Dont be too quick to judge the 1%

[TimG]

No inflation happens ANY time the monetary based grows faster than the economy. And based on the data on inflation, debt, M3 quantity, there was relative stability prior to Fiat FR, and immediate after we got instability.

Which is something the central bank heads are well aware of an they use interest rates as a tool to ensure that the money supply does not expand faster than the real economy.

No these problems are caused by the ease with which governments can fund themselves with monetary expansion. Governments responded to the new system by doing exactly what you would have expected to do, and exactly what they will continue to do.

Ironically - the solution proposed by your various video links would give even more power to people you claim are incapable of using that power.

The real factor driving deficit spending are the aging population. This places more demands on the social services while the economy slows because older people are not as interested in taking risks.

Those people can only potentially earn dollars that exist in the money supply. And the ammount of oustanding debt exceeds the ammount of dollars available to be earned at any one time.

And the amount if debt outstanding is generally backed by an equal amount of assets which also exceeds the amount of money available at any one time. You are making a mountain out of a molehile.

[TimG]

I question some of the things I saw here, but hopefully someone else with more knowledge can carry on this conversation.

Here are some links to arguments against the gold standard: http://www.wisebread.com/understanding-the-gold-standard

Still, the real problem with a gold standard isn't unsound banks. That would be easy enough fix — a regulator could track the issue of banknotes and audit the gold supplies in the vault. The real problem is that there isn't one, true gold price.

..

Since we're not on the gold standard, those price changes show up as changes in the price of gold. If you're on a gold standard, they don't show up that way. But that doesn't mean that they don't happen. It just means that the price change shows up as change in the value of the currency.

...

Imagine that the value of your money had spiked up by that much! Of course, it'd be great if you had a lot of money. (I expect this is why gold bugs don't tend to worry about this scenario — in fact, with a bunch of gold in their portfolios, they're positively yearning for it.) But what if you didn't? What if you were a businessman who had to sign long-term contracts with customers and vendors? When the value of the money jumps around like that, you're totally screwed. Worse yet, what if you're in debt? If the value of the money spikes up, the cost of making your loan payments spikes up as well. Could you pay your mortgage if it took you a week to earn what you'd earned in a hour a few years ago?

An important point to remember is the 'gold standard' was always a polite fiction that was abandoned whenever politicians found it convenient.

In the depths of the Great Depression, the U.S. took a slightly different path. In 1933, instead of suspending convertibility, the government banned the private ownership of gold, requiring citizens to turn in their gold in exchange for banknotes at the then current gold price of $20.67 per troy ounce. Shortly thereafter the value of the dollar was changed to a new parity of $35 per troy ounce. Convertibility was preserved (although only for foreigners), but at the new parity gold flowed into (rather than out of) the United States.

This is why I see no point in moving back. We need to discuss the real problems which are governments that refuse to live within their means and a regulatory environment that cannot deal with derivatives.

[dre]

Which is something the central bank heads are well aware of an they use interest rates as a tool to ensure that the money supply does not expand faster than the real economy.

Ironically - the solution proposed by your various video links would give even more power to people you claim are incapable of using that power.

The real factor driving deficit spending are the aging population. This places more demands on the social services while the economy slows because older people are not as interested in taking risks.

And the amount if debt outstanding is generally backed by an equal amount of assets which also exceeds the amount of money available at any one time. You are making a mountain out of a molehile.

Ironically - the solution proposed by your various video links would give even more power to people you claim are incapable of using that power.

Government already has all that power.

And I dont even think you watched any of those videos. The author of Money As Debt does mention that since the value of all money is backed by the government itself (through legal tender laws) that the government might as well be the one collecting the interest. Government could potentially fund itself this way instead of taxing incomes, like the government of Colonial Pennsylvania did. Hes right.

But the actual solution hes proposing is to completely privatize credit. Credit would be self issued based on each persons balance of trade, and the governments only role would be to maintain a mainframe electronic system that kept track of that (and in reality credit is self issued even in our current system because the money does not exist until you sign a mortgage contract).

So instead of getting credit by going to a bank and borrowing what is essentially your own money from them at interest, you would simply log into the system and issue yourself whatever credit is available based on your balance of trade, and your reputation as a producer of goods and services.

Everything of real value that the banking system provides in terms of its control of the money supply could done by a piece of computer software that runs on a rigid set of rules. It would know how much money needs to be added or removed from the economy in order to create price stability, because it would track each entities balance of trade in real time.

Private banking and investment banking would still be logical functions of the system, but the government would not backstop these activities.

That solution is worth discussing as a possible option once the current system has run its course and has to be replaced. But Im not endorsing it per say.

Generally I think the next system (and dont kid yourself into thinking there wont be one) should either be totally private and not backed by the government or totally public, instead of the quasi public/private system we have no, where commercial banks make all the profit while the government/taxpayers.

The real factor driving deficit spending are the aging population.

No. Defecit spending took off in the late 70's when the baby boomers were in their 30's. It was essentially flat for 100's of years until the gold window was closed, and the money supply began to explode.

Edited November 18, 2011 by dre

[dre]

Here are some links to arguments against the gold standard: http://www.wisebread.com/understanding-the-gold-standard

An important point to remember is the 'gold standard' was always a polite fiction that was abandoned whenever politicians found it convenient.

This is why I see no point in moving back. We need to discuss the real problems which are governments that refuse to live within their means and a regulatory environment that cannot deal with derivatives.

This is why I see no point in moving back.

I agree. Im not in favor of going back to the gold standard either. But we DO need some kind of perpetual money, and we need a light weight low cost system of making sure that the ammount of money in the money supply is proportionate to the ammount of goods and services in the marketplace. If we have that than the only way government and spending can grow is if the economy grows, and price stability is germane to the system.

[TimG]

And I dont even think you watched any of those videos. The author of Money As Debt does mention that since the value of all money is backed by the government itself (through legal tender laws) that the government might as well be the one collecting the interest.

Why stop there? Why not have the government run the factories and the farms so the government can profit from those businesses too?

You seem to think that the profits made on the spread between what borrowers pay and what savers receive is some sort of illigitimate way to make a profit. It is nonsense. Our society is filled with middlemen who make a profit by connecting buyers and sellers. That is what walmart and safeway do.

Government could potentially fund itself this way instead of taxing incomes, like the government of Colonial Pennsylvania did. Hes right.

You are basically saying that if you want to buy a home you need to convince some government bureaucrat to give you a mortgage - a bureaucrat with a monopoly that can screw you over because you have no other choice. What you are proposing would be hell on earth. Imagine the DMV with 1000x the power.

So instead of getting credit by going to a bank and borrowing what is essentially your own money from them at interest, you would simply log into the system and issue yourself whatever credit is available based on your balance of trade, and your reputation as a producer of goods and services.

Lovely - now instead of a free market you have a bunch of technocrats deciding who gets money and who does not. A system with no competition between lenders is recipe for stagnation and corruption.

Generally I think the next system (and dont kid yourself into thinking there wont be one) should either be totally private and not backed by the government or totally public, instead of the quasi public/private system we have no, where commercial banks make all the profit while the government/taxpayers.

Again, you are making stuff up. Commerical banks are no different than any other regulated business that serves a public purpose while making a profit. The governments have messed things up by letting politics rather than common sense drive regulations (i.e. grandstanding about the need to promote 'home ownership' when people first started to notice the problems with the system). But these problems can be fixed.

[TimG]

But we DO need some kind of perpetual money, and we need a light weight low cost system of making sure that the ammount of money in the money supply is proportionate to the ammount of goods and services in the marketplace.

We do have such a system. It is called indepedent central banks with a mandate to control inflation and nothing else.

[dre]

Why stop there? Why not have the government run the factories and the farms so the government can profit from those businesses too?

You seem to think that the profits made on the spread between what borrowers pay and what savers receive is some sort of illigitimate way to make a profit. It is nonsense. Our society is filled with middlemen who make a profit by connecting buyers and sellers. That is what walmart and safeway do.

You are basically saying that if you want to buy a home you need to convince some government bureaucrat to give you a mortgage - a bureaucrat with a monopoly that can screw you over because you have no other choice. What you are proposing would be hell on earth. Imagine the DMV with 1000x the power.

Lovely - now instead of a free market you have a bunch of technocrats deciding who gets money and who does not. A system with no competition between lenders is recipe for stagnation and corruption.

Again, you are making stuff up. Commerical banks are no different than any other regulated business that serves a public purpose while making a profit. The governments have messed things up by letting politics rather than common sense drive regulations (i.e. grandstanding about the need to promote 'home ownership' when people first started to notice the problems with the system). But these problems can be fixed.

Why stop there? Why not have the government run the factories and the farms so the government can profit from those businesses too?

This is just silly. Controlling the money supply and coining and issuing credit already ARE government functions and have been for hundreds of years.

Lovely - now instead of a free market you have a bunch of technocrats deciding who gets money and who does not. A system with no competition between lenders is recipe for stagnation and corruption.

That IS the free market. Credit is based on your real balance of trade and your reputation as a producer. In fact this is exactly how the free market worked. During shortages of gold the market place was empty and people could not trade except with direct barter. So the market produced a private system of self issued credit. People started writing notes to each other that were promises to produce goods and services, and those became money. The butcher would accept credit issued by the baker for a loaf of bread even if he didnt need bread, because he knew that credit had value in the market place based on the reputation of the baker as a dependable bread producer. The market was vibrant and the economy grew.

The current system was actually FORCED on the market by an act of government.

A system with no competition between lenders is recipe for stagnation and corruption.

You would still have private lenders but they would exist in the tertiary market and they wouldnt be able to create new money, and you would still have investment banks. And it would actually create the opposite of stagnation. Reputable producers of goods and services (people with income) would still have access to credit except that now they would not be paying interest on it. This means they have more to invest in making widgets and hiring workers.

Lovely - now instead of a free market you have a bunch of technocrats deciding who gets money and who does not.

This is no different than how credit is dispersed now. The bank tracks your credit scores (reputation) electronically, and the government keeps track of everyones balance of trade. The loan officer looks at those two things, applies a fairly simple formula and from that its determined how much credit you should be issued.

But these problems can be fixed.

Yes Iv seen how we try to fix problems in this system Massive monetary expansion and increased debt, and a never ending cycle of reduced wages and increased prices. Debt so high that you cant make the payments (budget defecit). No problem! Cant make the payments on THIS credit card, go get another one, and use THAT to make the payments. Then when the system crashes dump 16 trillion dollars worth of fresh money into it. And the Kenyesians tell you "Oh its cool! Thats just the business cycle!"... while enemployment goes up, wages go down, and debt continues to skyrocket.

The system wont survive much more of this "fixing", because every time you do it you just make the problem bigger and push it down the road a few years.

Edited November 18, 2011 by dre

[dre]

We do have such a system. It is called indepedent central banks with a mandate to control inflation and nothing else.

I know! Its working really great

http://www.baltimorechronicle.com/2008/images/Williams-CPI.png

BTW... see the third black dot on that graph? Thats when the gold window closed. IMMEDIATELY we had a rapid increase in deflation.

And thats when they did one of your "fixes" THey tried to hide the ensuing inflationary spiral by changing the way they measured inflation In other words they tweaked the CPI to make it show less inflation (by taking out a bunch of items from the basket of goods and services that the cpi is based on). This is very similar the tactics you accuse global warming scientists of using... Just change the model until you like the output!

The blue line on that graph shows what inflation would have been if we didnt change the CPI. And even under the new "extra warm and fuzzy" CPI what you have is a large increase in inflation after 1971.

[TimG]

This is just silly. Controlling the money supply and coining and issuing credit already ARE government functions and have been for hundreds of years.

You are talking about deciding you gets loans and who does not. This is not a government function and should not be,

That IS the free market. Credit is based on your real balance of trade and your reputation as a producer.

Nonsense. You are taking purely subjective measures such as 'your reputation as a producer' and claiming that will be used to determine whether you get credit. The way it is done now is banks make that decision and take the responsibility if they do it wrong. Under your scheme the government would be making that subjective judgement. Attaching the label 'free market' to this scheme is like sticking a sign saying 'horse' on a pig.

The butcher would accept credit issued by the baker for a loaf of bread even if he didnt need bread, because he knew that credit had value in the market place based on the reputation of the baker as a dependable bread producer.

A scheme which has no place in a world where goods are produced and sold globally.

This is no different than how credit is dispersed now. The bank tracks your credit scores (reputation) electronically, and the government keeps track of everyones balance of trade. The loan officer looks at those two things, applies a fairly simple formula and from that its determined how much credit you should be issued.

Balance of trade? What does that mean anyways? More bafflegab? As for the credit scores - they are maintained by competing private organizations and you have competing lenders to go to if one turns you down. Some people with bad credit can't and should not get loans but the competitive nature of the system means people on the border line have choices.

[TimG]

Since people seem to like learning economics by youtube:

Edited November 19, 2011 by TimG

[TimG]

The blue line on that graph shows what inflation would have been if we didnt change the CPI. And even under the new "extra warm and fuzzy" CPI what you have is a large increase in inflation after 1971.

Here the real GDP per capita for the US:

http://www.measuringworth.com/datasets/usgdp/graph.php

Same exponential curve. You keep focusing on one side of the equation.

You have to look at real incomes, and real assets as well.

An increase in debt is no problem if incomes and assets are growing as well.

The bottom line is the problems we have now are entirely cause by government spending.

BTW: The CPI is expected to change over time. It makes no sense to use a CPI from 100 years ago today.

If you want to make the case that there is a better CPI than is being currently used then make it.

But simply using what was used in the past is nonsense and simply shows you do not understand what the CPI is.

Edited November 19, 2011 by TimG

[dre]

Under your scheme the government would be making that subjective judgement. Attaching the label 'free market' to this scheme is like sticking a sign saying 'horse' on a pig.

Its NOT a subjective judgement. Its based on your credit score and your balance of trade. This is exactly what banks do today. And this is EXACTLY how the free market worked.

Nonsense. You are taking purely subjective measures such as 'your reputation as a producer' and claiming that will be used to determine whether you get credit.

Thats not a subjective measure. Its a number based on how much credit you already carry, and how consistant you have been in meeting your credit obligations in the past. And thats ALREADY whats used to determine your credit... NOW... TODAY...

Its you that putting the "horse" sign on the "pig" by claiming that a system where the power of a producer to CHOOSE what he wants to trade his goods and services for is stripped from him, and legal tender laws FORCE him to accept fiat paper money for his goods and services, is a market based solution.

Balance of trade? What does that mean anyways?

Um.... is that a serious question

Balance of trade and reputation are the two measures that banks use to decide if you get a loan or not. Balance of trade is the difference bewteen what you consume and produce. Reputation (credit rating) is the other. A commercial bank calculates your balance of trade normally by looking at all the credit you have already been issued, and it uses your federal tax return to determine your income (usually).

One again theres no subjective call here. You can simply send this information to a bank in an email, and theyll run the numbers and tell you whether your qualify for a loan or not.

A scheme which has no place in a world where goods are produced and sold globally.

Theres nothing about that idea that makes it incompatible with the global economy. Nothing at all.

As for the credit scores - they are maintained by competing private organizations

Thats fine. They do very little besides maintain a credit database and they provide that service for a reasonable fee. As long as they operate in a way thats open and transparent Im fine with keeping them.

As for the credit scores - they are maintained by competing private organizations and you have competing lenders to go to if one turns you down. Some people with bad credit can't and should not get loans but the competitive nature of the system means people on the border line have choices.

Some people with bad credit can't and should not get loans but the competitive nature of the system means people on the border line have choices.

Ahhh yes. Sub prime loans. You would still have those in the system I described, in the tertiary private banking industry. Thats really no different than how borrowers on the "border line" are forced into the tertiary market today.

[TimG]

Its NOT a subjective judgement. Its based on your credit score and your balance of trade. This is exactly what banks do today. And this is EXACTLY how the free market worked.

Then there is no need to change the system. The rational you have given is that you don't like banks making these decisions and you want the government to do it. That is not a free market.

Its you that putting the "horse" sign on the "pig" by claiming that a system where the power of a producer to CHOOSE what he wants to trade his goods and services for is stripped from him, and legal tender laws FORCE him to accept fiat paper money for his goods and services, is a market based solution.

This is more nonsense that you peddle. I negotiate prices in numerous currencies. The only time I am forced to use Canadian dollars is when I file my income taxes.

Balance of trade is the difference bewteen what you consume and produce.

In other words: how much you make vs. how much you spend. Why do you think dressing up basic concepts in bafflegab helps your case?

Theres nothing about that idea that makes it incompatible with the global economy. Nothing at all.

I don't see it.

Ahhh yes. Sub prime loans. You would still have those in the system I described, in the tertiary private banking industry. Thats really no different than how borrowers on the "border line" are forced into the tertiary market today.

The majority of the blame for the subprime loan crises rests with corrupt politicians who wanted to curry votes by 'helping americans buy homes' (mostly democrats). If the politicans had been doing their job they would have put a stop to it in 2003.

In fact, that is exactly what Bush tried to do:

http://www.bucksright.com/bush-proposed-fannie-mae-freddie-mac-supervision-in-2003-1141

[dre]

Here the real GDP per capita for the US:

http://www.measuringworth.com/datasets/usgdp/graph.php

Same exponential curve. You keep focusing on one side of the equation.

You have to look at real incomes, and real assets as well.

An increase in debt is no problem if incomes and assets are growing as well.

The bottom line is the problems we have now are entirely cause by government spending.

BTW: The CPI is expected to change over time. It makes no sense to use a CPI from 100 years ago today.

If you want to make the case that there is a better CPI than is being currently used then make it.

But simply using what was used in the past is nonsense and simply shows you do not understand what the CPI is.

First of all it would be irrelevant if GDP was following a similar curve because the skyrocketing inflation graph I showed you already takes GDP into account. If theres inflation it means the money supply was growing faster than GDP regardless of how GDP is growing.

In any case... GDP has not kept pace at all. Its a pretty straight line.

http://newsimg.bbc.co.uk/media/images/41437000/gif/_41437267_us_gdp_growth_graph416.gif

The CPI is expected to change over time. It makes no sense to use a CPI from 100 years ago today.

If you want to make the case that there is a better CPI than is being currently used then make it.

But simply using what was used in the past is nonsense and simply shows you do not understand what the CPI is.

The problem is the things they removed from that basket when they changed it were energy and food. And these are two of the things people need the most, and spend the most on.

http://www.cso.gov.tt/tt-today/images/Graphs/Food-inflation-rates-1998-2008-lg.jpg

Food inflation is at around 25%. Energy inflation is at about 8%.

Put energy and food back into the core CPI and youll realize we already have a fairly serious problem with inflation. And thats exactly why people feel squeezed and the middle class is disappearing.

[TimG]

The problem is the things they removed from that basket when they changed it were energy and food. And these are two of the things people need the most, and spend the most on.

The stats say people are spending less of their income on food than they did 30 years ago.

http://www.ers.usda.gov/AmberWaves/September08/Findings/PercentofIncome.htm

And the CPI does include food and energy. So your claims are nonsense:

Here is the BOC of website:

http://www.bankofcanada.ca/about/backgrounders/consumer-price-index/

The Bank of Canada monitors changes in the CPI in deciding when to adjust its policy interest rate to keep inflation on target. To assess the trend of inflation, the Bank finds it very helpful to monitor “core” inflation measures, including the CPIX, which excludes eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation, and tobacco products), as well as the effect of changes in indirect taxes on the remaining components. The Bank monitors core inflation to help achieve the total CPI inflation target, not as a replacement for it.

Edited November 19, 2011 by TimG

[dre]

Then there is no need to change the system. The rational you have given is that you don't like banks making these decisions and you want the government to do it. That is not a free market.

This is more nonsense that you peddle. I negotiate prices in numerous currencies. The only time I am forced to use Canadian dollars is when I file my income taxes.

In other words: how much you make vs. how much you spend. Why do you think dressing up basic concepts in bafflegab helps your case?

I don't see it.

The majority of the blame for the subprime loan crises rests with corrupt politicians who wanted to curry votes by 'helping americans buy homes' (mostly democrats). If the politicans had been doing their job they would have put a stop to it in 2003.

In fact, that is exactly what Bush tried to do:

http://www.bucksright.com/bush-proposed-fannie-mae-freddie-mac-supervision-in-2003-1141

This is more nonsense that you peddle. I negotiate prices in numerous currencies. The only time I am forced to use Canadian dollars is when I file my income taxes.

Oh yeah? Open up a business in Canada selling products and services, and refuse to accept Canadian currency then! Send me a post card from jail

The majority of the blame for the subprime loan crises rests with corrupt politicians who wanted to curry votes by 'helping americans buy homes' (mostly democrats). If the politicans had been doing their job they would have put a stop to it in 2003.

This has already been debunked by pretty much every economist on earth, Including the Federal Reserve you have been defending.

The VAST majority of sub prime loans were made by these 25 companies... Only one of them is a bank the rest of them are mortgage companies or realestate trusts. They arent subject to FDIC regulations because they dont accept deposits, and they arent subject to the mythical CRA either.

They did exactly what the felt like doing. Origionating these mortgages and having investment banks hide them in the junior traches of complexed ABS's was a great way to make money while housing prices were increasing. Nobody needed to pressure them at all.

http://www.businessweek.com/bwdaily/dnflash/content/may2009/db2009056_672318.htm

[GostHacked]

Since people seem to like learning economics by youtube:

Not to freakin bad at all!!

Here is another.

http://www.youtube.com/watch?v=2I0QN-FYkpw

[blueblood]

The stats say people are spending less of their income on food than they did 30 years ago.

http://www.ers.usda.gov/AmberWaves/September08/Findings/PercentofIncome.htm

And the CPI does include food and energy. So your claims are nonsense:

Here is the BOC of website:

http://www.bankofcanada.ca/about/backgrounders/consumer-price-index/

I have a question. Wouldn't it be more efficient for central bankers to set interest rates based on market values instead of arbitrarily low to try and inflate one's self out of a recession?

Take now these days, banks had lent out too much money because of low interest rates and now are trying to recoup those loans, why not let the rates rise, let the banks build up reserves to the point that they need to make loans to get their income stream back going.

Yes, I know its harsh and things will slow down, but how else do you get out of this without creating a further bubble down the road? It was tried in 1920-21 and in the early 80s.

I think had there been higher interest rates in 2001-2002, the recession would have been a little worse, but debts would have been paid and the market would have regulated the housing market by having interest payments out of the affordable range of people who shouldn't have bought houses in the first place.

[TimG]

I have a question. Wouldn't it be more efficient for central bankers to set interest rates based on market values instead of arbitrarily low to try and inflate one's self out of a recession?

That is the Hayak vs. Keynes debate - the youtube video above is a good intro to the two schools of economic thought.

Take now these days, banks had lent out too much money because of low interest rates and now are trying to recoup those loans, why not let the rates rise, let the banks build up reserves to the point that they need to make loans to get their income stream back going.

Banks make less money when interest rates rise because there are fewer borrowers. Banks only make money on the spread so they cannot really make more money if interest rates are higher.

Yes, I know its harsh and things will slow down, but how else do you get out of this without creating a further bubble down the road? It was tried in 1920-21 and in the early 80s.

The real estate bust in the US, the government meltdown in the EU and the coming bust in China have all been driven by interest rates that were too low as governments sought quick rewards instead of building the economy more slowly.

The elephant in the room is China who sucked trillions out of the developed economies through a low currency policy. If the currency markets were actually free the Chinese yuan would have risen much faster and there would have been less pressure on the US and the EU to inflate their economies to compesate for the jobs lost to China.

[blueblood]

That is the Hayak vs. Keynes debate - the youtube video above is a good intro to the two schools of economic thought.

Banks make less money when interest rates rise because there are fewer borrowers. Banks only make money on the spread so they cannot really make more money if interest rates are higher.

The real estate bust in the US, the government meltdown in the EU and the coming bust in China have all been driven by interest rates that were too low as governments sought quick rewards instead of building the economy more slowly.

The elephant in the room is China who sucked trillions out of the developed economies through a low currency policy. If the currency markets were actually free the Chinese yuan would have risen much faster and there would have been less pressure on the US and the EU to inflate their economies to compesate for the jobs lost to China.

The rising interest rates would encourage savings which should build up reserves for future lending. I agree that there would be fewer borrowers, but there has to be a sweet spot at which there are enough borrowers paying highest possible rates to ensure max recapitalization of banks.

Its been theorized that the low yuan has benefitted the USA consumer by the usa getting rock bottom prices for goods at the expense of more expensive usa labor. I think if the yuan rises, the chinese worker gets more purchasing power and thus goods from said factories should become more expensive, in the short term hurting the usa economy's spending power, and prolonging getting out of the woods.

[dre]

Wouldn't it be more efficient for central bankers to set interest rates based on market values instead of arbitrarily low to try and inflate one's self out of a recession?

Take now these days, banks had lent out too much money because of low interest rates and now are trying to recoup those loans, why not let the rates rise, let the banks build up reserves to the point that they need to make loans to get their income stream back going.

Yes, I know its harsh and things will slow down, but how else do you get out of this without creating a further bubble down the road? It was tried in 1920-21 and in the early 80s.

I think had there been higher interest rates in 2001-2002, the recession would have been a little worse, but debts would have been paid and the market would have regulated the housing market by having interest payments out of the affordable range of people who shouldn't have bought houses in the first place.

Take now these days, banks had lent out too much money because of low interest rates and now are trying to recoup those loans, why not let the rates rise, let the banks build up reserves to the point that they need to make loans to get their income stream back going.

That is what traditional monetary theory predicts, but its wrong.

The banks hate reserves because its money they arent collecting interest on. They will always try to have as little in reserve as possible because that money isnt earning any interest, and their desperation to move this money out of reserves drives down rates in the interbank market.

And this brings us to another one the surreal attempts to "fix" things things with more debt

http://www.newyorkfed.org/markets/ior_faq.html

In order to get banks to build up reserves the Fed has now been granted the power to pay banks interest on the money they keep in reserve

Edited November 19, 2011 by dre

[blueblood]

Not to freakin bad at all!!

Here is another.

http://www.youtube.com/watch?v=2I0QN-FYkpw

Welcome to the club. I've been posting his stuff for some time.

[TimG]

The rising interest rates would encourage savings which should build up reserves for future lending.

As dre says below: banks hate reserves because they are dead money. The government simply needs to mandate minimum reserve levels - a process which is happening now where 'too big to fail' banks will have larger reserve requirements.

Its been theorized that the low yuan has benefitted the USA consumer by the usa getting rock bottom prices for goods at the expense of more expensive usa labor.

The low yuan could have been a net benefit to the USA if it did not run such a massive deficit. But it did. Now the deficit is taken a life of its own and is sucking the life out of the economy. There will be no recovery in the US economy until they fix that problem.

[blueblood]

As dre says below: banks hate reserves because they are dead money. The government simply needs to mandate minimum reserve levels - a process which is happening now where 'too big to fail' banks will have larger reserve requirements.

The low yuan could have been a net benefit to the USA if it did not run such a massive deficit. But it did. Now the deficit is taken a life of its own and is sucking the life out of the economy. There will be no recovery in the US economy until they fix that problem.

Of course banks don't like large reserves, that's why the interest rate in a free market would drop to encourage more borrowing which is the banks income stream. A borrower would like to go to a bank with large reserves because theoretically that borrower should be getting the more attractive interest rate as the bank has sound money to borrow out. However there gets to be too much money in the economy and liquidity dries up, the problem is instead of rates rising and people saving to correct that, the printing press gets fired up.

IMO the free market can mandate reserve levels by having interest rates rise and fall accordingly. The problem is when someone thinks they know what rates should be and artificially sets them, which plays havoc with reserve levels through open market operations and increased borrowing when there should be savings. IMO interest rates should be set by market as to send signals to people in the economy on what to do with their finances.

[maple_leafs182]

Of course banks don't like large reserves, that's why the interest rate in a free market would drop to encourage more borrowing which is the banks income stream. A borrower would like to go to a bank with large reserves because theoretically that borrower should be getting the more attractive interest rate as the bank has sound money to borrow out. However there gets to be too much money in the economy and liquidity dries up, the problem is instead of rates rising and people saving to correct that, the printing press gets fired up.

IMO the free market can mandate reserve levels by having interest rates rise and fall accordingly. The problem is when someone thinks they know what rates should be and artificially sets them, which plays havoc with reserve levels through open market operations and increased borrowing when there should be savings. IMO interest rates should be set by market as to send signals to people in the economy on what to do with their finances.

Ya, you are right.

It isn't the richest one percent that the Occupy movement is against, it is the one percent that have come to own and controls everything around us by influencing government policies.

I don't think people understand that we live in a fascist world, the banks control everything. Just recently the world kicked out two Prime Ministers in Greece and Italy and replaced them with bankers. The banks have taken over, central banking needs to end.