Question please

[cjppjc]

Re: Question please (Thanks all)

I don't think there's any iTuliper that doesn't truly understand your sentiments.
It isn't a pretty picture... but knowing about it gives one more of a better & fighting chance to be able to counteract it, in spite how difficult it might be.

I'm sorry to have dumped on you like that with that large and somewhat complex cut & paste from my FAQ page, but in my experience the money creation game is so non intuitive and deceptive that some personal study of the realities is essential to "get it". I'm sure there are others who can explain it better than me too - I'm usually not known for being terribly clear.

Just hang in there and take it at your own speed.

Thank you. I surely don't feel dumped on. I am still reading it and have now gotten lost in Doug Nolan.

BTW I'm not that naive I've been in Gold and Silver stocks since gold broke 400. Took some profits over the years but not enough. I beleive in the bull market and figured if I went to all cash I would never know when to get back in. Besides I never thought they would treat gold and silver stocks like stocks. How stupid!
I shuld have remembered what my Father once told me "When they raid the horehouse they take the piano player too."

[Sharky]

Re: Question please

All right lets see if I've got it. The Fed lends 80 or so billion to Aig or 100 billion to Citigroup by computer and receives some kind of collateral. (Preferred stock, common stock, T bills) maybe with a market value of 5-10 billion?

The whole issue of "market value" is questionable, but OK, sure, it could go something like that.

This works ok as long as all these borrowers pay it back. Or does it not matter to the Fed because the Treasury has said the taxpayer will make goos on any default?

If the borrowers go into default, theoretically the Fed could sell the collateral and recoup the amount loaned. In reality of course, the collateral is worth far less than the amount loaned, so the difference has to be absorbed on the Fed's balance sheet. A write-down in asset values will require a write-down in liabilities or retained earnings.

At some point, the Fed's balance sheet becomes terminally damaged, since it is not allowed to create the money to fund itself. The only cure after that is for Congress to intervene with some sort of "rescue" plan. Either that, or the Fed is allowed to fail and a new central bank (and probably a new currency) emerges to take its place (FWIW, the Fed is the country's third central bank, not the first).

[cjppjc]

Re: Question please

At some point, the Fed's balance sheet becomes terminally damaged, since it is not allowed to create the money to fund itself. The only cure after that is for Congress to intervene with some sort of "rescue" plan. Either that, or the Fed is allowed to fail and a new central bank (and probably a new currency) emerges to take its place (FWIW, the Fed is the country's third central bank, not the first).

But it IS creating money to fund itself. Is the Fed not getting interest on the money it lends? Which they are just creating from nothing.

[bart]

Re: Question please (Thanks all)

Thank you. I surely don't feel dumped on. I am still reading it and have now gotten lost in Doug Nolan.

BTW I'm not that naive I've been in Gold and Silver stocks since gold broke 400. Took some profits over the years but not enough. I beleive in the bull market and figured if I went to all cash I would never know when to get back in. Besides I never thought they would treat gold and silver stocks like stocks. How stupid!
I shuld have remembered what my Father once told me "When they raid the horehouse they take the piano player too."

Cool - glad to hear I'd didn't over estimate and blow you into the weeds.

Don't you hate it when they take the piano player too?

[Sharky]

Re: Question please

But it IS creating money to fund itself. Is the Fed not getting interest on the money it lends? Which they are just creating from nothing.

Lending to others is not the same as "funding". They do create the money upon which their earnings are based, but that's not the same as directly creating profits. A loan creates both an asset (the loan) and a liability (the money). Funding their operations requires earnings, and the Fed can't create those.

Commercial banks work the same way. They can create money to lend to others, but they can't create their own profits. The Fed can fail in the same way that regular banks can fail: when their balance sheets get too out-of-whack.

The Fed does earn interest on the debt it holds, but there's no way that will come close to offsetting the losses from the toxic assets.

[cjppjc]

Re: Question please

And he had been playing such sweet music for so long.

[cjppjc]

Re: Question please

[quote=Sharky;76409]Lending to others is not the same as "funding". They do create the money upon which their earnings are based, but that's not the same as directly creating profits.

It's not too far removed.

Should the Fed balance sheet get ugly, can't it just create money buy T bills in the open market and repair the balance sheet that way?

[Sharky]

Re: Question please

Should the Fed balance sheet get ugly, can't it just create money buy T bills in the open market and repair the balance sheet that way?

No. When the Fed buys T-bills, they become an asset and the newly-created money becomes a liability. It hits both sides of the balance sheet.

In order to compensate for worthless assets, they would either have to add more assets without increasing liabilities, decrease liabilities without decreasing assets, or destroy some of their own capital or earnings.

To banks, the money they create is not an asset, it's a liability. Here's a link to the Fed's balance sheet:

http://www.federalreserve.gov/releases/h41/Current/

It's easy to see in section 8. Similar info is in section 1, but the language is more confusing. FRNs, deposits and other forms of money are shown as liabilities. Treasury securities, loans and other forms of credit are assets.

As I said earlier, the more you know about the system, the goofier it gets.

[cjppjc]

Re: Question please

No. When the Fed buys T-bills, they become an asset and the newly-created money becomes a liability. It hits both sides of the balance sheet.

In order to compensate for worthless assets, they would either have to add more assets without increasing liabilities, decrease liabilities without decreasing assets, or destroy some of their own capital or earnings.

To banks, the money they create is not an asset, it's a liability. Here's a link to the Fed's balance sheet:

http://www.federalreserve.gov/releases/h41/Current/

It's easy to see in section 8. Similar info is in section 1, but the language is more confusing. FRNs, deposits and other forms of money are shown as liabilities. Treasury securities, loans and other forms of credit are assets.

As I said earlier, the more you know about the system, the goofier it gets.

goofier? I'm getting a headache.

[*T*]

Re: Question please (Thanks all)

Excuse me I think I'm going to be sick.

I think that means you get it on a gut level ;)

It is bizarre isn't it.

[cjppjc]

Re: Question please

My gut says it can work. As long as something doesn't go wrong. And something always goes wrong.

[we_are_toast]

Re: Question please

Here's one applicable quote. There are many more.

Quote:

"ECCLES: We created it. PATMAN: Out of what? ECCLES: Out of the right to issue credit money. PATMAN: And there is nothing behind it, is there, except our government's credit? ECCLES: That is what our money system is." -- Federal Reserve Board Governor Marriner Eccles in testimony before the House Committee on Banking and Currency in 1941, during questioning by Congressman Wright Patman about how the Fed got the money to purchase two billion dollars worth of government bonds in 1933.

Here's another applicable quote:

Costello: You know the fellows' names?
Abbott: Yes.
Costello: Well, then who's playing first?
Abbott: Yes.
Costello: I mean the fellow's name on first base.
Abbott: Who.
Costello: The fellow playin' first base.
Abbott: Who.
Costello: The guy on first base.
Abbott: Who is on first.
Costello: Well, what are you askin' me for?
Abbott: I'm not asking you--I'm telling you. Who is on first.
Costello: I'm asking you--who's on first?
Abbott: That's the man's name.
Costello: That's who's name?
Abbott: Yes.

[strittmatter]

Re: Question please

Perhaps a suggestion for the itulip video production dept.......

A montage of clips from the various dog-n-pony congressional hearings with the Abbot/Costello "Who's on First" audio overlap.