film to a much higher level for me.

    Does anyone know what the 11,037 in gold certificates actually means?

  8. Nice post

    I am not a financier, just a newspaper reader, but by my reading of the newspapers I counted almost $300-350+ billion in Fed injections when things started going sticky last year.

    Then the Fed injected another $140 thru Feb and then a 'big injection' on March 11th of $200 billion. And I thought I saw they spent another $100 billion for other 'activities' including Bear Sterns.

    By my math they have already used $740-790 billion of their assets.

    Was I misunderstanding the newspaper reports? Or has the fed already been 'paid back' for those loans at the end of last year + Jan and Feb?

    Clark's death is very sad.

  9. Are these those loans? : (I don't think cut and past will work very well here)...

    Memo (off-balance-sheet items):
    Marketable securities held in custody for foreign
    official and international accounts(2,7) 2,151,216 + 1,204 + 291,443 2,162,203
    U.S. Treasury 1,277,697 - 2,930 + 63,967 1,282,820
    Federal agency 873,519 + 4,134 + 227,476 879,383
    Securities lent to dealers 11,639 - 7,381 + 9,366 11,705

    Note: Components may not sum to totals because of rounding.

    1 Includes securities lent to dealers, which are fully collateralized by other U.S. Treasury securities.
    2 Face value of the securities.
    3 Compensation that adjusts for the effect of inflation on the original face value of inflation-indexed securities.
    4 Cash value of agreements, which are collateralized by U.S. Treasury and federal agency securities.
    5 Estimated.
    6 Cash value of agreements, which are collateralized by U.S. Treasury securities.
    7 Includes U.S. Treasury STRIPS and other zero coupon bonds at face value.

  10. The Fed has done a variety of operations- all of them are loans, some of which expire in as little as 28 days. So just adding them up gives an inflated number.

    The amount of programs already implemented plus those just announced on Sunday come to about $400 billion.

    And no, those are not the numbers on the footnotes. In the current balance sheet they are under "Term auction credit" and some are under "Repurchase agreements".

    But the big numbers haven't hit yet.

  11. I feel that the FED last move may restore confidence for a while. Probably that of sunday was the response the "boyz" where waiting for: open up the FED balance sheet to our crappy paper.
    If liquidity is to come back to some markets, then the FED may slowly expel this waste from its balance sheet. Otherwise Ben may need to make this a permanent rollover of some sort.
    We will see, but the reaction of the exchange rate with the euro and the price of gold today look significant: the dollar is appreciating in the face of a 75 basis point cut.
    Interesting show, indeed!

  12. Hey Italian!

    The market was up big yesterday, but there wasn't much volume to it

    And Calculated Risk has an interesting post on the worsening TED spread again.

    Fundamentally, from what Hell has been saying, I have to agree with anon yesterday, nothing has changed

  13. Thank you for your comment Thai,
    I stand ready to jump on the dollar wagon with all my weight, so any insight is appreciated ;)

  14. We have a very interesting blog in French made by tropical bear.

    Like yours it is made for mortals like me to understand a little bit more of our foolish world.

    Last post was about the US stock markets that plummet at slower rates than European ones. But apparently not if you look at the indexes after conversion in Euro...

  15. Nothing the FED has done has removed the debt burden from the American consumers. The end of the day the inability of the American consumer to pay back his/her debts is the root of the financial crisis. The great leverage unwind continues from top to bottom of our society.

  16. Goldman leadership on Bloomberg:

  17. I agree with your excellent analysis except for the part where you say that the housing bubble wouldn't have occurred but for Greenspan's interest rates cuts.

    I used to believe that as well, but the Fed could not have caused the $5 trillion housing bubble just as, as you point out, the Fed today cannot cure the $10 trillion mortgage problem. The Fed just doesn't have enough money.

    The housing bubble was caused by massive fraud throughout the entire financial and real estate industries, from top to bottom, whether it was homeowners lying on their applications, construction firms colluding with appraisers and brokers to get kickbacks by over-valuing homes, lenders who resold mortgages without checking any of the claims, investment banks that securitized loans based on the assumption that real estate prices would rise forever, ratings firms and monoline insurers that took fat fees to lie about these potentially worthless securities.

    How is it possible that this rot, this blight, this depravity, this debauchery permeated EVERY financial institution at EVERY level, without almost any exception? This debauchery was caused by the low Fed Funds rate? I don't think so.

    And why did the stock market bubble begin in 1995 rather than, say, 1990 or 2000? Did the Fed cause that too? I don't think so.

    There's only one credible explanation: The Great Depression survivors all retired in the early 90s, and when the Boomers took over as senior managers, they ignored all those "old rules" about credit and created the dot-com bubble. Then, Generation-X reached their 40s in the early 2000s, and created the fraudulent financial engineering models and structures that are disintegrating today around the world.

    I think that it's funny that Alan Greenspan last year blamed the housing bubble on the fall of the Berlin Wall, and now he's blaming the credit crisis on "animal spirits." However, he did not cause and could not have caused, the problems we're seeing today. Those problems were caused by the massive depravity and debauchery that permeated every level of every institution of the financial industry, and it's something that everyone will have to pay for.

    John J. Xenakis
    Web site:

  18. This comment has been removed by the author.

  19. Hells,

    How big a role do you believe the Yen carry trade had in the creation of all the asset bubbles in the US ?

    Thanks, regards.

  20. I posted this comment on yesterday's topic when it might be more appropriate today.

    So it seems general leverage conditions haven't changed one bit. The worst debt is being nationalized and never marked to market via term auction facilities.

    Onto a slightly different question. Does anyone have any confidence that AAA-rated debt is actually the quality it claims to be? With the crazy capital gyrations and easing of capital requirements for Fannie and Freddie, what's good U.S. debt?

  21. "The greatest tragedy in mankind's entire history may be the hijacking of morality by religion."
    Arthur C. Clarke

    "We have to abandon the idea that schooling is something restricted to youth. How can it be, in a world where half the things a man knows at 20 are no longer true at 40 - and half the things he knows at 40 hadn't been discovered when he was 20?"
    Arthur C. Clarke

    What a great life Clarke had. Viva Sri Lanka!

  22. Arthur Clarke was a pederast. Overlooking THIS-why in this world of 6.7 B people is the passing of one man who lived to ninety years 'very sad'?

  23. The media noise and attention the BSC bailout, BK or whatever one wants to call it gets lots and lots of media, political and finanical coverage. Yet the exporting of American jobs, closing down factories and opening new facilities in far away countries were all considered good for America.
    Yet this leverage unwind has struck a nerve with the wealthy mention counterparty risk and suddenly everything must be done to same the skin of a few.

  24. Is the Fed lending to subprime borrowers?

  25. Mr. Xenakis:

    This debauchery was caused by the low Fed Funds rate? I don't think so.

    Without really disagreeing with you, let me add some information to your opinion:

    When ordinary folks look to purchase anything (including homes), they will price it based on what they cannot afford to spend every month. Let's say John and Mary Smith want to buy a home. They have worked out their monthly budget and they figure they can spend one thousand dollars ($1000) per month for a house. So they go to a real estate agent and they tell them that they are interested in buying a house and they can afford to spend up to $1000/month. The real estate agent then says "with interest rates at 4%, you can afford to buy a $200,000 house."

    So naturally the real estate agent will start by showing the couple a house that is priced at $250,000. After all, maybe they will like the house and try to find a way to stretch their budget to afford it. Maybe the couple will ignore some of the other costs of homeownership such as taxes and insurance.

    If the couple then says, "we love the house, we just can't afford it," the agent will go to his friend -- the subprime lender -- who has a new product called an ARM loan, and the agent says "we can get you into the house with a payment of only $650."

    "We'll take it," says the couple.

    Of course, no one ever tells the couple that in order to get that low of a payment (at 1% interest for the first two years), the interest rate will have to go up to 7% after that (with the payments going up to $1500 plus taxes and insurance.

    "Just get them to sign on the dotted line" the agent is told. To compound the pressure the hopeful new homeowners feel in their anticipation to buy the house, they will have to pay $1000 out of pocket for the inspections and so forth.

    With interest rates at 7%, in order for the house payment to be about the same as $200,000 @ 1%, the house will have to sell for $100,000.

    That, in large part, is what is happening now. As the "innovative" products stop being used to finance home purchases, house prices are starting to fall back down toward parity to rental costs. (Although house prices historically are "sticky" -- meaning they do not fall like stock prices). At the same time, people are still shopping for houses based on their monthly budget.

    Going back to your original point: I think that many -- if not most -- lenders (i.e. those at the top of the food chain) in the banking industry knew this and took advantage of the couples in my example above. They earned fat fees and then -- with moral hazard in perfect harmony -- passed off the risk of these bad loans to "investors" or -- if that does not work -- on to taxpayers. To compound the moral hazard, we have had an Administration that has as its raison d'être a policy of laissez faire in the extreme.

    Also see what I wrote here and here. You might also want to take a note of when I wrote those posts.

    So, I think you may be right; but just not in the way that you think.

  26. in actuality the fed is not constrained by the size of its current balance to inject liquidity into the system. they simply issue non-interest bearing debt (federal reserve notes or what most know as cash) to monetize anything they want (within the bounds of the current law). this is highly inflationary.

    the only time the balance sheet is constraining is when they would like to inject liquidity and they want it to be non-inflationary. in central bankers' language this called "sterilization." the TSLF is sterilized; meaning the fed swapped its treasuries for junk paper owned by a primary dealer. it is uncertain if the latest dealer facility will be sterilized.

  27. Okielawyer:

    So you blame the dot-com bubble and the massive fraud throughout the financial industry on the Bush administration? That's even more bizarre than blaming it on Greenspan. Shall we talk about Whitewater, drug dealers in the White House, lying to a federal judge and Juanita Broaddrick? Were any of those factors in the housing bubble? Or how about blaming it on Nixon for bombing Cambodia? It's always the easy solution to get down into the political mud and give a gibberish political reason for just about anything, since that way you don't have to look at what's real, and besides, it's so much fun to be covered with mud.

    John J. Xenakis
    Web site:

  28. anybody recall all those "ownership society" speeches by George Bush?
    How did you guys think he was going to achieve said society?
    Much like all his plans he never looks past the first stage.

  29. Hey Okielawyer!

    Probably no suprise to you, but I am sort of on John's side here-- he makes some very good points in his original comment.

    The underlying picture I take away from your response is that you view the world in a kind of 'black and white' with 2 types of people in the world:

    1. 'Good honest ordinary folk'. They might be a little uneducated and easily manipulated, but they require my protection at all costs.

    2. Abusive manipulative (usually Republican) business types that are bent on stealing from the good 'ordinary folk'

    I do not mean to insult you if I am over simplifying your view of the society (if I am please accept my apologies). But if I am accurately characterizing your view of society-- I strongly reject it as flawed on so many levels.

  30. Is there any way of ascertaining the specifcs of the collateral used for the TAF (and at what discount to par)?

    Could we get this via a FOIA request?

  31. since that way you don't have to look at what's real

    Having practiced bankruptcy law for several years, I think I know at least a little bit about "what's real."

    Give me some credit. I was on the front lines of the battles against our current excessive use of debt instruments to fund the American lifestyle. And there is no way that I can -- in the space these comments can afford me -- fully cover the complexities of the debt problem in the U.S. now. However, I have seen enough to observe the mentality of all the players involved in the game. I hold those who have more information to a higher standard than those who don't.

    In my view it is critically important that we create more parity in the bargaining power of the two parties to contracts. I also think that Hellasious is trying to make this same point even if he is coming from a different focal point.

  32. In fact, securities law and financial regulations hold those with more expertise and information, e.g. professionals, to a much higher standard than the general public.

    "Know your customer", "widows and orphans" and all such types of laws are not only designed to protect the public from outright crooks, but from itself, also.

    I will stress it again: these are laws on the books and have been there for many decades.

    But mortgage brokers fell through the regulatory cracks.

  33. Okielawyer said... "I hold those who have more information to a higher standard than those who don't. In my view it is critically important that we create more parity in the bargaining power of the two parties to contracts"

    Okie thanks! You may have just illuminated the real difference we have.

    At some level: "I hold those with more information to a higher standard..." means you really do not see everyone as equal. I reject this.

    Both are just as guilty in my book, period. Neither more, nor less.

    I understand in a court of law "higher standard" is argued to sway a jury, but I view this as a thinly veiled attempt to simply win $ from the deep pocket.

    Assymetry of information is fundamental to EVERY transaction. This is ALWAYS true.

    Person A wants X from person B for price Y, because it is really worth Z to person A. Person B will never know what Z really is--ever.

    Have you ever loaned money to someone? The so called 'assymetry' you mention ALWAYS goes both ways. The lender may think the buyer a fool (knows all kinds of things about the real estate market as a whole, etc...). But the buyer knows all kind of things the lender does not-- most importantly whether they will ever pay the lender back. Remember, the lender is ALWAYS at risk of not getting repaid in the first place.

    But to look at one as "higher standard' goes against every fiber of my sense of equality.

    Both must do the right thing. Period.

  34. Person A goes to doctor B and insists that said doctor remove his appendix, no matter what, no questions asked.

    In a world of perfect equality and where both parties must do the right thing, what should doctor B do?

    This question holds for finance too.

  35. Hi Hellasious,

    Thank you for your excellent blog. Was also sad about Sir Arthur. Many fond memories of the Odyssey and Rama series and many others.

    Mr Xenakis, the "generational dynamics" concept is interesting. Certainly, the narcissistic emphasis of our present culture impacts our present financial situation, we should always learn from the past. It seems to me that Greenspan's lowering of the fed funds rate and holding it low as long as he did was a key initial factor for the housing bubble. The greed/fraud of many lenders/borrowers/realtors/brokers/homebuilders blew the bubble. Deregulation of our banking system and the invention of all these "exotic" financial engineering structures were key factors and are fantastic enough to belong in one of Sir Arthur's novels,the Ramans would have known better ;).

    Mr Okie, I believe Capitalism has enabled much of the wonderful advancements of the the human condition. I appreciate your insight. We need the rule of law to keep us as honest as possible. Unbridled laissez faire is one reasons we are in this mess. I understand your advocacy for the uninformed "little guy" as Thai puts it. I think we have de-emphasized personal responsibility in our culture. But even due diligence doesn't provide immunity from a greedy, crafty punk hiding behind the shield of "caveat emptor". Also, financial literacy seems to be a low priority these days. I admit to being a late bloomer in that category.

    Thai, if information is asymmetric in a transaction, it makes sense to make an attempt to equalize the information as much as practically possible. In a legal and thus social sense, the more knowledgeable party will (as we all know) frequently exploit this to their advantage. So I understand how an ethical lawyer (like Okie ;)) would like to make sure it is as even a playing field as possible.

    As for the Doctor/Patient problem:

    not enough such thing as perfect equality....what is the "right thing"? Without a patient history, proper exam, and any additional testing, proper informed consent, etc, I would politely decline to treat the patient. I would politely suggest a psychiatric referral. I'm guessing Hellasious is trying to illustrate a roughly analogous "transaction" to some financial interactions that occur with one party having significantly more information than the other. BTW if the patient has an appendix that is about to rupture I would not feel guilty decling treatment as the patient should have been more forthcoming.

  36. Thank you Hell for replying to Thai's rediculous proposition. If everyone could always be counted on to do the right thing we could abolish all laws, police, courts and the rest of govt and everyone would just voluntarily pay their fair share to maintain the roads and bridges. Maybe in Grover Norquist's fevered imagination but not in this world.

  37. Hellasious,

    This might be a little off-topic, but how big a role do you believe the Yen carry trade had in the creation of all the asset bubbles in the US ?

    Thanks, regards.

  38. To: camabron, in re yen carry

    I have previously estimated the size of the yen carry "trade" at around $1 trillion. It definitely played a very significant part in the blowing up of the speculative debt leverage bubble.

    In other words, it was used as a source of cheap margin money to purchase all sorts of higher yielding assets.

  39. Hell...

    "Primum non nocere"-- First, do no harm

    I deal with endless variants on this theme everyday.

    Without trying to sound unkind, what does comparing 'ordinary folk' to the mentally ill say about your view of your fellow man? A child might might be a better analogy, though the issues are fundamentally identical.

    The thing you have to remember is society has already decided mental illness permits social institutions to suspend certain privledges usually granted to non-mentally ill adults.

    Sadly, I have lost count of the number of people I have committed to psychiatric institutions against their will over the years, the number being so great-- my ED gets something like 8-10 people a day brought in by the policy involuntarily on what is known as an 'emergency petition'.

    Yet stripping some adults of their full privledges because we deem them mentally ill (I know there are all kinds of man vs. society issues in that statement) does not invalidate the full privledges and responsibilities that other members of society have towards one another.

    There is no need to give one group of adults a 'free pass' because they are poor, and then hold another group to a 'higher standard' because they are professionals (trust me, I hear this line of reasoning all the time and reject it as a load of nonsense only betraying its originator's nonegalitarian roots). Okie should trust me because I am trustworthy, period. If he needs to rely on the fact that 'I am a professional' to guarantee my trustworthiness... well I think we both know the answer to that.

    I might reframe your example as a beautiful illustration of how people often have difficulty rectifying issues of asymetric consequence against issues of personal responsibility and issues of personal compassion towards other people's loss.

    But the fundamental reality of asymetric consequences in life do not need to change levels of resonsibility towards one another within a society.

    They are in fact two completely different things.

    And anon, you make good points, yet at some practical level it simply is impossible to share all information. And even if we could (which we can't), our differences would always lead us to different conclusions from the same information.

    I look at all of us as being very different-- but once you are an adult within this society (with all its privledges), you are my equal and with it I have a responsibility towards you AND you have responsibility towards me. Wealth, color, privledge, power, birth do not change our level of responsibility whatsoever.

  40. This comment has been removed by the author.

  41. And to the anon who said I think everyone can be counted on to do the right thing...

    I wish this were true, but it is very far from my views. My issue is how we treat those who do not do the right thing.

    Okie and Hell say "those with more information" should be held to one standard, while 'ordinary folk' (presumably without as much information-- a view Karl Popper might take issue with) are held to another.

    I see these types of double standards as very socially destructive.

    I just read up on Grover Norquist on Wikipedia (never heard of him). Yuck! I won't even respond.

    And to the anon who said they would not take out the patient's appendix if they were not forthcoming with information-- you would loose your liscence to practice medicine very fast if you acted that way.

    If it needs to come out, it needs to come out. If the patient is mentaly ill, it is likely in the end they will loose their right to refuse care (depends on 'how' mentaly ill they are... it will have to happen through legal chanels, which will take time and therefore (sadly) worsen their outcome, but if they are really mentally ill, it will likely come out).

    Now if they are not mentally ill, that becomes another issue!

  42. "but once you are an adult within this society"

    Maturity/capability hit different people at different ages, but I understand a culture has to draw a line in the sand at some point and 18 isn't bad.

    Maybe America should have an "adult" permit that you have to apply for at 18 so you can then enter into legally binding contracts. The application would explain that:

    1)What your parents/school/church have taught you may not be accurate or sufficient. You are responsible for reviewing this and educating yourself from this point on.

    2) You are responsible for being skeptical. Don't trust easily; charming people can be predators.

    3) No one is obligated to help you. You are not obigated to help anyone. But do consider that our individual experiences will more likely be pleasant if we play nice as a group.

    And so on.

    (BTW, there are always lots of comments before I log on. I assume I'm the only West Coast reader).

  43. Thai:

    Let me point out what I see are inconsistencies in your arguments.

    1) First, do no harm.

    This rule has, as a presumption, the idea that medical doctors (which I presume you are one) are capable of doing with their superior knowledge of the human body. It is therefore incumbent that certain rules (ethics) that govern the behavior of the practitioners of your profession. It is therefore impossible to not require that those with more knowledge be required to be held to a higher ethical and legal standard.

    Let me give you a more concrete example of how a doctor can abuse their superior knowledge to gain a financial benefit from their patients:

    Patient comes in complaining about pain and asks for painkillers. Doctor has been receiving sample painkillers from pharma company rep. Doctor is promised "financial compensation" for prescribing said medication. Doctor overprescribes said medication and patient becomes "dependent" on the painkillers. Doctor also gains other psychological and (possibly sexual) advantages over the patient.

    Now can you seriously argue that the doctor and patient are in an equal bargaining position?

    All patients were sane (before their "treatment" anyway). And all alleged sexual acts were with legal adults and "consensual."

    This example is not just a fantasy. It actually happened.

    Now, why do you think said doctor could be held legally -- even criminally -- responsible? Could it be that it was because of the asymmetric relationship between doctor and patient? What about other areas of the law: teacher-student, employer-employee and others that I can't think of right now? Do you think that we should just do away with said protections?

    2) Okie should trust me because I am trustworthy, period.

    I think trust needs to be earned. Having said that, your screen personality comes across as a trustworthy person. However, why should I inherently trust the doctor in the example above?

  44. ...are capable of doing with their superior knowledge of the human body.

    I meant to say "are capable of doing harm because of their superior knowledge of the human body."

  45. I agree with much of what you say, I am not condoning your physician, I am not saying all behavior is 'OK' in some kind of extreme 'laissez faire' view of the world.

    What I am saying is we are all human and we all have 'flaws', AND when we hold one person less accountable for their behavior in society than another, we risk social disintegration.

    Perhaps Frame of Reference, which I wrote for fun a while ago, will make my point clearer.


  46. Thai:

    ...I am not condoning your physician....

    I just want to make sure that it is clear that the physician that I was referencing was not my personal physician, nor any physician who ever treated me.

  47. Okie, I gave a bad link, here it is again: Frame of Reference.

  48. Has anyone NOTED..the ONLY ones that made out like "bandits" and NOT damaged by the whole sorry mess...had one COMMON GENE? THEY WERE FEE PAID..and RISKED ZERO.. all others "go to back of bus".. The fee paid.. are not paying back or losing a dime.. THEY in fact MUST be..from lower end mortgage to the "trasactions fees" at the top. THEY MUST have known the whole thing would blow up.. and now setting home counting the money..and laughing. Wonder how much in "Fees" crossed hands in the BS 30 Bil deal.. The "fee paid"'s highway men. and ran into one rather odd items. Friends in state where "Lawyer must by law close the deal" was NEVER told a lot they should have...even down to a survey that really was not.. and their neighbors never told of how and what the ARM really did. But lawyer got his "Fee" as have it seems.. all the other vultures that now flew off.. bellies stuffed.

  49. anonymous:

    See my response to Mr. Xenakis @ March 20, 2008 2:35 AM further up in the comments. The term "moral hazard" is used to describe the very problem you are trying to address. Also, see my links that I provide in that response. It covers a lot of what you are asking about.

  50. someone wrote:

    "in actuality the fed is not constrained by the size of its current balance to inject liquidity into the system. they simply issue non-interest bearing debt (federal reserve notes or what most know as cash) to monetize anything they want (within the bounds of the current law). this is highly inflationary."

    This is hyper-inflationary, ala The Weimar Republic.
    And not that you are suggesting the U.S. government is planning to monetize thusly, but my guess is that what you describe would only come about when the the government is close to or at the point when they can not get sufficient bids at successive auctions on sovereign debt. At that point, i.e. multiple auction failures, the bond market would cease to be of much use anyway, so going the full monty and killing it off via hyper-inflation, which would absolutely do the trick, would then cease to be much of a consideration.

  51. "Has anyone NOTED..the ONLY ones that made out like "bandits" and NOT damaged by the whole sorry mess...had one COMMON GENE? THEY WERE FEE PAID..and RISKED ZERO.. "

    Having seen this before, let me reassure you. The easiest person to sell a car to is a car salesman.

    Most of them thought they 'earned' those fees, spent them like they would have them forever, and are now trained for nothing and looking for work.

    To get a true picture of the story, i keep wondering where Warren Spector's cash is. Do you think he was wise enough to have put it in t-bills? Or was he so 'smart' and so inside the game, that he was 'allowed' to put his money someplace like Carlyle?

    My favorite part of the book "Bonfire of the Vanities" is how the BFD, tom hanks, is completely bankrupt six months after tragedy strikes. It's not a satire.


  52. Hall:

    always excellent writing and delightful reading selections. I sold to the sleeping level. thank you.

  53. Special Purpose Vehicle.

    Remember Enron? Its hundreds of offshore accounting entities?

    It helps to assume that there is a gameplan for the Fed, and to work backward from the most likely endgame for it.

    It helps to look at central banking on the scale that changes happened at other major transition points, such as the early 1930s.

    The Fed, and perhaps the Treasury, are two Special Purpose Vehicles harnessed in tandem.

    The Fed is owned by the (big NY or International) banks. The Treasury is (supposedly) owned by We The People.

    On the Fed's balance sheet is the $11 bn in gold certificates, for the metal which is (supposedly) stored for it by the Treasury.

    (Hmmmm, why does the NY Fed have so much international gold stored in its basement, and not store its own gold?)

    We could be in some doubt as to which entity actually owns the gold, however, undoubtedly the American people think of it as "our gold", if they think of it at all. Then why is it on the private Fed's balance sheet?

    Anyway, that gold is valued at (I think) $42 an ounce. If there really are 260 million ounces there, it is worth at market now around $240 bn. If it reaches Jim Sinclair's predicted $1650, due to dollar collapse, it will be worth over $400 bn.

    The approx $800 million FRNs are the only "solid" "liability" of the Fed, and yet they are not redeemable at the Fed for either its T-bills, or its gold.

    Quite a feat for any "bank", to be able to count self-vaporizable liabilities on its balance sheet!

    The FRNs, for now, are redeemable only for -- our labor and goods.

    Think of the elite's economic system as a series of collapsible formations, allowing multiple rearguard actions, as the peasant classes catch on to the serial expropriations of their labors, savings, and homes.

    (Why am I getting a remembered image from the film "Shaka Zulu"? Perhaps, when you're a hated minority deep in enemy territory, you develop smart defensive formations -- it's all you got!)

    So, as long as we take the green paper, fine. They won't start printing that like crazy -- until they need to. That's probably after the T-bills give out. (Depends on the credibility of tax revenues in a depression under high unemployment, etc.)

    They put this system forward to appropriate our labor and profit from it for as long as possible.

    Then they withdraw (offshore?) their private fortunes from it as it implodes.

    Next they put forward a quasi-gold backed system (ECB at its founding?) showing they have some gold in the bank window. I think this is what Sinclair expects next.

    As long as that works, they don't actually have to give up gold in convertible paper money.

    Of course, if present, that $400 bn of gold is available, with its useful world credibility, to fund another "USA" banking system, to keep the "wheels of commerce" turning, and to profit off our labor and resources under a new "Federal Reserve System" more like the pre-1933 regime of gold convertibility.

    Meanwhile, think of how many lived comfortably, grew rich and fat, sent their kids to Choate and Andover, by playing lead banking and finance roles in the 75+ years of this artificial system!

    So -- either the Fed -- or the Treasury -- or both -- might then be flushed (probably the Treasury first in a default, or "stretch-out" haircut) as Special Purpose Vehicles, as the tax revenues no longer support the T-bills, but the Fed has its soaring gold value to fall back on.

    Then the Fed chooses its favored banks (JPM?) through which to fund and found a new financial order, with as solid or spongy a gold backing as the working and investing public and industry insist on or let it get away with...

  54. H:

    I hope you are still around and feeling well.

    I heard the news today that the truckers may all go on strike on April 1. If they do, I think it may have more immediate implications for the American economy than the Bear Stearns implosion.

  55. Hellasious

    where are you?

    I love your blog and am looking forward to your analysis of the current situation!

    please write soon!

  56. Regarding exploitation of consumers based on asymmetric informational advantage....

    The entire investment industry exists based on this.

    How many people that own mutual funds out there know what is the price they paid to own that mutual fund? The MER.

    How many people that buy/sell securities are aware of the spread that they are paying some trader?

    When the consumer isn't aware of the price they are paying for a product/service, then the sellers are given leeway to exploit the consumer by charging much higher prices (i.e. wider bid/ask spreads and fatter MERs).

    Where do you think MERs would be right now if every mutual fund investor received a bill in the mail which listed the explicit dollar amount that they paid to the mutual fund through the MER for that year?

    All the portfolio managers and the traders on Wall Street have been milking the rest of the population based on this informational asymmetry---and they know it.

    Ah, the virtues of the "free market"....

  57. cqx

    The Board Meeting had come lv ringto an end. Bob started Replica Watchesto stand up and jostled the Replica Handbagstable, spilling his coffee over his Replica Handbagnotes. "How embarrassing. I am Coach Handbagsgetting so clumsy in my old age." EveryoneGucci Handbags had a good laugh, Rolex Watchesand soon we were all Replica Rolex Watchestelling stories of ourDesigner clothing most embarrassing moments. Designer replica handbagsIt came around to Frank Wholesale jewelrywho sat quietly listeningReplica rolex watches to the others. Someone ,replica handbags "Come on, Frank. replica watchesTell us your most embarrassingdata processing service moment." Frank laughed anddata processing began to tell us of his data processchildhood. "I grew up in San Pedro. data processing serviceMy Dad was a fisherman, and he data processingloved the sea. He had his data processown boat, but it was hard making a living on the sea. He worked hard and would stay out until he caught enough to feed the family. Not just enough for our family, but also for his Mom and Dad and the other kids that were still at home."

  58. cuicui

    Leaders from developing and world of warcraft gold industrial countries met in cheap wow goldWashington Saturday for dofus kamas an emergency summit on kamas dofusthe global financial crisis. Final Fantasy XI gilVOA's Barry Wood reports the ffxi gilfive-hour meeting endedbuy ffxi gil with a resolve to work together lotro gold to keep markets openlotr gold and prevent furtherflyff penya economic weakening.
    Outgoing buy flyff goldUS President Bush declaredflyff money the summit a success,Maple Story Mesos saying the leaders areMapleStory mesos committed to pro-growth Maple Story mesopolicies. The meeting agreedeq2 plat on an action plan toEverQuest 2 goldassure smoother functioning EverQuest 2 platof financial markets and Ugg Bootssaid developing countries Ugg Bootsshould have more say Ugg Bootsin the weighted votingRunescape Money structure of the InternationalRunescape Power leveling Monetary Fund, aRunescape Gold provider of emergency Final Fantasy XI gilloans to countries ffxi gilin need.
    President Bush buy ffxi gilpraised the achievements of this first ever meeting of leaders of 20 countries that account for over 75 percent of global output.

  59. (法新社a倫敦二B十WE四日電) 「情色二零零七」情趣產品大產自二十三日起在倫敦的肯辛頓奧林匹亞展覽館舉行,倫敦人擺脫對性的保守態度踴躍參觀,許多穿皮衣與塑膠緊身衣的好色之色情徒擠進這項世界規模最大的成人生活展,估計三天展期可成人網站吸引八萬多好奇民眾參觀情色電影




  60. If financing highly leverage investment banks and brokers get a wide range of illiquid securities as collateral, then they take interest in own investment. There are much information about banks and I want to get more information but at this time I am busy in exam 646-588 Advanced Wireless LAN for Account Managers. Thanks for share this article.