15 Comments

• 1. Hates Cows--Male  |  December 6th, 2007 at 5:58 am

  Mark,

  What do you expect from the NY Slimes–they blame America for illegals breaking our laws.

  Funny thing, but in one small way, they’re right. The government has ignored this issue since 1986, and here we are now, with wide open borders. WE NEED OUR BORDERS SECURED!!!

  However, having “defended” such a rag as the old gray lady, let me add that the DBDM, along with the Donkaroach Party, does not advocate securing our borders. They want them to remain open, under the guise of compassion, so there’s plenty of new voters.

  Motor voter, anyone?

• 2. Christian Wright  |  December 6th, 2007 at 7:31 am

  Economy booming? A Depression greater that the Great Depression is just around the corner thanks to free market Republicans who do not beleive in regulation.

  To understand the coming financial collapse of US banks you need to understand how they work. Banks take your money and give you interest. They are able to pay interest by finding people that they loan your money to. The interest they charge is higher than the interest they pay. The difference between what they charge and what they pay is the profit. Under Fractional Reserve Lending, a bank will lend many times over the cash they have in their reserve. They do this under the theory that people will not withdraw their money because they are earning interest. Fractional Reserve Lending is creating money out of thin air because it is not fully backed up by the reserves. In fact, banks are known to lend as much as ten times as much as they actually have in reserve.

  Bank employees are paid commissions by the number of loans they bring into the bank. Adjustable Rate Mortgages (ARMs) pay more commission than regular mortgages. Agents sold ARMS to people they knew could not afford the mortgages once the rate was adjusted in two years just to earn the higher commission. They traded short term financial goals for long term financial health. The banks went along because it increased their quarterly profits. These ARMS were packaged and sold as security instruments on Wall Street. The loans were sliced up, bundled with less risky mortgages, and sold as mortgage-backed securities called “collateralized debt obligations” (CDOs). The banks used a computer model to estimate the percentage of foreclosures in a typical CDO and they determined that each CDO still made a handsome profit. These CDOs were sold to other banks that used them as collateral to make even more loans and then those loans were used as collateral to make even more loans with each bank using Fractional Reserve Lending practices. Unfortunately, the computer model was wrong.

  As mortgage defaults grew beyond anybody’s wildest imagination, the value of these CDOs became suspect so nobody wanted to buy them. These CDOs were originally valued, according to the computer model, at two trillion dollars. But a commodity is only worth what a person is willing to pay for it, and nobody wants to buy a CDO, so they are now worthless. This means that the imagined value of two trillion dollars that was used as collateral to make even more loans expands the damage to a thousand trillion dollars in the global economy with “$600 trillion in world liabilities, plus more than $400 trillion derivatives.

  So banks that invested in CDOs are now stuck with financial instruments of no value, and due to Fractional Reserve Lending, do not have enough in reserve to cover this debt. And there are no more borrowers to cover this quadrillion dollar black hole. It means that only an optimist would be investing in gold right now. The best investment for the future is canned food. This, of course, is all the fault of Republicans because they have more faith in free markets than in regulation. The S&L crisis under Reagan was a puddle compared to the ocean of debt from the sub-prime crisis under Bush.

• 3. neocon  |  December 6th, 2007 at 7:44 am

  Christian,

  Thanks for the 101 lessen in banking economics, and if our economy was at all based on banking interest margins and if there was no such institution as the FDIC, I might believe your pedestrian approach to liberal fear tactics.

• 4. plainjane  |  December 6th, 2007 at 8:04 am

  and the only thing which can stop this from happening is the election of a Democrat to the Presidency next year. December 6th, 2007 at 05:44am Mark Noonan

  Bull crap. The Republican currently in the W.H. is the biggest advocate of amnesty in America. President Bush got nowhere with his amnesty plan in both a Republican and now a Democratic Congress. At least 70% of the American people are for tighter borders and the insistence immigrants enter this country as their ancestors did. Dobbs, Hannity and Limbaugh will do all they can to make this an abortion type wedge issue in the coming election, but I just don’t see it. Both eventual candidates are going to have to come up with immigration plans that satisfy the 70% or risk losing votes.

  Only difference I see between Republicans and Democrats on this issue is who to punish for this mess. Republicans want to punish the illegals and their families, where Democrats believe it was big business with promises of jobs and the ability to lobby for illegals against anti-immigration legislation that should be punished.

• 5. eric  |  December 6th, 2007 at 10:00 am

  I am married to a Brazilian immigrant. She moved here in the late ’90s - legally. We were married in 2002. Five years later, she became a citizen. It was not cheap and it took much effort. We hired an immigration attorney to handle the application. We had to prove to the government that our marriage was not a shame. That meant gathering a bunch of evidence showing our union, e.g., bank statements, credit card statements, photographs, etc. We also had several interviews with agents from the USCIS.

  Again, this was not an easy, fast process. It is pretty laborious. Many illegal immigrants are too intellectually lazy to go through the proper channels in order to get their green cards. Further, once you are here illegally, it is difficult to change to a legal status - unless there is amnesty from the government.

• 6. anarchist  |  December 6th, 2007 at 10:55 am

  Christian Wright, what exactly created that massive expansion in the money supply that enabled all that speculative investing? Could it have been the 1% discount rate of the fed and it’s easy money policy during the tech bubble burst? Every time the fed expands the money supply by artificially lowering interest rates below the market rate or monetizing debt there is a boom in capital goods like houses, factories machinery, ect… followed by a bust. This happens because of the divergence between the amount of investment, which increases with the money supply, and the amount of savings(non-consuption), which stays about the same.

  Of course alot of speculators popped up and made a bunch of money, but this is because the fed’s credit expansion gave them alot more money to play with. It’s like playing monopoly and doubling everyones money while letting the house prices stay the same, it add volatility and experienced traders come out the winners and the average house buyer comes out the loser.

  So this was not caused by the free market. The federal reserve is a socialist institution that centrally mandates it’s control over the nation’s banking through violent coercion, threats of fines and imprisonment. The purpose is to use this power to violently coerce banks in order to re-organize the economy to some state other than that which the free market would achieve, the socialist goal. The free market is where individuals lend and borrow at rates determined freely and voluntarily, which is a system that hasn’t existed in the US with regards to banking for about a hundred years.

• 7. Dasein Libsbane  |  December 6th, 2007 at 2:32 pm

  anarchist,

  Spoken like a true Paul-Pot; which money supply are you speaking of? M1; M2 etc …The fact is that money supply from the Fed has held steady or been reduced in the past 5 years. The increases are a necessary outgrowth of the expanding economy and add nothing to inflation. You are stuck in 1970’s money-supply logic.

  The Chicago Economists already proved Paul’s theory (Keynesian) of incresing money = inflation faulty. When money is pumped into an economic system, recipients are likely to purchase that which is dearer to them. The pre-depression theory (Keynesian) held that money supply should be restricted; increasing the valuation of the remaining dollars. Friedman theorized (rightly) that increasing the basic money supply will encourage sound fiscal investment and will follow with an expanding economy, introducing investment, increasing consumables and expanding financial opportunities.

  Double entry accounting requires that whenever there is an “outflow” of money, there must be an equivalent “inflow”. If there is an increase, or Debit of a particular amount, there must be an increase in the utility (Cost + Expenses) on the Credit side.

  The Fed doesn’t “hand out” dollars to Wall Street or Main Street; it makes money available. When the subprime liability was exposed, it was availability of credit that caused the concern, not too much money.

  The last paragraph is hysterical (as in hilarious). The Federal Reserve exists to put stability in the financial markets, unsubstantiated paranoia aside.

• 8. anarchist  |  December 6th, 2007 at 5:02 pm

  Dasein Libsbane, the US economy has had nothing but inflation higher than growth since the great depression, if you don’t believe me find someone older than you and ask them about how much stuff used to cost. Sodas where a nickel and rent used to be $200. But anyways while M1 has held steady, M2 has increased, but more significant look at MZM of the Austrian Money Supply(AMS). Of course M3 is no longer public. M2 is more important for big capital investments(like houses).

  “The Chicago Economists already proved Paul’s theory (Keynesian) of incresing money = inflation faulty”.

  Keynesian economics is a product of the Chicago school, as is monetarism, I’m relying on Austrian and neo-classical theory. But the monetarist do define inflation as a monetary phenomenon, not as the keynesian “overheating economy”, as do the austrians and marginalist and most other modern schools.

  It’s not that the fed hands out dollars, it’s that investment in higher order goods increases with cheap credit. So when interest rates are lowered artificially by central bank mandate, alot of lengthy investments become profitable, so people borrow and there’s a boom. But this is an illusion, this is just expanded credit. As the borrowers bid up the prices of the factors of productions, inflation sets in and the malinvestments reveal themselves. The entrepreneurs must abandon some of their failed investments. This is the bust of the buisness cycle.

• 9. Dasein Libsbane  |  December 6th, 2007 at 7:31 pm

  M3: is M2 plus certs of deposit; I don’t know what you mean by “not public.” that is to say it doesn’t make sense.

  I’ve often heard Econ students ( in higher order goods increases with cheap credit ) claim affiliation with the Austrian school (moral theologians) or neoclassical (utility) to deflect attention from their conclusions ( interest rates are lowered artificially by central bank mandate). Austrian and neoclassical is hardly a modern economic theory. If you were using the Austrian basis, you’d be stating that the increase in money supply would lengthen the structure of production. This would divert capital from consumer goods (via production) and increase capitalization on higher order goods. This assumes that capital goods produced by “credit creation” are fundamentally specialized and basically useless beyond their design. The current financial markets belie that theory as consumer products are flying off the shelves at all price points and of all utilities.

  This is also evident in the antithesis of your statement, “ borrowers bid up the prices of the factors of productions” in that the capitalization of producers of consumer goods is following a savings trajectory; more investment, cheaper goods, lower production costs. There is no competition from consumables to higher order goods evident today.

  Keynes theories were analyzed at the U of Chicago, but hardly a product of that school (Friedman was a Keynesian before he wised up). I don’t think Keynes was ever at Chicago, his tight money theories were used by governments in the 1930’s and exacerbated the Great Depression; Keynes himself was wiped out financially in the stock market crash in 1929.

  As I stated earlier, people don’t borrow simply because money is available or cheap; they borrow when there is need, want desire and that borrowing is accompanied by corresponding utility.

  The prices of consumer goods since my youth (1950’s) has increased, but technology and innovation has increased the equity of utilitarian goods; an 8 track tape is much cheaper today than in 1967, and delivery of ice for my ice-box is much more expensive than my energy star refrigerator.

• 10. Ricorun  |  December 6th, 2007 at 9:08 pm

  Dasein: This assumes that capital goods produced by “credit creation” are fundamentally specialized and basically useless beyond their design. The current financial markets belie that theory as consumer products are flying off the shelves at all price points and of all utilities.

  But isn’t that happening as a result of “credit creation”? And aren’t interest rates being lowered artificially by central bank mandate?

  Completely OT but… if there were to recommend two books on economics that you think a reasonably capable individual could understand, what would they be? It’s pretty clear that I’m lacking a view of the Big Picture here, and that’s not financially healthy.

• 11. Brian (Boston)  |  December 7th, 2007 at 6:06 am

  A couple of things. The Fed stopped reporting the M3 money report:

  http://www.newyorkfed.org/aboutthefed/fedpoint/fed49.html

  Here is a graph mapping the M3 report:
  http://members.aol.com/gparrishjr/m3_inflation.html

  Also, many other countries are worried about the US Economy. The rest of the G8 and the ECB (European Central Bank) have expressed concerns about the US economy and its stability. Jean-Claude Trichet, the head of the ECB, has said several times that he is willing to work with the US, but has been rejected his proposals.

  Most people in the country also believe the economy is in bad shape. Of course, this does not reflect the actual reality of the situation:

  http://americanresearchgroup.com/economy/

  While there are pros and cons to having a weak Dollar, an extremely weak Dollar does not make a strong econony. While Europe does not have a particularly strong economy, the Euro is expected to top $2.00 by the end of the next year if things are not changed. This represents certain good news for the US (exports, etc), but does it represent a weak economy?

• 12. anarchist  |  December 7th, 2007 at 11:12 am

  The fed quit publishing M3 in 2006, right in the middle of the housing bubble, so I can’t use it for any of my analysis.

  Dasein, houses are big lengthy to produce higher order capital goods. There’s alot of home builders suffering right now.

  And people do borrow when money is cheap, that’s what started this speculative housing boom. If you can buy a house for X dollars and you think you can sell it for 10% more a year later, a 3% interest rate makes you a 7% profit, a 7% interest rate makes you 3% profit. Low interest rates drive entrepreneurial activity.

  But consumer goods aren’t suffering because they don’t suffer much during economic downturns. There was an inflationary boom in housing, before all the projects could be completed and all speculations sold, banks started realizing the inflationary nature of the boom and now there’s a credit crunch. Now entrepenuers know what happening, housing is going to go down in price and banks will be tight with their money regardless of interest rates. It’s just the housing market that’s not doing well. Some people are further worried not that the housing credit crunch itself will spread to other markets, it’s that people worry that the same sort of malinvestments brought on by really really low interest rates might soon reveal itself in other markets.

  Ricorun, an excellent free book on the internet.
  http://www.mises.org/rothbard/mes.asp

• 13. Dasein Libsbane  |  December 7th, 2007 at 11:22 am

  rico,
  According to the Austrian school, yes. but, the reality is that manufacturing is up and what would have been considered “higher order” are no longer luxury (consumer electronics as just one example). The utility of the goods is more complex than ever, and innovation is creating multi-use applications. Computers are a good example of this; business, personal, recreation household necessity and functional business applications from single purchases.

  We’ve discussed before the motivation of borrowing; the Austrians believe that cheap credit will cause borrowing from those that don’t really need it to be spent on things they don’t really need that have no purpose beyond the aesthetic or singular functionality, Fabergé Eggs all around. This diverts resources from much needed functional consumer goods like ice boxes and T-augers.

  The reason we have a Federal Reserve is to establish the money supply, regulate interest rates and stabilize the wheels of industry. The interest rates are not “artificially” low; they are in fact low. Our credit is available, in turn business, investors and other countries have funds available, and the grand circle of life continues.

  The money supply argument was played out in the Nixon era when the Gold Standard was fundamentally changed. The sky didn’t fall, the economies of the world didn’t turn to seashells as a currency and cats didn’t stop sucking the breath from baby’s mouths.

  I may have told you this but a wise Econ maven once told me that when the American housewife spends the household paycheck in its entirety the day it arrives, we’ll know the economy is finished. If Mrs. American is borrowing money and spending it on home improvements or vacations in Aspen we’re doing quite alright.

  As far as books, I know you’ve read Friedman, but I don’t have an expansive library of my own. I’ll ask around the Econ Department and see what the Profs say. (I have lunch with one about once a week. And he’s a Reaganesque conservative).

• 14. Dasein Libsbane  |  December 7th, 2007 at 11:41 am

  Some people are further worried not that the housing credit crunch itself will spread to other markets, it’s that people worry that the same sort of malinvestments (sic) brought on by really really low interest rates might soon reveal itself in other markets.

  But, don’t you see that’s the exact reason the Fed needs to loosen money supply?

  There wasn’t an “inflationary boom in Housing.” More correctly it would have been demand-pull causing an overvaluation of private property. Default rates in the subprime market accelerated the supply of housing and a market correction is underway. dopey dunderheads that gave loans to very very risky borrowers are getting what they deserve, and subprime ( a sanitized term for “less than desirable” or near-deadbeat) borrowers had bad credit to begin with and in all likelihood wouldn’t have qualified, much less purchased a loan under normal conditions.

  Speculative purchasing of real estate has been a hallmark of our economy for most of the last century. These investments will rebound, and in fact housing starts are up again. The market will correct prices, and most of the investors (homeowners) who bought during the high times and those (like me) that bought a few years before (like 20 years before) will have safe investments as they always have. subprimers and greedy lenders will have what Kelsey shot at; nothing!

  Von Mises is a good site for understanding the Austrians, but remember; they are the moral theologians of economics, a return to many beliefs that powered industry in the 18th and 19th centuries; workers are a commodity; wealth in the hands of the hoi polloi is wasted resources, etc. think Jacob Marley.

• 15. Dasein Libsbane  |  December 7th, 2007 at 12:02 pm

  I feel like I’m walking away from the table before the game has played out, but the financial records for November are available this morning so I’ve some heavy reconciliations to do; December being shortened and all with that mandatory two week vacation at the end of the month, damn government jobs!

  We’ll have to pick up the discussion another time, meanwhile, my stocks yield is 12.72% for the year to date and 18.61% for the rolling 12 months; I’m a happy guy.

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