Fed announces commercial paper funding facility. Here is my post from yesterday. My best shot at a positive spin, just offered to Alex in my office, is this:
They wouldn’t do it unless they had to. And if they had to do it, that they are doing it is very good news indeed.
I am not sure that Alex was persuaded. There are some good comments at the first link.
Why do you TRY to put a “postive spin” on it? Is that your job?
When a bad bailout bill was put to vote you said “it was better than nothing”.
When it was pointed out that 700 billion could be spend a lot of different ways you said “one could argue abot the most effective way to spend 700 billion, but I’ll trust Paulson”.
Unbiased analysis of the facts tells us there are more reasons not to trust Paulson and the bailout was not “better than nothing”. Now you admit you are just trying to put a positive spin on things…is your conscience getting to you?
Gabe, you are not a subtle reader…
True, that is a fault of mine. On the one I hand I understand that it can be better to have you writing in the NYT than say the 2nd or 3rd best economist/writer at the Brookings Institute. Even if it does mean you have to say things like “this baliout is better than nothing”. However, the argument could be made that by gradually destroying the mojo of a economist on the good side by forcing him to degrade himself in this manner, it is a huge victory for the dark side.
The key turning point is, do you really believe that giving this massive new authority to a cabal of thieves was “better than nothing” or are you just consicously saying it becuase you seek to stay in good standing with the powerful?
A inner struggle to figure out a way to spin things positively shows your mind is focused on developing subtle propaganda more than on analyzing Paulson’s true motives.
Gabe,
It may actually be better than nothing. Unfortunately, free banking wasn’t on the menu.
The division of labor and the free market has done the best with the banking and credit system it was given. Starving it of even that malnutritious fare is not likely to result in an improvement.
Libertarians didn’t have the sway to keep us from getting here, and we are here partly because of previous crises, and now that we are here, maybe the ones who do have some sway can only limit the damage from here out.
On the other hand, do all these special powers go away when we get out of the woods? Persuade me.
“A inner struggle to figure out a way to spin things positively shows your mind is focused on developing subtle propaganda more than on analyzing Paulson’s true motives.”
Wow. Ernie Ironic you’re not.
of course the special powers don’t go away and it is a sure thing that this “solution” will not lead us out of the woods. Just as the “solution” of having a federal reserve and a income tax in 1913 did not lead us out of the “woods” of periodic economic dowturns experienced earlier.
Just as the “solution” of WW1 did not lead us to permanemt peace.
We know that they will use whatever powers we give them to further attack us.
If bush, paulson and the Fed ask for further powers from the people then it is because the powers will be used against us…so we already know it is a bad thing simply because they are asking/threatening for it.
I’m scared
Not so much by the government intervention, but by the fact that CP got so frozen up in the first place. What’s next?
Gabe, you are not a subtle reader…
Not when he’s off his meds.
Again.
So, Gabe, are you saying that all of the governments of the modern economic
world have joined together to make one final power grab and establish a
consolidated global oligarchy?
And only Gabe stands between us and a consolidated global oligarchy. Hold out!
Calculated Risk had a Google Ad at a bottom that said “These banks are about to close…Is yours one of them? Click here to find out before it’s too late.”
How exactly can it be “too late” with FDIC insurance? That’s not the kind of mentality we need now.
My take is that if the government is doing it, then it is late to the party and completely meaningless.
Andrew,
I can understand that reasoning to some degree. However, I bet most of us agree that it is important to combat the dangerous idea that “free-markets and lack of regulation” caused this problem? Likewise, we should also be ready to combat the idea that too small of a bailout package caused the next crisis.
“Even in the midst of a severe meltdown on Wall Street, Federal Reserve officials at their September meeting believed the risks from weaker growth and higher inflation were roughly equal. The meeting occurred a day investment bank Lehman Brothers collapsed.”
ruh-roh
http://biz.yahoo.com/ap/081007/fed_economy.html
JK,
question #1, I had the opportuninty and asked the president of the Boston Federal Reserve Bank this exact question.
He said that the banks had to be compensated for “the capital they provided”….this made no sense to me because the fed can create it’s own capital….why does it need to borrow from the member banks? he avoided that question and jsut said that it took some capital to run the whole thing and it was only fair for the member banks to be reimbursed.
When asked how this could be jsutified on moral grounds his attitude was that all of government is wasteful and surely there are more wasteful things being done by other parts of the government that had lower IQ’s than the Fed employees.
the answer I got sucked…I’d bet money that you will not get a better answer from any of the “serious” economist. They simply like to pretend the fed is awesome.
wiki-cognitive dissonance
“Forbidden toy study”
“experiment by Aronson and Carlsmith (1963)”
This is the best explanation I have found for the inability to get questions on this topic answered.
“The Fed Supporter not only does not disapprove of atrocities committed by his own side, but he has a remarkable capacity for not even hearing about them.”
JK
1. I don’t know the correct number but it is actually quite small, an investor doesn’t receive a risk premium in the Fed since there is almost no risk in investing in the fed, I know the Fed makes a “profit” almost every year, if I remember correctly the Fed’s profit from 2006 was 40 Million.
2. This really isn’t that much of a problem since the Fed interest rate is almost always lower than the market price, and the Fed’s interest rate is almost always a defensive rate.
3. The government could just print money and throw it from helicopters, but why do that when you can print money and buy something with it, this process is called seignoraige. The Fed lends this printed money to banks at a less than market percentage, this makes it appealing to banks because its a pure profit for banks. The fed charges interest on this money but it is below market price, this gives the Fed a profit.
4. The main stock owners of the Federal Reserve are: Citibank, Chase Manhatten, Morgan Guaranty Trust, Chemical Bank, Manufacturers Hanover Trust, Bankers Trust Company, National Bank of North America, and the Bank of New York, (This data is estimated by few monetary economists and is 10 years old since the ownership of the Fed data is hard to come by, some of these banks may have been bought out by now or are going by different names)
JK
1. I don’t know the correct number but it is actually quite small, an investor doesn’t receive a risk premium in the Fed since there is almost no risk in investing in the fed, I know the Fed makes a “profit” almost every year, if I remember correctly the Fed’s profit from 2006 was 40 Million.
2. This really isn’t that much of a problem since the Fed interest rate is almost always lower than the market price, and the Fed’s interest rate is almost always a defensive rate.
3. The government could just print money and throw it from helicopters, but why do that when you can print money and buy something with it, this process is called seignoraige. The Fed lends this printed money to banks at a less than market percentage, this makes it appealing to banks because its a pure profit for banks. The fed charges interest on this money but it is below market price, this gives the Fed a profit.
4. The main stock owners of the Federal Reserve are: Citibank, Chase Manhatten, Morgan Guaranty Trust, Chemical Bank, Manufacturers Hanover Trust, Bankers Trust Company, National Bank of North America, and the Bank of New York, (This data is estimated by few monetary economists and is 10 years old since the ownership of the Fed data is hard to come by, some of these banks may have been bought out by now or are going by different names)
Hmmm, you sound worried Tyler. I recently went to a talk you gave and you did not mention this financial situation as something to worry about.
So, is this worth worrying about? Did Kahneman prove in the lab that this is something we should of worried about?
I thought money market funds supplied a large amount of liquidity to the CP market. If I’m not wrong about this, why aren’t yields on money market funds spiking? If they went high enough, wouldn’t this attract all the liquidity needed?
Keith, Nobody wants to buy anything right now, there is no demand to invest in anything because of the abundance of uncertainty in the markets. Very few people know who holds what right now or which firm is going to go under, the bailouts are in part responsible for this, so the demand for a money market fund is very low, that makes the price for the money market fund low.
JK, I think that you misunderstood me on Question #3. I don’t think that we should have a federal reserve, I am in favor of free banking (we had a very efficient free banking period in the US). I don’t think that politicians or private sectors should have control over the money supply, because there is always a temptation to print money, (think about congress wanting to print money for pork barrel spending).
I think we should have an amendment in the constitution to print a FIXED amount of money each year, which would cause expected inflation, expected inflation is benign. When the Fed prints money in lump sums it usually results in unexpected inflation, which is economically inefficient for everybody.
As for #2, This was taken from the Fed’s Website, The Federal Reserve’s income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other sources of income are the interest on foreign currency investments held by the System; fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations; and interest on loans to depository institutions (the rate on which is the so-called discount rate). After paying its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. (The discount rate plays a big part in this)
As for #1, I got that number from a Intermediate Macroeconomic textbook called “Intermediate Macroeconomics and it’s applications” published by Southwestern.
Thank you for the link Bill. I see where you are getting your information from and I appreciate your response.
Bill: “So, the Fed wants the sound banks to leave their funds in their reserve balances at the Fed. And the Fed will lend the money to were it is really needed.”
Thanks for the explanation.
How do we grade the Fed on how they are doing on this god-like power? I think the main threat of The Fed is much more subtle than the conspiracies. They over time decide who fails. This has to favor bigness, even if they did not intend it to, which of course, leads to too-big-to-failness, which results in these crises, which yields the ratchet-effect of leviathan. Is my thesis flawed?
torris says:
“3. The government could just print money and throw it from helicopters, but why do that when you can print money and buy something with it, this process is called seignoraige. The Fed lends this printed money to banks at a less than market percentage, this makes it appealing to banks because its a pure profit for banks. The fed charges interest on this money but it is below market price, this gives the Fed a profit. ”
Throwing the money from helicopters or some similar action would allow the new money to be spread more evenly. It is unfair for those with political power to steal the value of money from those with little political power.
You admit in very clear language that certain banks benefit from this unjust method of money creation. Then you call anyone who questions the goals of big banks who support this type of system a “conspiracy theorist”.
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