Monday, December 12, 2011

Conspiracy theory

Heard about the OMG $29 trillion dollar Fed bailout of the U.S. banks? Yes? Congratulations... you've been taken in by yet another conspiracy theory!

The reality is that the Federal Reserve never had $29T outstanding in loans to the banks. During the peak crisis period when the banks could no longer raise money on the open markup due to a complete lockup of equity markets, the peak liquidity lending was about $1.5 trillion, or roughly 6% of outstanding corporate and household debt. The current balance, BTW, is $0 -- that's how much the banks owe the Fed right now, because they repaid everything they were loaned once equity markets unfroze.

Furthermore, this is sort of the purpose of the Federal Reserve, the whole reason it was created -- to provide liquidity by trading cash for long-term assets when there's a bank run. Which there was. The failure of the Federal Reserve to do this job during 1929-1932 is what caused the collapse of over half of the banks in the United States and massive deflation that resulted in over 30% unemployment.

In short, the conspiracy theorists find a conspiracy in the Fed doing its job. Which is just whack. The whole point of the Federal Reserve is to loan money to banks in exchange for long-term assets when the banks need short term cash, otherwise there's no reason to have it. Blasting the Fed for doing what it's supposed to do is either dishonest, idiotic... or both.

-- Badtux the Monetary Penguin


  1. I am sure it stems from not understanding what the Fed does or how it does what it does. I don't know if it helps or hurts that the media simplifies things so much when they talk about the Fed. I will just say that the whole banking system with abstractions like a fiat currency and money supply that includes demand deposits etc is confusing to even smart people. It is also human nature to fear what one does not understand.

  2. Well, it doesn't help that bankers deliberately try to obfuscate what it is banks do. What banks do, fundamentally, is borrow short and lend long. They're borrowing either from you (your "deposits" in the bank, which are actually short-term loans to the bank) or from money markets, or from the Fed if they have long assets (such as car loans) but need cash *now* because the people they borrowed short from (i.e., you and me) want our money back so we can stuff it under mattresses in panic.

    If ordinary people understood that their "deposits" in a bank were actually loans to the bank (why else would the bank pay interest on it? Charity?), they would understand implicitly why a bank needed another short-term facility for those periods where people decided to pull their money out of banks. If banks borrow short and lend long, how *else* are they going to get the money to pay one group of short-term lenders, if not from another short-term lender of last resort willing to accept the loans in their portfolio as backing for short-term loans?

    On the other hand, would ordinary people put their money in banks if they understood that they're actually loaning their money to the bank, and that the money they "deposited" is actually being turned around and loaned long at a higher interest rate rather than sitting in a giant bank vault somewhere? Banks are scared that ordinary people *wouldn't* keep their money in banks if they knew the truth on more than an intellectual basis. Thus the word "deposit" to describe the short-term loans you make to a bank, which is probably one of the earliest uses of propaganda techniques known. Because without this mechanism, there is no capitalism, and without capitalism, there is not most of the wealth we have around us today -- if we drove cars they'd be Trabants, we wouldn't have computers and the Internet (even tho the Internet took government participation to build, it was buildable only because capitalism had created the computer parts to build it with), and so forth.

    Which is why the notion that I'm anti-capitalist is silly, BTW. What I am, is someone who views capitalism as a *tool*, not as a religion to worship. Where it works, great -- I love my new Jeep :). Where it doesn't work -- like in paying for health care -- time for a single-payer government system there, yo. It's all about pragmatism and what works, in the end, with me. Sorta conservative, in the old sense of the word before the batshit crazies hijacked the word, in other words.

    - Badtux the Capitalist Penguin

  3. Ah yes. What many fail to understand is that if you have a good social safety net, regulations to prevent destruction of the environment and maybe some anti-trust sorts of regulations, you can actually end up with markets that are much more free than they would be otherwise. I believe that the Scandinavian countries tend to have both better social safety nets *and* markets that are more free than ours here in the USA. Yes, mixed economies are the way to go imho.

  4. "What I am, is someone who views capitalism as a *tool*, not as a religion to worship." - BT

    Amen, bro! Oh wait, maybe I should rephrase that...

  5. 'Tux, does your argument negate the argument for nationalizing the Fed? I don't think it does (but I've erred on the side of stupidity before).

  6. Phil, the Fed is what I call a "pseudo-nationalized" central bank. That is, it was set up the way it's set up for a reason -- to add a lot of checks and balances to prevent going Weimar while also preventing bank collapses. That didn't quite work in 1929-1934 due to Republican appointees to the Fed not allowing it to work, but (shrug). What can you do?

    In short, I think the Fed is set up correctly at the current time. It's done exactly what it's supposed to do during the course of this crisis, and there's a good reason why it has *not* done certain other things during this crisis that others have urged it to do. So yes, I'm saying "leave the Fed alone!" But that's just the conservative in me, who doesn't want change just for the sake of change, only when it's necessary...

    - Badtux the Traditional Conservative Penguin


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