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The fed is not injecting deposits into banks, its buying preferred shares. This doesn't change their reserves. Rather it makes the banks solvent again. It should increase the amount banks are willing to lend though as they will have more free capital. Its not going to return to what we were seeing a few years ago tough.
You said it here... exactly what I meant... free up liquidity... allow banks to continue to lend. Therefore, contributing to the money multiplier. Of course it's not going to be as free flying as yesteryears... but, once the foreign capital (US dollars are still exiting the country) comes back... we'll see pretty heavy credit expansion.
As long as we continue to have a trade deficit, credit will be available in some shape or form. Foreigners currently aren't as gun hoe in putting it back into our financial institutions... but if the central banks and governments shore up the bank finances... sooner or later the returns these banks offer will be very attractive to foreign US dollars (vs. treasuries).
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Stopping inflation is just as easy as starting it. You simply reduce credit and/or the money supply. There is also the issue of the velocity of the money supply, right now...its seems to be declining. But its not easy to measure or control.
Not so easy... a rapid reduction of credit... like we are facing now results in a heavy contraction of the market (unemployment, businesses closing, etc.)... From what we are seeing now, central governments rather debase the value of the currency rather then face retaliation from its' constituents (corporations, the wealthy, business owners, and lastly the masses).
The main utility the Fed and other central banks use to reel in the Money Supply is with interest rates. They can't just go out and take people's money (at least not at the moment). Oh, and also by raising taxes... but that's not an easy thing to pass.
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Anyhow, the only way the FED would be able to inflate is by totally annihilating the dollar. Nothing being purposed would do this though. The FED is not going to be able to inflate after one largest global expansion of credit in history. Only after everything unwinds would inflation be able to show its head in a major way.
Agree, that's why I said in 3-5 years... it'll be the Revenge of the actions currently being set in place. They need to fight household debt... so they don't have to continue feeding the endless hunger of the beast (banks/financial institutions). Without addressing households... more capital is going to be pumped into the system than necessary.
Meanwhile, wages will still be stagnant... and debt service would still be difficult for most households. In terms of spending tax dollars... the most bang for the buck would be to address the household sector.
I think they are stalling major actions (besides "voluntary" debt reductions) with the household sector because currently, in the most part it's a sub-prime, alt-a issue (ie, the poor/middle/semi upper middle class issue). Once the option ARMs starting hitting in force... and the property values and wallets of the more wealthy are being hit, then I think the government would address more seriously the household sector.
It's sad but plainly obvious. The rich and wealthy get better help and "welfare" than the middle/poor. Look at the current fires in Porter Ranch, and last year in South OC... reaction times were fast, and the shelter facilities were nicer. Then, you take the same look at disasters that hit Katrina, or Galvenston, TX? and you see slower reaction times, negligence, apathy... etc.
It's sad to say... but this is how the world works.... The rich/wealthy will get the help once THEIR properties and assets fall as hard as those in the middle/poorer areas. There's politics at work... not just economics.
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The rest of the world does not care about what Americans prefer. Americans are going to have to learn the hard way that they aren't the center of the universe.
The FED nor the government will be able to stop the unwinding, at best they can keep the system from a complete collapse.
Anyhow, once the intellectuals start to leave the country it will slowly collapse.
The problem isn't just American... it's the debtor nations (mostly the developed nations) vs. the developing nations (creditors).
You said it here... exactly what I meant... free up liquidity... allow banks to continue to lend. Therefore, contributing to the money multiplier. Of course it's not going to be as free flying as yesteryears... but, once the foreign capital (US dollars are still exiting the country) comes back... we'll see pretty heavy credit expansion.
"Freeing up liquidity" is not going to cause inflation as lending is still going to contract greatly from the peak of the credit bubble.
As far as US dollars coming back. There are multiple situations that can occur, one of which is that they don't come back much at all. This issue causing inflation is in no means guaranteed or even likely.
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Originally Posted by chuck22b
The main utility the Fed and other central banks use to reel in the Money Supply is with interest rates. They can't just go out and take people's money (at least not at the moment). Oh, and also by raising taxes... but that's not an easy thing to pass.
You have this all backwards. The only interest rate that the FED controls is the discount rate. All the important rates are determined by the market the FED tries to change these rates (most notably the FED funds rate) by changing the money supply. So, it is not the case that the FED "reals in the money supply" with interest rates.
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Originally Posted by chuck22b
I think they are stalling major actions (besides "voluntary" debt reductions) with the household sector because currently, in the most part it's a sub-prime, alt-a issue (ie, the poor/middle/semi upper middle class issue). Once the option ARMs starting hitting in force... and the property values and wallets of the more wealthy are being hit, then I think the government would address more seriously the household sector.
You seem to think the government can solve anything it wants to, but how exactly is the government going to solve household debt? Inflation isn't a real option, while helping some it will hurt others. Banks aren't particularly interested in being paid back with inflated dollars. High inflation would just cause another banking crisis, much like it did in the savings and loans crisis.
The government can't print magic money and hand it out to households, any action taken by the government to correct household debt will have dramatic consequences.
There is really only one solution for households. They need to deleverage.
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Originally Posted by chuck22b
It's sad but plainly obvious. The rich and wealthy get better help and "welfare" than the middle/poor. Look at the current fires in Porter Ranch, and last year in South OC... reaction times were fast, and the shelter facilities were nicer. Then, you take the same look at disasters that hit Katrina, or Galvenston, TX? and you see slower reaction times, negligence, apathy... etc.
Comparing the fires in Porter Ranch to Katrina and Galvenston is just plain silly. The events aren't even comparable.
You have this all backwards. The only interest rate that the FED controls is the discount rate. All the important rates are determined by the market the FED tries to change these rates (most notably the FED funds rate) by changing the money supply. So, it is not the case that the FED "reals in the money supply" with interest rates.
They sell treasuries and notes to reel in the money supply. Which ultimately affects rates. That is also one of the major ways China has essentially been able to artificially keep their currency low by propping up the value of the dollar (reducing the dollar money supply by buying tons of treasuries).
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You seem to think the government can solve anything it wants to, but how exactly is the government going to solve household debt? Inflation isn't a real option, while helping some it will hurt others. Banks aren't particularly interested in being paid back with inflated dollars. High inflation would just cause another banking crisis, much like it did in the savings and loans crisis.
The government can't print magic money and hand it out to households, any action taken by the government to correct household debt will have dramatic consequences. What dramatic consequences? They are doing the same thing with banks (eliminating/taking on their obligations/debts)? Why aren't people outraged about that? or what are the "Dramatic" consequences of that?
As a result savers would have thinning value of their savings (the Dollar wouldn't rise as fast as it has been), the responsible get slapped for being responsible, and those who don't directly benefit from bank bailouts (low, middle, and none business owners) get absolutely hoodwinked and will continue to default.
There is really only one solution for households. They need to deleverage.
I agree... and many households are... via defaults. But, the government seems to believe that the banks do not have to deleverage by filling in and buying up bank/institution's bad debt. I know the reasoning behind it, but in theory they can do the exact same thing for the household sector and buy off/pay down household debt in exchange for household EQUITY (the exact same thing they are doing now with banks - preferred shares).
Ultimately, this would be far more effective than shoring up bank balance sheets since they aren't addressing the root of the bank's problems (household defaults). As far as I can tell, the central bank's current actions do nothing to solve the problem but trade bad debt for tax payer capital. This will allow the economy to somewhat move... but ultimately the level of defaults will still cause a deflationary environment/contraction.
I'm more in the camp that we should address the problem and reduce the amount of capital demanded from the tax payers (we should use the least tax payer dollars to solve the problem). If we address household debt that would be a better approach than continuously draining tax payers in filling an undying pit (banks/institutions).
I KNOW the current environment is deflationary and that there is a more rapid fall in the money supply than what the central banks have been putting in. I've stated countless times in the past that I agree with you on this. But, in a few years from now... all those "dollars"/capital being poured into the banking institutions will eventually come back to haunt us. That, IMO, will be in the form of heavy inflation.
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Comparing the fires in Porter Ranch to Katrina and Galvenston is just plain silly. The events aren't even comparable.
There are other events that are smaller in scale... but the point, as many can see for themselves, is that the government mainly works for the wealthy/rich.... not as much for the people (masses).
That is why I believe that there will be more government action addressing the household sector when the Option ARMs start resetting enforce. When Beverly Hills, Newport Beach, NY, Manhattan drops 40+ percent (as they very will should considering rents vs. house prices), that is when the government will start taking household debt seriously. At that point we will really see who runs our government.
They sell treasuries and notes to reel in the money supply. Which ultimately affects rates....
Which is again the opposite of what you stated. The change in the money supply causes the change in the rates not the other way around.
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Originally Posted by chuck22b
But, the government seems to believe that the banks do not have to deleverage by filling in and buying up bank/institution's bad debt.
I would really doubt that anybody that matters in the government thinks this. The point of the current actions aren't to prevent the banks from deleveraging, but rather to allow an orderly collapse of some institutions and an orderly deleveraging of others. In fact major part of the deleveraging process is done, all the major broker dealers are gone or have filed to become banks (And hence, must dramatically deleverage). This is what essentially caused the current wave of the credit crisis, essentially the most leveraged part of the financial system collapsed.
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Originally Posted by chuck22b
If we address household debt that would be a better approach than continuously draining tax payers in filling an undying pit (banks/institutions).
How do you address household debt? Do you pay off everyone's credit cards and HELOC? There is no way to do this without massive side effects. Secondly, it is America's addiction to credit that got us into this mess in the first place so even if you could find a way to sensibly do this it would be ripe with moral hazard. The events would just repeat themselves.
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Originally Posted by chuck22b
But, in a few years from now... all those "dollars"/capital being poured into the banking institutions will eventually come back to haunt us. That, IMO, will be in the form of heavy inflation.
This didn't happen during the depression why would it happen now? It didn't happen in Japan either. Its not in any sense clear what is going to happen after the everyone unwinds. I see little point in even speculating about it because, because there are far too many variables that are unknown.
Rapid inflation will cause another financial crisis though. So if it does happen it could put the nail in the coffin.
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Originally Posted by chuck22b
That is why I believe that there will be more government action addressing the household sector when the Option ARMs start resetting enforce. When Beverly Hills, Newport Beach, NY, Manhattan drops 40+ percent (as they very will should considering rents vs. house prices), that is when the government will start taking household debt seriously. At that point we will really see who runs our government.
You have an odd idea what the wealthy do. The wealthy weren't out getting Option ARMS. That was middle-class trying to pretend they were wealthy. Most wealthy folks will buy their house with cash. Of course, they will still lose money if it declines but they are losing far more in the financial markets!
There is nothing you can do about the Option ARMs, nothing. The people that took out these can't even began to afford the payment once the negative amortizing period is over. Not only that the majority of people that took them out were speculating in the first place. They had no plans to stay in the property. Regardless, the government would have to pay of around 50% of the loan in these cases. That would be wildly unpopular with the public....
Which is again the opposite of what you stated. The change in the money supply causes the change in the rates not the other way around.
In essence they control interest rates by controlling the money supply. Yes, to be technical they don't directly control interest rates... but, they do control the money supply by through open market transactions. Anyhow, your just being technical. I believe you and most people already know what I meant by them raising interest rates to control/reel in the money supply.
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I would really doubt that anybody that matters in the government thinks this. The point of the current actions aren't to prevent the banks from deleveraging, but rather to allow an orderly collapse of some institutions and an orderly deleveraging of others. In fact major part of the deleveraging process is done, all the major broker dealers are gone or have filed to become banks (And hence, must dramatically deleverage). This is what essentially caused the current wave of the credit crisis, essentially the most leveraged part of the financial system collapsed.
I very well know the reason why they are injecting/pumping capital into banks. I'm not totally against this... But, the reason why banks are forced to deleverage and require tax payer capital is ultimately because of defaults from the household sector. If this issue isn't addressed, IMO, pumping trillions of dollars into banks is a futile task.
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How do you address household debt? Do you pay off everyone's credit cards and HELOC? There is no way to do this without massive side effects. Secondly, it is America's addiction to credit that got us into this mess in the first place so even if you could find a way to sensibly do this it would be ripe with moral hazard. The events would just repeat themselves.
They already have a program in place established by the housing bailout bill from July. The punishment toward the home owners is the loss of equity stake (just like the Fed taking up preferred stock). They just have to make it mandatory for banks that take bailout money to participate in the FHA Hope for Homeowner's program. Voluntary won't cut it... especially since the Fed is taking the bad debt off the banks hands anyhow.
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This didn't happen during the depression why would it happen now? It didn't happen in Japan either. Its not in any sense clear what is going to happen after the everyone unwinds. I see little point in even speculating about it because, because there are far too many variables that are unknown.
Your right... that inflationary conditions might not exist in the future. The point to try to analyze this, and what potentially may happen is to be better prepared if it happens. One can still live with dollar denominations... but one can also hedge against it in case of the heavy inflation scenario.
So it looks like CPI and the money supply has been tracking pretty close with a boost that occurred in the 1970s. What happened then? Did we go off the gold standard? Or was that when we started having a trade deficit?
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You have an odd idea what the wealthy do. The wealthy weren't out getting Option ARMS. That was middle-class trying to pretend they were wealthy. Most wealthy folks will buy their house with cash. Of course, they will still lose money if it declines but they are losing far more in the financial markets!
It's not the wealthy that's the problem. It's the wanna be middle/upper middle folks who took the Option ARMs and moved into traditionally "wealthy" areas. The fall in property values will effect both the wanna bes and the traditionally wealthy. Currently the fall in "wealthy" areas have been minimal... once the wanna bes start defaulting... those areas are going to be severely hurt.
If you look at the New York Fed of 6 month Change in the number of Alt-A ARMS resetting in 12 months... you'll see that a Lot of the nicer areas are primed for some catastrophe in the up coming year.... Malibu, Santa Monica, NY County area, NH, etc. Dynamic Maps of Nonprime Mortgage Conditions in the United States
Anyhow, in a way I'm glad I didn't move to a more "wealthy" area and took on a Jumbo mortgage or way excessive debt. Once the Option ARMs reset... the 100k in monetary dollars lost in a home in the IE or other boonie like city would be chump change compared to the 200k, Half-Million in losses in the higher end homes/areas. Once this happens, I'll re-evaluate my position and whether to move ... but sadly... more than likely the government will intervene at some point to save the more wealthy when they cry foul play and when their blood is spilled.
I believe you and most people already know what I meant by them raising interest rates to control/reel in the money supply.
Sorry, when you say something that is the opposite of reality, I don't know that you meant to say the correct thing.
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Originally Posted by chuck22b
I very well know the reason why they are injecting/pumping capital into banks. I'm not totally against this... But, the reason why banks are forced to deleverage and require tax payer capital is ultimately because of defaults from the household sector.
The problem is far more general that just housing. Its not just mortgage related debt that is problematic its all debt. Credit cards, Auto loans, Student loans etc etc. These all inflated during the last 10 years or so and most all unwind. Mortgages weren't the only debt that was creatively securitized.
You seem to be under the impression that if we just write down some mortgages it would fix the household debt problem but this is far from reality. I would suggest the majority of people that are in trouble with their first mortgage are people that were speculating and are unlikely to stay in the house regardless as it was purchased as a speculative investment. The forms of debt that are killing the average person are things like credit cards, student loans and most importantly home equity loans. But none of these will be dealt with under a mortgage buy back program.
Anyhow, most of the foreclosures are from speculative investors that will default regardless. Just look at yourself, you purchased near the peak yet don't have plans to walk away etc. I would imagine most that weren't speculating are in a similar boat.
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Originally Posted by chuck22b
It's not the wealthy that's the problem. It's the wanna be middle/upper middle folks who took the Option ARMs and moved into traditionally "wealthy" areas. The fall in property values will effect both the wanna bes and the traditionally wealthy.
This didn't happen much. The middle class folks were buying in McMansion communities that tried to mimic the feel of a more wealthy communities. If you haven't noticed most of the architectural features of recent Neo-eclectic homes were taken heavily from Neo-classical mansions. Of course they were watered down, but it gave them a feel of luxury.
The homes in the wealthy communities were too expansive even with creative financing. Not only that, they wouldn't be very welcome in these communities in the first place.
Perhaps, we just have a very different notion of who is or isn't wealthy. Most wealthy communities I know of are off the beaten path and gated with a 24 hour guard. I don't know of a single city that is entirely Wealthy. Most of the people in the cities you are naming are middle-class. The wealthy have a lot more to worry about then a decline in their home value.
Yea I know... we're heavily in debt... The right way is like you said... to get the banks to write it down/off or somehow arrange for the households/debtors to pay. As a result there may be more defaults, unemployment, bankruptcies, etc. etc.
The easy way, is to print money and to increase the money supply. Dilute the dollars... and make the debt become easily payable by diluting the value of the currency.
Of course, what this would do will increasingly make America on sale for creditor nations... AND hurt savers and those who are responsible.
Anyhow... that's what the central banks and governments are doing. I don't think Americans today could take the pain of a deep recession/depression. I think in the most part we prefer a long dragged out limited/diminishing prosperity.
-chuck22b
Isn't the problem with banks writing down the debt, they have to raise a corresponding amount of capital to maintain reserve ratios. And isn't that what the fed is trying to do by injecting capital into the banks and simultaneously going to buy toxic assets - I.E create healthy banks ?
Isn't the problem with banks writing down the debt, they have to raise a corresponding amount of capital to maintain reserve ratios. And isn't that what the fed is trying to do by injecting capital into the banks and simultaneously going to buy toxic assets - I.E create healthy banks ?
Your right, banks are writing things off/down... but, they are now also getting support from tax payers. The thing is, is that the banks that have excessive write-downs should eventually default. But, instead, they are allowed to continue to survive through tax payer funding. They may still be bad banks... but now they are bad banks with federal dollars.
In the most part, I'm ok with what the Fed is doing. I agree with those that believe what the Fed is doing is not inflationary because the environment is actually deflating faster than the Fed is inflating.
But, I'm a bit weary if the Central Banks will have to continue to pour capital into banks that have more bad (continue to have mortgage defaults, and as Humanoid points out, other defaults - Credit cards, student loans, auto loans, etc.) than good.
If these banks are propped up to survive... they may very well be able to ramp up and recreate the same problems again. Credit will eventually flow back into this Country. We still have a trade deficit. These banks can very well re-inflate the money supply/credit expansion.
Humanoid, this period in time is a bit different than during the Great Depression. Back then I believe the US was more industrialized and was exporting more than we imported. Therefore, even after capitalization by the Fed, banks didn't really have anywhere else that fed it more credit.
These days, we have foreigners with excessive dollar reserves and a trade deficit. These dollars can come back as "credit" to fuel another credit expansion... OR... they can be used to buy American Goods and Services. Either/or... dollars coming back into the Country will raise the money supply. So, our future, and whether or not we see an inflationary climate may very well depend on our creditors. The Fed has some control... but we've been giving out dollars for so long... and they will come back to us eventually.
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Anyhow, most of the foreclosures are from speculative investors that will default regardless. Just look at yourself, you purchased near the peak yet don't have plans to walk away etc. I would imagine most that weren't speculating are in a similar boat.
How do you know we don't have plans to walk away? Well, if push comes to shove... many will still walk away. It's called self preservation. If joblessness hits, and savings become depleted... we'll all meet at the soup lines
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Perhaps, we just have a very different notion of who is or isn't wealthy. Most wealthy communities I know of are off the beaten path and gated with a 24 hour guard. I don't know of a single city that is entirely Wealthy. Most of the people in the cities you are naming are middle-class. The wealthy have a lot more to worry about then a decline in their home value.
Yea, just replace what I said above from "wealthy" to upper/middle class. Would that clear things up?
These days, we have foreigners with excessive dollar reserves and a trade deficit. These dollars can come back as "credit" to fuel another credit expansion... OR... they can be used to buy American Goods and Services.
What you are saying makes little sense. The foreign governments etc aren't holding dollars per se they are holding dollar denominated debt. They have already loaned their dollars out how are they going to do it again? How? In order to loan the dollars again they would have to sell the debt, but who exactly is going to buy it? Essentially we would first have to buy off the debt for them to loan it out again....
Everything you are saying is based on the idea that China etc are holding "dollars", but they aren't. China would first have to sell their dollar denominated debt before they could use it to make purchases etc. I wonder who you think is going to buy trillions in US debt...
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Originally Posted by chuck22b
How do you know we don't have plans to walk away? Well, if push comes to shove... many will still walk away. It's called self preservation. If joblessness hits, and savings become depleted... we'll all meet at the soup lines
I believe you said you weren't planning on walking away. I know when push comes to shove even honest that weren't speculating will walk away, but my point was that currently the foreclosures are largely driven by defaults from speculators. About the only thing that would prevent these foreclosures is if the market started to rapidly appreciate again. They simply weren't planning on staying in the home. It wasn't just sleazy flippers either, many average people planned to flip their house within 2-3 years before their payments recast. This is especially the case with option ARMs, there is very little you can do to fix these loans. They are going to default.
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Originally Posted by chuck22b
Yea, just replace what I said above from "wealthy" to upper/middle class. Would that clear things up?
Sure, but the elite or whatever you want to call them don't care about the upper middle-class. I don't necessarily disagree that the government helps what is essentially American aristocracy. What I disagree with is that these people are going to be highly effected by the decline in housing.
Anyhow, nothing will prop up the real estate market. Its too big to manipulate successfully.
What you are saying makes little sense. The foreign governments etc aren't holding dollars per se they are holding dollar denominated debt. They have already loaned their dollars out how are they going to do it again? How? In order to loan the dollars again they would have to sell the debt, but who exactly is going to buy it? Essentially we would first have to buy off the debt for them to loan it out again....
Everything you are saying is based on the idea that China etc are holding "dollars", but they aren't. China would first have to sell their dollar denominated debt before they could use it to make purchases etc. I wonder who you think is going to buy trillions in US debt...
I believe you said you weren't planning on walking away. I know when push comes to shove even honest that weren't speculating will walk away, but my point was that currently the foreclosures are largely driven by defaults from speculators. About the only thing that would prevent these foreclosures is if the market started to rapidly appreciate again. They simply weren't planning on staying in the home. It wasn't just sleazy flippers either, many average people planned to flip their house within 2-3 years before their payments recast. This is especially the case with option ARMs, there is very little you can do to fix these loans. They are going to default.
Sure, but the elite or whatever you want to call them don't care about the upper middle-class. I don't necessarily disagree that the government helps what is essentially American aristocracy. What I disagree with is that these people are going to be highly effected by the decline in housing.
Anyhow, nothing will prop up the real estate market. Its too big to manipulate successfully.
The foreign governments etc aren't holding dollars per se they are holding dollar denominated debt.
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Well, if push comes to shove... many will still walk away. It's called self preservation. If joblessness hits, and savings become depleted... we'll all meet at the soup lines 
