The Fed, part one

[Good4Nothin]

Glass Steagall was a regulation that prevented investment banks from also being commercial savings banks. It was a good idea because savings banks are federally insured, and investment banks can engage in risky gambling. It would not be fair to the taxpayers if we had to pay for a bank's bad bets.

However, Glass Steagall was repealed during the Clinton administration. There was some reason why banks thought they needed it repealed and they convinced congress. And this was great for the banks, because without Glass Steagall they couldn't lose, only win. The taxpayers could lose, but who cares about them.

Around 2008 banks had made some very bad bets, investing in subprime mortgages. Real estate prices were greatly inflated, so if a home buyer defaulted on a loan the actual value of the property could be half of the borrowed amount. And these mortgages had been mashed up and disguised within complex derivatives. Kind of like when you have to give your dog some bad tasting medicine and you mash it up and mix it with something he likes.

The derivatives became known as toxic assets, and they were all over the place. One thing the Fed can do is buy assets from banks. So it bought tons of those toxic assets (HOW can something that is toxic be considered an ASSET??), to help the banks. After all, we don't want banks to have a hard time. And its the taxpayer who pays, and who cares about them.

But the Fed is also allowed to create money. So it can "buy" assets from banks without actually paying for them. And this creates money, because the banks hand over the assets and their reserves magically increase.

Does this seem accurate so far?

 

[OrphanSlug]

Does this seem accurate so far?

Not at all.

Most of your OP is a distortion of what happened wrapped up in a general misunderstanding of economic fundamentals.

 

[Good4Nothin]

Not at all.

Most of your OP is a distortion of what happened wrapped up in a general misunderstanding of economic fundamentals.

It's real easy to say that, without providing any reasons for what you said. What did I misunderstand?

 

[Jetboogieman]

I don’t know about every piece of it, I admit I’m no economic expert but I have attempted to learn more and more over the past year or so, listening to a ton of lectures and other things.

The issue with the toxic assets was a credit freeze, at that time one of the nightmare scenarios that in theory would have ended the global economy basically as we know it, the whole economy is built on debt and cash flow and if credit stopped flowing, the whole thing would have collapsed so that’s my understanding of it, prior to the central bank system and more closely controlling the money supply and being lender of last resort, banks were often independent and small entities that went bankrupt routinely, taking customers savings with them, this became a pretty rare occurrence with the inception of the Fed and its various control mechanisms following the Great Depression.

 

[Good4Nothin]

I don’t know about every piece of it, I admit I’m no economic expert but I have attempted to learn more and more over the past year or so, listening to a ton of lectures and other things.

The issue with the toxic assets was a credit freeze, at that time one of the nightmare scenarios that in theory would have ended the global economy basically as we know it, the whole economy is built on debt and cash flow and if credit stopped flowing, the whole thing would have collapsed so that’s my understanding of it, prior to the central bank system and more closely controlling the money supply and being lender of last resort, banks were often independent and small entities that went bankrupt routinely, taking customers savings with them, this became a pretty rare occurrence with the inception of the Fed and its various control mechanisms following the Great Depression.

Yes, that is why central banks were created, to prevent bank panics. Banks are only required to keep one tenth of the money they borrowed from depositors (fractional reserves). So that means if too many customers want their money at the same time, oops, the bank can't pay them all.

Why are fractional reserves allowed? That's one thing I don't know yet.

Also, we don't know how that nightmare scenario would have turned out. Banks that made bad decisions might have gone broke. But other banks would have filled the gaps. If you play a game badly, you're supposed to lose. But when the game is rigged, as it most certainly is, you can play badly and still win anyway. That is what we have right now, starting at least in 2008 and shifted into ultra high gear for the current crisis.

So yeah ok we understand the reason for central banks. But in the scenario I described, they are doing things that are good for the banks, bad for the taxpayers.

So don't you think something has to change about how our central bank operates?

 

[Jetboogieman]

Yes, that is why central banks were created, to prevent bank panics. Banks are only required to keep one tenth of the money they borrowed from depositors (fractional reserves). So that means if too many customers want their money at the same time, oops, the bank can't pay them all.

Why are fractional reserves allowed? That's one thing I don't know yet.

Also, we don't know how that nightmare scenario would have turned out. Banks that made bad decisions might have gone broke. But other banks would have filled the gaps. If you play a game badly, you're supposed to lose. But when the game is rigged, as it most certainly is, you can play badly and still win anyway. That is what we have right now, starting at least in 2008 and shifted into ultra high gear for the current crisis.

So yeah ok we understand the reason for central banks. But in the scenario I described, they are doing things that are good for the banks, bad for the taxpayers.

So don't you think something has to change about how our central bank operates?

Oh I think so but the problems with the way they operate also are simply a by-product of an overarching problem with the entire economic system, in my opinion singling our the Fed in what I perceive as an overall broken economic system is like blaming the flat tire for the bike being broken, when true, but it’s also missing handles and a seat.

The Feds basic function is to be lender of last resort and manage inflation, which it has various tools including control of interest rates in order to facilitate.

It’s just one piece of the puzzle and without the benefit of hindsight, we may never know what the full order of magnitude would have been if the banks had been allowed to go bust and credit had dried up and hey man, I’m definitely not on the side of the banks, but it seemed to me the best thing would have been to bail out the banks to protect people’s savings and with the full weight of government go after them for what lead to the situation and reform the entire industry.

But hey, was nice to dream.

 

[justabubba]

Glass Steagall was a regulation that prevented investment banks from also being commercial savings banks. It was a good idea because savings banks are federally insured, and investment banks can engage in risky gambling. It would not be fair to the taxpayers if we had to pay for a bank's bad bets.

However, Glass Steagall was repealed during the Clinton administration. There was some reason why banks thought they needed it repealed and they convinced congress. And this was great for the banks, because without Glass Steagall they couldn't lose, only win. The taxpayers could lose, but who cares about them.

Around 2008 banks had made some very bad bets, investing in subprime mortgages. Real estate prices were greatly inflated, so if a home buyer defaulted on a loan the actual value of the property could be half of the borrowed amount. And these mortgages had been mashed up and disguised within complex derivatives. Kind of like when you have to give your dog some bad tasting medicine and you mash it up and mix it with something he likes.

The derivatives became known as toxic assets, and they were all over the place. One thing the Fed can do is buy assets from banks. So it bought tons of those toxic assets (HOW can something that is toxic be considered an ASSET??), to help the banks. After all, we don't want banks to have a hard time. And its the taxpayer who pays, and who cares about them.

But the Fed is also allowed to create money. So it can "buy" assets from banks without actually paying for them. And this creates money, because the banks hand over the assets and their reserves magically increase.

Does this seem accurate so far?

house vote: Republicans 205–16; Democrats 138–69; Independent 0–1
senate vote: 53 Republicans and 1 Democrat in favor; 44 Democrats opposed

which party seemed to be driving the repeal of glass-steagall?
Gramm–Leach–Bliley Act - Wikipedia

 

[rickc]

house vote: Republicans 205–16; Democrats 138–69; Independent 0–1
senate vote: 53 Republicans and 1 Democrat in favor; 44 Democrats opposed

which party seemed to be driving the repeal of glass-steagall?
Gramm–Leach–Bliley Act - Wikipedia

The deregulator!

 

[OrphanSlug]

It's real easy to say that, without providing any reasons for what you said. What did I misunderstand?

Fair enough.

It is correct in saying "Glass Steagall was repealed during the Clinton administration" but the appeal was to certain Republicans in Congress at the time who originated both bills in the House and Senate, handled the negotiations to blend them, and took a few Democrats with them on the condition of additional redlining restrictions.

It is not entirely accurate to say "Around 2008 banks had made some very bad bets, investing in subprime mortgages." That was the conclusion, not the means.

The truth is consolidation efforts in the financial sector goes back to the 1990's, underwriting securities (stocks, corporate bonds, private debt, etc.) goes back to the 1980's, the very idea of "encouraging" banks and lenders into risky mortgages from economically depresses areas goes back to the coining of the term "redlining" back in the 1960's, and the very idea of looking at lending practices by area of a city or state goes back to the 1930's. The government has been in the encouragement of risk business for longer than I care to mention, it did not start in the 1990's with a sex crazed young President with an arrogant wife from Arkansas.

Many of the larger banks, financial and investment organizations, larger brokerage operations, and even insurance companies wanted Glass Steagall gone well before the repeal but it took Republicans gaining control of Congress to get it. The thing to keep in mind is Reagan nor Bush 41 had a completely favorable Republican Congress, Bush 41 faced nothing but opposition during his short 1 term Presidency. Clinton had a favorable lock on Congress but only for his first 2 years.

Republicans did not get all of Congress until 1995, they had not had a lock on Congress since 1955 (let that sink in and it was back when Republicans and Democrats were very different.) Some of the first things they did was oppose all things Clinton and the prior Congress who raised taxes, so they did not accomplish much but a shutdown across 1995.

By 1999 Republicans came up with the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 and the Commodity Futures Modernization Act of 2000.

Justification for all this interest was these larger banks wanting even more mergers and consolidation on the back of two principles. One, that individuals invest more when the economy is doing well (they have more to play with) and put money into savings once the economy is not doing to well (they still have more to play with.) Two, that real estate valuations had no ceiling.

The latter ended up a huge mistake and the former allowed a financial institution to control capital no matter where the individual put their money. The underline argument is no matter how the individual was doing the larger banks would be fine.

Ultimately they were all wrong... and I'll note the Fed was sleeping at the wheel the entire time being neither central bankers or intelligent economists.

Real estate prices shot through the roof right up to the collapse because these larger organizations dealing in investment banking, commercial banking, insurance underwriting, and the organization of private investment circles gave us our first true to the letter example of bubble and pop economics. It was all artificial, sinister driven, with profit being made right up to the point of the crash.

BTW, toxic assets are still an *asset* because there is something behind the investment vehicle (some type of debt) even if it is not worth all that much... hence "toxic." The Fed making all that "Debt owned by the Fed" allowed them to leave the balance sheets of very large organizations that destroyed the financial system and economy on the back of Republican economic epic and historical stupidity.

Also, the Fed does not just run around making money... they set the stage for money to be made by dealing with reserves (call them liquidity accounts.) In how they handle reserves and dealing with the banking system can result in millions in digital currency being made or destroyed every... single... day.

Real money creation takes place the moment banks take these new funds and loans them out to the broader economy. Loans to governments state and local, to businesses for all sorts of reasons, and of course the individual for everything imaginable. Understanding banking assets and liabilities explains how money is really "made" by loaning it out.

The taxpayer does not really "lose" even though when everything goes south it ends up being the government to bail these **** shows out. Then again it is the government that is the only entity standing that can deal with such aggregate demand faults usually resulting from... wait for it... their own stupidity with legislation causing bubble and pop economics.

 

[Hypothetical]

Fair enough.



Real money creation takes place the moment banks take these new funds and loans them out to the broader economy. Loans to governments state and local, to businesses for all sorts of reasons, and of course the individual for everything imaginable. Understanding banking assets and liabilities explains how money is really "made" by loaning it out.

The taxpayer does not really "lose" even though when everything goes south it ends up being the government to bail these **** shows out. Then again it is the government that is the only entity standing that can deal with such aggregate demand faults usually resulting from... wait for it... their own stupidity with legislation causing bubble and pop economics.

the taxpayer absolutely does lose by having housing values drop if he is an owner, putting many underwater, inflation by creating more money and by adding to the national debt due to the bailout.

also to answer an earlier question, fractional reserves are allowed, simply , so a bank can lend more money.

 

[OrphanSlug]

the taxpayer absolutely does lose by having housing values drop if he is an owner, putting many underwater, inflation by creating more money and by adding to the national debt due to the bailout.

also to answer an earlier question, fractional reserves are allowed, simply , so a bank can lend more money.

The taxpayer (and/or individual having a mortgage on a home) is not an unwilling participant.

Where has inflation occurred outside of the expected ranges and depending on economic condition? (I've been hearing for years of hyperinflation for the US dollar because of Fed policy and the national debt, have not seen it and neither have you.)

The national debt has been building, a rare bipartisan consensus, for a very long time and generally speaking is because no matter how the economy is doing the federal government rarely has years of tax revenues being higher than outlays. It is complete distortion on your part to link our debt exclusively to bailouts.

And no, the Fed has several "tools" in dealing with monetary policy one of which is how they handle getting money to banks to loan out. The motivations and standards for banks loaning to whoever is what generally gets us in trouble.

 

[Hypothetical]

The taxpayer (and/or individual having a mortgage on a home) is not an unwilling participant.

Where has inflation occurred outside of the expected ranges and depending on economic condition? (I've been hearing for years of hyperinflation for the US dollar because of Fed policy and the national debt, have not seen it and neither have you.)

The national debt has been building, a rare bipartisan consensus, for a very long time and generally speaking is because no matter how the economy is doing the federal government rarely has years of tax revenues being higher than outlays. It is complete distortion on your part to link our debt exclusively to bailouts.

And no, the Fed has several "tools" in dealing with monetary policy one of which is how they handle getting money to banks to loan out. The motivations and standards for banks loaning to whoever is what generally gets us in trouble.

i'm not talking about hyperinflation, inflation has been occurring since we went off of the gold standard on a regular basis and gets worse as they create more and more fiat money. that is partially why families now need 2 people working to make ends meet than just one like in the 70's. it's been a slow burn. that is why they can get away with it. they can create wealth for themselves while the price of milk goes up to $5 a gallon for normal people, but wages lag behind.

I have no idea what the answer to that is.. it might actually be to redistribute the wealth. who knows. If I knew, I ought to run the fed

and ok its not the entire national debt, but it DID put a lot of homeowners underwater.

 

[Good4Nothin]

Oh I think so but the problems with the way they operate also are simply a by-product of an overarching problem with the entire economic system, in my opinion singling our the Fed in what I perceive as an overall broken economic system is like blaming the flat tire for the bike being broken, when true, but it’s also missing handles and a seat.

The Feds basic function is to be lender of last resort and manage inflation, which it has various tools including control of interest rates in order to facilitate.

It’s just one piece of the puzzle and without the benefit of hindsight, we may never know what the full order of magnitude would have been if the banks had been allowed to go bust and credit had dried up and hey man, I’m definitely not on the side of the banks, but it seemed to me the best thing would have been to bail out the banks to protect people’s savings and with the full weight of government go after them for what lead to the situation and reform the entire industry.

But hey, was nice to dream.

Instead of rewarding the bad decisions, and even maybe some criminality, they should have been punished.

 

[OrphanSlug]

i'm not talking about hyperinflation, inflation has been occurring since we went off of the gold standard on a regular basis and gets worse as they create more and more fiat money. that is partially why families now need 2 people working to make ends meet than just one like in the 70's. it's been a slow burn. that is why they can get away with it. they can create wealth for themselves while the price of milk goes up to $5 a gallon for normal people, but wages lag behind.

I have no idea what the answer to that is.. it might actually be to redistribute the wealth. who knows. If I knew, I ought to run the fed

and ok its not the entire national debt, but it DID put a lot of homeowners underwater.

Inflation was happening anyway, just for different reasons.

And as for why families need 2 people working to "make ends meet" that is because growth in "real wages" accounting for inflation is out of sync with overall economic productivity gains over the same time period. Meaning wealth collection at the top never "trickled down" to the lower 3 income quintiles. This is readily available when looking at wealth concentration over the 5 income quintiles (especially the top percent of the highest income quintile) where the bottom 3 are largely flat lines. And that goes back to before the 1970's but the gap started to become more pronounced around the 1980's.

The reason is everything from labor market globalization, to declines in private sector unions, to globalization of products and services, to too few employers here competing for higher levels of workers needing income (i.e. if a worker here is dissatisfied with his pay working Ford's production line there are few alternatives.)

The "middle class" so called "race to the bottom" has been accelerated by concentration of big business and international capabilities to find inexpensive product and labor.

You guys really think opening up China in the late 1970's to early 1980's was all about helping domestic production labor? You guys really think NAFTA helped what was left of it?

We have little economic evidence that the middle class crunch was due to moving to a fiat money system and all the evidence in the world (literally) that modern business modeling is all about consolidation of wealth and influence over governance at the direct expense of a "middle class."

It is called "monopsony power" over a labor market, the classic example is a coal company's impact to a small town. When a large company can become the sole purchaser of labor in a smaller community they have the capability to set wages below the production of their workers in relation to time. As in a trend over the longer period that company can suppress wages below the same inflation curve we all experience. It was not inflation, it was "vulture capitalism." If enough people complain or something happens to the need for coal the company goes elsewhere and the local economy is destroyed.

This is a realized truth of energy production, manufacturing of everything from clothing and mattresses (examples) up to electronics and appliances up to automotive and transpiration, and everything in between.

We see it everywhere.

Walmart's impact to a smaller community, tech giants like Amazon Apple and Google, at one point even major Silicon Valley firms agreed to not compete with each other and the result was suppressing wages in that labor market.

That is what killed the Middle Class from the post WWII point of view. Wealth exploded, but not for everyone, and the increasing gap between the top and everyone else is the real reason why both parents work and anyone not college educated (or at least skilled in a trade) ends up with very poor outlooks.

BTW, in the top 2 income quintiles we do see more at home moms or dads because they can afford that conclusion, both working becomes a choice.

For everyone else... everyone works or there is less ability to buy what is in the standard basket of goods and services.

 

[Good4Nothin]

The taxpayer does not really "lose" even though when everything goes south it ends up being the government to bail these **** shows out. Then again it is the government that is the only entity standing that can deal with such aggregate demand faults usually resulting from... wait for it... their own stupidity with legislation causing bubble and pop economics.

First of all, my OP was only intended as a very brief introduction. But thank you for filling in details.

But how can you say the government does the bailing out, not the taxpayer? All the government's money comes from taxpayers.

 

[Good4Nothin]

the taxpayer absolutely does lose by having housing values drop if he is an owner, putting many underwater, inflation by creating more money and by adding to the national debt due to the bailout.

also to answer an earlier question, fractional reserves are allowed, simply , so a bank can lend more money.

But if fractional reserves were not allowed, we wouldn't need the Fed. Wouldn't everyone, except the banks, be a lot better off?

 

[Good4Nothin]

i'm not talking about hyperinflation, inflation has been occurring since we went off of the gold standard on a regular basis and gets worse as they create more and more fiat money. that is partially why families now need 2 people working to make ends meet than just one like in the 70's. it's been a slow burn. that is why they can get away with it. they can create wealth for themselves while the price of milk goes up to $5 a gallon for normal people, but wages lag behind.

I have no idea what the answer to that is.. it might actually be to redistribute the wealth. who knows. If I knew, I ought to run the fed

and ok its not the entire national debt, but it DID put a lot of homeowners underwater.

Yes, inflation robs the average American. And we have no idea how bad inflation will get thanks to infinite QE.

 

[Good4Nothin]

Another question I have, and I hope someone knows the answer -- the Fed injects reserves into banks by buying assets from them, as far as I understand it. Those reserves are intended to be used by the banks for lending to businesses and individuals.

Ok, how do we know that ALL that money is either left sitting in the banks OR loaned out? How do we know that NONE of that money goes to the bank executives as bonuses?

I think that is a very important question. Because if nothing prevents them from taking bonuses out of that reserve money, then we can see a tremendous motivation for theft.

 

[Hypothetical]

But if fractional reserves were not allowed, we wouldn't need the Fed. Wouldn't everyone, except the banks, be a lot better off?

well the GDP would probably shrink because business needs capital.. would we be better off in the long run? no idea.

 

[Hypothetical]

Inflation was happening anyway, just for different reasons.

And as for why families need 2 people working to "make ends meet" that is because growth in "real wages" accounting for inflation is out of sync with overall economic productivity gains over the same time period. Meaning wealth collection at the top never "trickled down" to the lower 3 income quintiles. This is readily available when looking at wealth concentration over the 5 income quintiles (especially the top percent of the highest income quintile) where the bottom 3 are largely flat lines. And that goes back to before the 1970's but the gap started to become more pronounced around the 1980's.

The reason is everything from labor market globalization, to declines in private sector unions, to globalization of products and services, to too few employers here competing for higher levels of workers needing income (i.e. if a worker here is dissatisfied with his pay working Ford's production line there are few alternatives.)

The "middle class" so called "race to the bottom" has been accelerated by concentration of big business and international capabilities to find inexpensive product and labor.

You guys really think opening up China in the late 1970's to early 1980's was all about helping domestic production labor? You guys really think NAFTA helped what was left of it?

We have little economic evidence that the middle class crunch was due to moving to a fiat money system and all the evidence in the world (literally) that modern business modeling is all about consolidation of wealth and influence over governance at the direct expense of a "middle class."

It is called "monopsony power" over a labor market, the classic example is a coal company's impact to a small town. When a large company can become the sole purchaser of labor in a smaller community they have the capability to set wages below the production of their workers in relation to time. As in a trend over the longer period that company can suppress wages below the same inflation curve we all experience. It was not inflation, it was "vulture capitalism." If enough people complain or something happens to the need for coal the company goes elsewhere and the local economy is destroyed.

This is a realized truth of energy production, manufacturing of everything from clothing and mattresses (examples) up to electronics and appliances up to automotive and transpiration, and everything in between.

We see it everywhere.

Walmart's impact to a smaller community, tech giants like Amazon Apple and Google, at one point even major Silicon Valley firms agreed to not compete with each other and the result was suppressing wages in that labor market.

That is what killed the Middle Class from the post WWII point of view. Wealth exploded, but not for everyone, and the increasing gap between the top and everyone else is the real reason why both parents work and anyone not college educated (or at least skilled in a trade) ends up with very poor outlooks.

BTW, in the top 2 income quintiles we do see more at home moms or dads because they can afford that conclusion, both working becomes a choice.

For everyone else... everyone works or there is less ability to buy what is in the standard basket of goods and services.

i agree, there are other reasons... it's just that fiat money tends to inflate over time.

so, what is your solution?

 

[OrphanSlug]

First of all, my OP was only intended as a very brief introduction. But thank you for filling in details.

But how can you say the government does the bailing out, not the taxpayer? All the government's money comes from taxpayers.

Your questions are rooted in dangerously old school thinking of economics, monetary systems, and how the government fits into all this.

It may be something difficult for you to accept but not all of the "government's money" comes from the taxpayers, even though it is very accurate to say that revenues in terms of accounting are linked to taxes.

The issue boils down to your interpretation of a nation's currency under fiat money systems. Since most modern economies are fiat the currency is only backed by faith in that government and that it competes with one another in the "international basket of currencies," there never is a promise to convert that currency to some fixed value in gold or even some other nation's currency (for the most part.) For the former all you can do with currency is *buy* gold, but that is a private transaction having nothing to do with a nation determining that conversion day by day. The market determines that. And the latter moves every single day as a matter of market determination of any one nation's currency "value" in comparison to another (all of them really) because they compete.

It is a question of logical understanding of sequences in terms of what the government does.

In old school terms the logical chain of events is government taxes then government spends, because in the gold standard days the only way around caps was forced reduction in that conversion rate (more dollars, same level of gold held, something along those lines... or, rely on issued debt.)

In fiat money systems the logical sequence is *reversed.* The government spends (or lends out) the currency into the economy before the taxpayers can give some of it back in the form of taxes. And all of this is a means to deal with a nation's economic aggregate demand. Debt is not even issued for the same reason even though in accounting terms it has a similar result.

Before you ask... no, sigh, we cannot eliminate taxes entirely as that would mean a huge increase in aggregate demand absent economic reason (i.e. what can cause inflation.) Taxes drives currency and if we eliminate taxes we put pressure on the main driver for its use in the first place.

Look at this as a pressure cooker valve for dealing with reason to use currency against a nation's aggregate demand.

If you really observe federal government outlays in spending to intake from tax revenues as percentages of GDP, usually but with a few exceptions it is spending that is higher. Usually a gap of something around 3% but does fluctuate, what that means to the economy (as in GDP math) is roughly 3% of the economy is that net injection. You reduce that to no taxes and all of a sudden that is something more like 21% injection into the economy and that would cause an economic fault.

Ideally the best way to look at taxes is a counter-cyclical valve for aggregate demand. In good times you actually raise taxes and reduce spending to reduce deficit pressure and rein in bubble economics (higher than sustainable aggregate demand on a trend line.) In bad times you lower taxes and increase spending, exploding the deficit of course but to rein in the consequences of when that bubble pops and kills too much of the economy.

It is always about stabilization of aggregate demand, said another way reducing the amplification of the economic cycle. The high is not so high as to encourage foolishness, and the low is not so catastrophic and painful for everyone.

*What* the government spends on, or who they decide to bailout, is another discussion because that is all after the fact. Something discussed because of the economic condition and what is happening to major contributors of it.

You have to let go of gold standard monetary and fiscal policy thinking, that is long since dead and not coming back.

 

[Hypothetical]

Your questions are rooted in dangerously old school thinking of economics, monetary systems, and how the government fits into all this.

It may be something difficult for you to accept but not all of the "government's money" comes from the taxpayers, even though it is very accurate to say that revenues in terms of accounting are linked to taxes.

The issue boils down to your interpretation of a nation's currency under fiat money systems. Since most modern economies are fiat the currency is only backed by faith in that government and that it competes with one another in the "international basket of currencies," there never is a promise to convert that currency to some fixed value in gold or even some other nation's currency (for the most part.) For the former all you can do with currency is *buy* gold, but that is a private transaction having nothing to do with a nation determining that conversion day by day. The market determines that. And the latter moves every single day as a matter of market determination of any one nation's currency "value" in comparison to another (all of them really) because they compete.

It is a question of logical understanding of sequences in terms of what the government does.

In old school terms the logical chain of events is government taxes then government spends, because in the gold standard days the only way around caps was forced reduction in that conversion rate (more dollars, same level of gold held, something along those lines... or, rely on issued debt.)

In fiat money systems the logical sequence is *reversed.* The government spends (or lends out) the currency into the economy before the taxpayers can give some of it back in the form of taxes. And all of this is a means to deal with a nation's economic aggregate demand. Debt is not even issued for the same reason even though in accounting terms it has a similar result.

Before you ask... no, sigh, we cannot eliminate taxes entirely as that would mean a huge increase in aggregate demand absent economic reason (i.e. what can cause inflation.) Taxes drives currency and if we eliminate taxes we put pressure on the main driver for its use in the first place.

Look at this as a pressure cooker valve for dealing with reason to use currency against a nation's aggregate demand.

If you really observe federal government outlays in spending to intake from tax revenues as percentages of GDP, usually but with a few exceptions it is spending that is higher. Usually a gap of something around 3% but does fluctuate, what that means to the economy (as in GDP math) is roughly 3% of the economy is that net injection. You reduce that to no taxes and all of a sudden that is something more like 21% injection into the economy and that would cause an economic fault.

Ideally the best way to look at taxes is a counter-cyclical valve for aggregate demand. In good times you actually raise taxes and reduce spending to reduce deficit pressure and rein in bubble economics (higher than sustainable aggregate demand on a trend line.) In bad times you lower taxes and increase spending, exploding the deficit of course but to rein in the consequences of when that bubble pops and kills too much of the economy.

It is always about stabilization of aggregate demand, said another way reducing the amplification of the economic cycle. The high is not so high as to encourage foolishness, and the low is not so catastrophic and painful for everyone.

*What* the government spends on, or who they decide to bailout, is another discussion because that is all after the fact. Something discussed because of the economic condition and what is happening to major contributors of it.

You have to let go of gold standard monetary and fiscal policy thinking, that is long since dead and not coming back.

not coming back.... until the current paradigm causes the great depression 2.. then it might be rethought after the wealthy bankers and politician frontmen are shown to the guillotine.

eh.. more than likely you are right though, they'll probably try some sort of centralized authoritarian government instead at that point.

throwing the wealth mongers of greed on the guillotine would serve too much righteous justice, more than humanity has ever been able to dole out properly to those who are responsible.

 

[Good4Nothin]

Your questions are rooted in dangerously old school thinking of economics, monetary systems, and how the government fits into all this.

It may be something difficult for you to accept but not all of the "government's money" comes from the taxpayers, even though it is very accurate to say that revenues in terms of accounting are linked to taxes.

The issue boils down to your interpretation of a nation's currency under fiat money systems. Since most modern economies are fiat the currency is only backed by faith in that government and that it competes with one another in the "international basket of currencies," there never is a promise to convert that currency to some fixed value in gold or even some other nation's currency (for the most part.) For the former all you can do with currency is *buy* gold, but that is a private transaction having nothing to do with a nation determining that conversion day by day. The market determines that. And the latter moves every single day as a matter of market determination of any one nation's currency "value" in comparison to another (all of them really) because they compete.

It is a question of logical understanding of sequences in terms of what the government does.

In old school terms the logical chain of events is government taxes then government spends, because in the gold standard days the only way around caps was forced reduction in that conversion rate (more dollars, same level of gold held, something along those lines... or, rely on issued debt.)

In fiat money systems the logical sequence is *reversed.* The government spends (or lends out) the currency into the economy before the taxpayers can give some of it back in the form of taxes. And all of this is a means to deal with a nation's economic aggregate demand. Debt is not even issued for the same reason even though in accounting terms it has a similar result.

Before you ask... no, sigh, we cannot eliminate taxes entirely as that would mean a huge increase in aggregate demand absent economic reason (i.e. what can cause inflation.) Taxes drives currency and if we eliminate taxes we put pressure on the main driver for its use in the first place.

Look at this as a pressure cooker valve for dealing with reason to use currency against a nation's aggregate demand.

If you really observe federal government outlays in spending to intake from tax revenues as percentages of GDP, usually but with a few exceptions it is spending that is higher. Usually a gap of something around 3% but does fluctuate, what that means to the economy (as in GDP math) is roughly 3% of the economy is that net injection. You reduce that to no taxes and all of a sudden that is something more like 21% injection into the economy and that would cause an economic fault.

Ideally the best way to look at taxes is a counter-cyclical valve for aggregate demand. In good times you actually raise taxes and reduce spending to reduce deficit pressure and rein in bubble economics (higher than sustainable aggregate demand on a trend line.) In bad times you lower taxes and increase spending, exploding the deficit of course but to rein in the consequences of when that bubble pops and kills too much of the economy.

It is always about stabilization of aggregate demand, said another way reducing the amplification of the economic cycle. The high is not so high as to encourage foolishness, and the low is not so catastrophic and painful for everyone.

*What* the government spends on, or who they decide to bailout, is another discussion because that is all after the fact. Something discussed because of the economic condition and what is happening to major contributors of it.

You have to let go of gold standard monetary and fiscal policy thinking, that is long since dead and not coming back.

Ok, all right, I get it. I knew we had fiat money, but your description helped me think about it further. So the government spends regardless of tax revenues, and that's why the debt increases. But they try to keep their spending somehow related to tax revenues.

And I did know that the value of American dollars depend entirely on whether and how much the rest of the world wants them. If we are perceived as having a successful wealth-generating economy, the world wants dollars. Otherwise, it wouldn't.

So it seems to me a fiat currency is vulnerable in a crisis like this. Of course, as long as the rest of the world is worse off than we are, then I guess the dollar survives. But what if?

I personally think, and this may be more of a gut feeling than a logical analysis, that fiat currency is a fragile house of cards, just waiting to collapse. And it is much easier to abuse the system than it was with a gold standard.

However I did read somewhere the reason Nixon had to give up the gold standard. Something about other countries could buy all our gold.

 

[Moonglow]

Glass Steagall was a regulation that prevented investment banks from also being commercial savings banks. It was a good idea because savings banks are federally insured, and investment banks can engage in risky gambling. It would not be fair to the taxpayers if we had to pay for a bank's bad bets.

However, Glass Steagall was repealed during the Clinton administration. There was some reason why banks thought they needed it repealed and they convinced congress. And this was great for the banks, because without Glass Steagall they couldn't lose, only win. The taxpayers could lose, but who cares about them.

Around 2008 banks had made some very bad bets, investing in subprime mortgages. Real estate prices were greatly inflated, so if a home buyer defaulted on a loan the actual value of the property could be half of the borrowed amount. And these mortgages had been mashed up and disguised within complex derivatives. Kind of like when you have to give your dog some bad tasting medicine and you mash it up and mix it with something he likes.

The derivatives became known as toxic assets, and they were all over the place. One thing the Fed can do is buy assets from banks. So it bought tons of those toxic assets (HOW can something that is toxic be considered an ASSET??), to help the banks. After all, we don't want banks to have a hard time. And its the taxpayer who pays, and who cares about them.

But the Fed is also allowed to create money. So it can "buy" assets from banks without actually paying for them. And this creates money, because the banks hand over the assets and their reserves magically increase.

Does this seem accurate so far?

The Savings and Loan crisis in the later 1980's should have proved to the govt. that bankers are a risk not worth taking. That little poor investment moment cost US taxpayer only 4 trillion.

 

[Good4Nothin]

The Savings and Loan crisis in the later 1980's should have proved to the govt. that bankers are a risk not worth taking. That little poor investment moment cost US taxpayer only 4 trillion.

Yes I know. Our government has its head up its ass.