By: Conrad

Conrad — Sun, 29 Jun 2008 16:45:16 +0000

My wife is from Bulgaria and she and her parents lived through 1000% inflation in the 90’s. They are a lot like my depression era grandparents. The scowl every time we waste food and always try to repair things. I have learned so many skills that have been forgotten her but I beleieve may still come in handy like growing a garden, canning vegtables and makeing jams in jellies. What seems like a nice hobby to an American was a survival skills for my wife and in laws. An interesting side note is that during this time my wife said as soon as she would get a pay check she would imeddiately chang it into dollars so it would not lose value in couple of days. What a difference a few years make.

By: Mike in Iraq

Mike in Iraq — Tue, 22 Apr 2008 05:59:14 +0000

Ghetto is an ITALIAN word. The plural is ghetti.

By: nick gogerty

nick gogerty — Thu, 10 Apr 2008 14:58:10 +0000

Having grown up in iowa with a farming family, I can still recall grand parents who spook heavily of the period. One of the great works of the time about the consequences is of course the Grapes of Wrath. I would recommend renting or getting it on netflix. The DVD commentary on the countries political response to the book and the poverty is quite amazing and revealing. The housing bubble could lead to some extreme political change domestically.

By: Don Stephens

Don Stephens — Sat, 03 Nov 2007 18:29:10 +0000

Dr.Bubble, as always ,your article was informitive and enlighting. What I would like you to address, is the solution. We must first admit there is a problem. Our industry has a problem to address this fiasco, as this would prove we not only created this fiasco, we promoted it! There are few in this industry who have the experience and knowledege of the PRE-subprime market. Most of the people in our industry were trained on sub-prime programs, and had little or no training on conventional, or government loans, (after all these took more time, paper work, and paid less). Sub-prime came into the market in the mid 80’s, but expanded by leaps and bounds in the 90’s. Major lenders saw the increase, and opened the door further by creating their own sub-prime companies, ( check employment increases w/ M.B.A. during this time), along w/ new corp. that were created specifically for the sub-prime market, New Century, being one example. Traditional underwriting guidelines were thrown out the window. Alternate guidelines used to approve the loans were relaxed to the point of non-existence! Greed to produce more income became the focus. U/W were given Quotas to get loans approved quickly. These are NOT opinions, as the numbers will reflect this reality. I audited thousands of loans, and continue to advise the industry as an independent. I have forwarded suggestions to Corp. and have not recieved any response. If you would like, I would be more then happy to send you my overview, and resolutions to our current situation. Don Stephens M.C.A. (retired)

By: Flow5

Flow5 — Fri, 10 Aug 2007 22:00:00 +0000

Economists have long sought to buttress their forecasts with various cycle theories. Kondratieff, a Soviet economist of the 1920’s, promulgated a cycle of approximately fifty years. Professor Batra of Southern Methodist University, who, with selected data, announced a thirty year cycle.
Great Depressions presume catastrophic financial events: not just a panic on Wall Street, but the actual collapse of the U.S. monetary system.
The loss of faith in the private commercial banks had become so pervasive by the end of 1932; banks were being forced to liquidate by the thousands. People everywhere were attempting to convert their demand and time deposits into currency. Thousands of towns and cities throughout the country were attempting to finance their daily commerce without a single operating bank. And by March, 1933, just before Roosevelt’s “banking holiday” there were even entire states without a single operating bank.
in the first 20 years of the Federal Reserve Act of 1913, there were over 20,000 bank failures. The intention of the framers of the Act was to establish a unified banking system under 12 central banks. There were many flaws in the original Act, one being the establishment of 12 rather than one central bank. The fatal flaw was not making membership in the System compulsory for all money creating institutions. And had not Franklin Roosevelt declared a “banking holiday” in March 1933, the lack of confidence in the banking system would have resulted in the failure of virtually every bank in the United States.
Some unprecedented things have been happening since the coming of the “New Deal” in 1933. On a year-to-year basis, Federal Reserve Bank credit has always expanded. The same applies to commercial bank credit, and the means-of-payment money supply. The consumer price index has fallen on a year-to-year basis in only two years, 1937 and 1949. The chief factor affecting the level of long term interest rates since the early 1950’s is inflation expectations, not the level of business activity.
We now actually have a central bank. It is called the Federal Reserve Bank of New York. An amendment to the Federal Reserve Act in 1933 established The Federal Open-Market Committee and gave it the power to control Total Reserve Bank Credit. The Fed can now buy an unlimited volume of earning assets. (With the federal debt at over 8.9 trillion, and expanding, and billions of dollars of “eligible paper” available, the term “unlimited” is not an exaggeration in terms of any potential needs of the Fed.) In the process of buying Treasury Bills etc., new Inter-Bank Demand Deposits (IBDDs) are created. These deposits can be cashed by the banks into Federal Reserve Notes, without limit, on a dollar-to-dollar basis.
Today, the public, seeking to cash their deposits, would soon have a surfeit of paper money. A general run on the banks is impossibility. Where the Federal Deposit Insurance Corporation cannot handle the situation (Continental Illinois, for example), the Fed will guarantee the liquidity of the bank’s deposits. In other words, a liquidity crisis leading to the wholesale failure of commercial banks is impossible. Where banks are allowed to fail, or are absorbed into solvent banks, customers never suffer losses if their deposit does not exceed $100,000. The fed intervened in the Continental case because many corporations, foreign and domestic, had deposits far in excess of $100,000.
These institutional changes plus the numerous “safety nets” now provided business and consumers preclude a recurrence of a “Great Depression”.
In the period from 1929 – 1932 stocks were spiraling down, unemployment was becoming endemic, businesses were failing in increasing numbers, bank failures were accelerating, and millions of people were suffering severe malnutrition, there was not a single piece of legislation passed by Congress or action taken by the administration which had any significant effect in stemming the tide of economic disaster.
In retrospect, the answers to the depression seem simple. We needed a central bank that could and would pump IBDDs into the commercial banks in a volume sufficient to satisfy the public’s demand for currency, specifically paper money (currency is an asset the Fed does not, should not, and cannot control). In the control of the monetary aggregates, the monetary authorities are completely dependent on their power to control the volume of bank credit. They have no power over the volume of the Treasury’s General Fund Account or the currency holdings of the public.
It was not until 1933 that we began to unshackle our paper money from the numerous and unnecessary restrictions pertaining to its issuance. With the numerous types of paper money in circulation at the time, this would seem to have been a non-problem. Here is the list: gold certificates, silver certificates, national bank notes, United States notes, Treasury notes of 1890, Federal Reserve Bank notes, and Federal Reserve notes. With that array of paper money there should have been plenty to meet the liquidity demands placed on the banks by the public. But the volume of each type that could be issued was so circumscribed by restrictions that even the aggregate group could not begin to meet the panic demands of the public.
Today we have only the Federal Reserve Note, and there is only one restriction placed upon its issuance. No Federal Reserve Note can be put into circulation unless there is a prior transaction involving the relinquishing by the public of an equal volume of bank deposits, and an equal diminution of the holdings of IBDDs on deposit with the Federal Reserve Banks; In other words, the issuance of our paper money contains no inflationary bias. Its issuance does not increase the volume of money. It merely substitutes one form of money for another form
The last vestige of legal reserve and reserve ratio requirements against the Federal Reserve Note, demand deposit, and inter-banks demand deposit liabilities of the Reserve banks was eliminated in 1968. Today the Federal Reserve Note has no legal reserve requirements, and the capacity of the Fed to create IBDDs has no legal limit. These IBDDs are owned by commercial banks; they are bank legal free reserves and can be converted dollar-for-dollar into Federal Reserve Notes. The volume of IBDDs is almost exclusively related to the volume of Reserve Bank credit. When Federal Reserve Banks expand credit, for example by buying U.S. obligations, the balance sheets of the Banks reflect an increase in earning assets and an equal increase in IBDD liabilities, i.e., legal free reserves
Actually the issuance of Federal Reserve Notes is deflationary, other things being equal, since the issuance diminishes the clearing balances and legal free reserves of the commercial banks. The Fed recognizes this fact and uses its open market power to replenish bank free reserves and prevent any unwarranted contraction of bank credit.
In 1933 the Federal Reserve Note had to be collateralized by at least 40 percent in gold bullion or coin, and the remaining collateral had to consist of eligible comer paper, principally Trade and Banker’s Acceptances. The problem was the banks had practically no eligible collateral.
The first tentative step was to reduce the gold requirement to 25 percent and allow U.S. government obligations to provide the remaining collateral. The framers of the Federal Reserve Act did not believe that the credit of the U.S. government was inferior to that of the Federal Reserve Banks and the short term commercial paper of business; they merely believed that the volume of paper money should rise and fall with the level of business activity. They also had the naïve belief that this country was so big, so diverse in its commercial needs, that it needed twelve central banks.
Had the present Federal Reserve System been in place at the beginning of the Great Depression, there would have been no Great Depression. We were not reduced to practically a barter economy because the banks were insolvent; we needed that condition because perfectly sound banks could not meet the liquidity tests imposed upon them by a panic-stricken public.
One of the preconditions the U.S. needed in 1929 was a much larger national debt, and a willingness on the part of the Congress, the Administration, and the business community to tolerate an adequate expansion of the national debt. In 1929 the national debt was less than $17 billion, and the banks held only a small proportion of that amount. We needed a larger debt and a much more rapidly expanding debt in the 1930’s, not only to “prime-the pump”, but to meet the monetary management needs of the Fed. Note: Both Roosevelt and Hoover in 1932 ran on platforms calling for balanced budgets.
The open market operations of the Fed require a depth of market that will enable the Fed to buy or sell billions of dollars worth of treasury bills on any given day without deeply disturbing the bill rates. Another of the many lessons from the Great Depression was the realization that if a financial panic is allowed to reach crisis proportions, monetary policy becomes useless, totally ineffective.
For all of the Great Depression legal reserve management was impossible even though the Banking Act of 1933 provided for the coordination of all open market operations through the New York Reserve bank. (that is to say, before 1933 one FRB could be conducting operations of the buying type -- expanding credit, creating bank free reserves and laying the foundation for a multiple expansion of money, while another FRB was doing the opposite, -- conducting open market operations of the selling type) Before April 1933 any excess free reserves in the system were quickly wiped out by the massive “runs” on the banks.
But even after bank failures were brought under control business confidence remained so traumatized the expansion of legal free reserves remained to a large extent excess free reserves. There were not enough credit worthy borrowers in the private sector (according to the bankers), and in the public sector there was an insufficient volume of government debt to absorb excess bank lending capacity. From 1933-1942 the centralization of the open market power was of little consequence. It was not until about 1942 that the member banks operated with no excessive amount of excess free reserves.
After 1933, after we had a central bank and a coordinated Fed credit policy, the Fed pumped billions of dollars of free reserves into the banks; and nothing happened. There were years during this period when the excess legal free reserves held by the member banks were larger than the volume of required free reserves. The exercise of Fed policy was likened “to pushing on a string”. Note: before 1942, and before the federal debt became a controlling economic factor, demand deposits fluctuated up and down with the business cycle. Commercial banks were commercial banks and when business demand for loans increased, demand deposits increased, and vice versa. Now the banks always remain fully “lent-up”, they hold no excessive amount of excess legal lending capacity to finance business (or consumers), it is now used to acquire a piece of the national debt or other creditor ship obligations that are eligible for bank investment.
World War II changed this and since 1942 the member commercial banks have operated with no significant amount of excess legal free reserves. Excess free reserves were, and should be, made equal to total free reserves minus the product of all deposit liabilities times the reserve ratios.
Today, the monetary authorities use two tools to control the money supply, legal free reserves and reserve ratios. Furthermore, the reserve assets that all money creating institutions are required to hold, should be of a type the monetary authorities can quickly ascertain and absolutely control. The only type of bank asset that fulfills this requirement is interbank demand deposits in the Federal Reserve Banks owned by the member banks. This was the original definition of the legal free reserves of member banks in the Federal Reserve Act on Dec. 23, 1913 –(Owen-Glass Act) and it is still the only viable definition (pre-Dec 1959 requirements pertaining to assets). The time is long past for the Congress to require that balances (IBDDs) in the Federal Reserve Banks be the sole legal free reserves of all banks. If this reform is not made all other reforms will be of little consequence.
Similarly the monetary authorities have to have complete discretion over changes in reserve ratios. Note: required free reserves were 20 percent of demand deposits (for central reserve cities) in 1958 and are 10 percent today. This is essential since under fractional reserve banking (the essence of commercial banking) these ratios determine the minimum volume of legal free reserves a bank must hold against a specified volume and type of deposit liability
Note :deposit classification for reserve ratio purposes is based on the false premise that the purpose of legal free reserves is to provide bank liquidity. As a consequence of the abuse and laxity now surrounding the administration of monetary policy, commercial banks since 1994, have been permitted to arbitrage –that is to sweep (reclassify), checking accounts into savings accounts, overnight to circumvent required free reserves.
Rather than discipline the member commercial banks the reserve authorities have become increasingly lenient, resulting in many undesirable forms, including allowing member banks to count vault cash as a part of their legal free reserves, thus confusing liquidity (liquid assets to meet seasonal and other “extra” demands on their clearing balances) and legal free reserves and making the Fed’s job of monitoring the volume of legal free reserves more difficult to predict.. Required reserve balances at the Federal Reserve Banks are now only 15 percent of their level at the end of the 1980s. Today 85 percent of commercial bank legal free reserves is now applied vault cash. Since the beginning of the 1990s IBDDs at the Reserve Banks have declined by 83 percent, and lagged reserve requirements have replaced contemporaneous reserve requirements as a result (see numerous reserve figure revisions and bankers inability to determine requirements pertaining to assets ).
The monetary authorities have long recognized that the volume of bank legal free reserves, combined with the reserve ratios applicable to various class of bank deposits, determined the limits and, since 1942, the amounts of bank credit creation (Member commercial banks have maintained negligible excess free reserves since 1942) Bank credit creation is a “system” process. No bank or minority group (from an asset standpoint) can expand credit (and the money supply) significantly faster than the majority group are expanding. Prior to the DICMCA of 1980 member banks held only 65 percent of total bank assets, (after holding 85 percent in the late 1950’s), thus creating the need for new legislation to reign in the state chartered banks that had lower reserve requirements.
With deposit classifications reduced, reserve ratios reduced, non-bound CBs, and a 30 day lagged reserve maintenance; this all adds up to a legal reserve apparatus that the Fed cannot monitor, much less control, even on a month-to-month basis. And the Fed cannot know, in a meaningful administrative sense, the current volume of depository institution legal free reserves. What the net expansion of money will be, as a consequence of a given injection of additional free reserves, nobody knows until long after the fact. The consequence is a volatile, delayed, remote, and approximate control over the lending and money-creating capacity of the banking system. The rationale for this particular form of “accommodation” originates from the Fed’s technical staff, by adhering to the false Keynesian theory – that the money supply could be properly controlled through the manipulation of interest rates (specifically the federal funds “bracket racket”) – lost control of both the money supply and the federal funds rate. The Fed cannot control interest rates, even in the short end of the market except temporarily.
The first order of business should be to require all banks to have the same legal reserve requirements, both as to types of assets eligible for reserves and the level of reserve ratios. The Fed should limit all reserves, to balances in the Federal Reserve banks, and have uniform reserve ratios, for all deposits, in all banks, irrespective of size.
From a systems viewpoint, commercial banks as contrasted to financial intermediaries, never loan out existing deposits (saved or otherwise) including existing DDs, or TDs or the owner’s equity or any liability item. When CBs grant loans to or purchase securities from the non-bank public (which includes every institution and every person except the commercial and the reserve banks), they acquire title to earning assets by the creation of NEW money-DDs.
From the standpoint of the individual banker his institution is an intermediary. An inflow of deposits increases his bank’s clearing balances, and probably its legal reserves – and thereby its lending capacity. But all such inflows involve a decrease in the lending capacity of other banks, unless the inflow results from a return flow of currency to the banking system or is a consequence of an expansion of Reserve Bank credit.
It was true, as the Keynesians insisted, that monetary policy didn’t matter; fiscal policy was everything. No more. Never will we allow a financial panic to get out of hand, and never will we have another Great Depression. That does no mean the future is rosy. The future holds the prospect of sharply declining levels of consumption for the vast majority of the American people, who will be facing years of stagflation. It is probable that we will never be able to dig ourselves out of the present morass of debt and still operate the economy within the framework of a free capitalistic system.

Comments on: Personal Story by a Lawyer from a Previous Asset Bubble. Can we Learn from the Past and How will the Housing Decline Impact You?

By: Conrad

By: Mike in Iraq

By: nick gogerty

By: Don Stephens

By: Flow5