Need help in this argument

22 posts / 0 new
Last post
castlewp's picture
castlewp
Status: Gold Member (Offline)
Joined: Oct 7 2008
Posts: 304
Need help in this argument

Hi all. A friend of mine (who works for Deutsch Bank in NYC) and I are having quite a discussion about the Federal Reserve and Ben Bernake.  After going back and forth he sent me this email which I would like your feedback.

"We will start with the purchasing power they give is completely ridiculous, no form of inflation and 100% stable prices is laughable, and in itself naïve, and shows a lack of understanding of basic economics.  If you have workers making widgets, inevitably those workers are going to want raises, those higher wages increase the cost of the widgets. I.e. Inflation. For there to be nothing but stable pricing is impossible.  Don't get me started on supply and demand and a growing global population, all striving to better themselves and live better lives but at the end of the day we only have so much natural resources.  Open page 1 of your econ 101 book, you will see a supply and demand curve.

The gov'ts only real source of income is interest on money it prints?  Interesting, pretty sure I pay a hell of a lot of income taxes.

As for banks,  I will make this simple.  By definition a BANK is a levered entity.  If 10 people each deposit $100 into a bank, that bank now has $1,000.  That bank will then lend, let's call it 80% of that money to local businesses, people who want to buy homes.  That leaves $200 of reserves for people to pay their bills, take cash out, or whatever.  Sometimes they might have a 1 or 2 people too many pay bills at the same time, let's say the 30th of every month, so the bank needs to borrow that $ on a short term basis.   That is what the federal reserve is there for, if it isn't or some other type of organization, then the banking system doesn't work, and the economy gets stuck in the mud, never moving us forward.  The industrialized nation as we know it would be non_existent.

Now sometimes, as it did in fall of 2008, a panic is caused because of an economic event, such as a housing bubble created by congress and the american consumer who took on too much debt and lived above their means. Don't get me wrong, this was exacerbated by certain mortgage brokers, banks, the gov't, and many others, and at least when it comes to the banks and the mortgage brokers, those people are long gone.  But make no mistake, the root of the problem was the american consumer, and the loosening credit standards put in place by our congress in the 1990's that forced freddie and fannie to give mortgages to people that had no chance of paying it back. We love to come up with conspiracy theories and blame others, but we have nobody to blame but ourselves.  If we took more responsibility for our own actions, we wouldn't be in this mess.

I got off course, I will finish up with my banking tutorial.  When a financial crisis occurs, everyone rushes to the bank to take out their money, well guess what. It's not all there.  It was old fashion run on the banks (more complicated thank that but my thumbs are beginning to get tired).  The Fed and the FDIC, without their intervention, the financial system would have collapsed.  These entities have to exist to supply order in the system. Is it perfect, no.  But, remember, we are dealing with events that are unforeseen, there is no simple answer or easy plan in place. And for these gutless congress people (and video makers) to ask ridiculous questions only look tough and get reelected is a joke.  If they are so damn brilliant, where are their great ideas on how to better handle the situation?  Haven't heard one yet.  It's easy to criticize and pass around mistakes made by individuals like Bernanke, but at the end of they day, he had the Balls to do something, might not have been perfect but he did something. He knew he was stretching his reach, and would pay for it when I was over, but he still did it, not to get reelected but because somebody had to.  If it were up to our congress it would have been a tsunami of shit you could never have imagined."

docmims's picture
docmims
Status: Platinum Member (Offline)
Joined: Jun 17 2009
Posts: 644
Re: Need help in this argument

He just postponed things a bit.  Quite frankly, if you add the amount we "owe" ourselves as social security retirement, our new debt is now around 5 times our GNP.  Bernanke did stave off financial collapse, but the day to pay the piper is still coming.

Subprime JD's picture
Subprime JD
Status: Platinum Member (Offline)
Joined: Feb 17 2009
Posts: 562
Re: Need help in this argument

If you have workers making widgets, inevitably those workers are going to want raises, those higher wages increase the cost of the widgets. I.e. Inflation

Mr. Banker fails to realize that as technology and efficiency improve, the cost of goods fall so workers purchasing power increases, thus eliminating the need for a raise. Also, if govs keep taxes low and keep gov spending/borrowing/printing low thus less inflation or even deflation real prices.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Need help in this argument

I only went as far as paragraph 3. I have a veep of a bank on FB with me. I go back and forth with this cr*p every week.

First the leverage created by derivatives and the ability to not give a sh*t if the money would or wouldn't be paid back created the ability to have a housing bubble. The rating also fueled the fire and allowed sh*t to be offed to pension funds. Everyone may want drugs but when you legalize crack dealing you are going to get addicts.

Keynesian 101 is a $60,000.00 waste of a false education. Want proof? How many Keynesian economists forsaw this train wreck?

Like Bernoulli's Law doesn't make lift on airplanes inflation is not high prices. Inflation is the amount of money. When our dollar is worthless because they they created trillions out of thin air he/she and the rest of the people who got duped by Keynesian will get it when they are out in streams pan handling for gold so they can buy grub.

One word: Zimbabwe.

The government is insolvent. They take in 2 trillion and blow 4 trillion. He/she and everyone else will be paying more in taxes, the average Joe/Jane already works from Jan 1 to Sep 1 and every cent goes to Uncle Sam who spends 2x that.

No offense, your friend hasn't a clue, I can't even bear to read the rest of it. Clueless. Absolutely clueless.

PS He/she makes it sound like the bank loans out it's investments and doesn't create money/loan out more than it has. That's a novelty in my book.

 

rowmat's picture
rowmat
Status: Gold Member (Offline)
Joined: Nov 15 2008
Posts: 358
Send your friend this....
  1. Reinstate Glass Steagall
  2. Ban naked short selling
  3. Actually ENFORCE anti-fraud laws
  4. Investigate AND prosecute those shown to have broken laws
  5. Take back all taxpayer monies provided to Wall Street
  6. Take back all bonuses paid to those who were, at the time, recipients of taxpayer funds
  7. Dismantle the Federal Reserve
  8. Ban lobbyists
  9. Once a week broadcast a list of all political donations and the names of those who receive them on TV and radio along with which way they voted on bills
  10. Let the public stockholders of a company decide the renumeration of those who run it
  11. Put and end to 'Too Big To Fail' (Too Big To Fail means Too Big To Exist!)
  12. Remove the revolving door between big business and Washington

That' will do for starters

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Send to friend this....
rowmat wrote:
  1. Reinstate Glass Steagall
  2. Ban naked short selling
  3. Actually ENFORCE anti-fraud laws
  4. Investigate AND prosecute those shown to have broken laws
  5. Take back all taxpayer monies provided to Wall Street
  6. Take back all bonuses paid to those who were, at the time, recipients of taxpayer funds
  7. Dismantle the Federal Reserve
  8. Ban lobbyists
  9. Once a week broadcast a list of all political donations and the names of those who receive them on TV and radio

That' will do for starters

Re-denominate the dollar. Stop the fuzzy math. Stop the off balance sheet accounting. Apply the same rules to Social Security that you would have with pension funds - or get rid of it. Get rid of the Fed and FRB. Use GAAP accounting, with NO off balance sheet BS.

rowmat's picture
rowmat
Status: Gold Member (Offline)
Joined: Nov 15 2008
Posts: 358
Oh and get him to watch some Steve Keen lectures

n/t

castlewp's picture
castlewp
Status: Gold Member (Offline)
Joined: Oct 7 2008
Posts: 304
Re: Oh and get him to watch some Steve Keen lectures

This was the original email he sent me that got me going.  He has obviously drank the DB Kool Aid.

"The market is down 400 points this week due to this presidents administration trying to distract citizens to the fact they are losing the battle against the current health care plan.  in their efforts to deflect blame and to try to not look anymore stupid than they already do, they have decided to go back to blaming the banks and Fed Reserve President Bernanke who worked around the clock and saved not only the financial system but life as we know it, we were headed for a disaster we may never have come out of if not for his multiple programs to get the economy and financial system to where we are today, not great but a heck of a lot better.  He implemented many programs, some never used before.  He repaired the commercial paper market which is the life blood to corporate lending as well the money market funds, and has gotten the credit and capital markets back into shape, or we would have seen a wave of corporate bankruptcies like you could not imagine.  I won't get into interest rate stuff, but his programs are the reason mortgage rates are so low, and the housing market has fallen even further.  Not to mention the huge recover we have seen in the S&P 500.  I am sure you have all seen this reflected in your 401K statements in the past year."

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Oh and get him to watch some Steve Keen lectures
castlewp wrote:

This was the original email he sent me that got me going.  He has obviously drank the DB Kool Aid.

"The market is down 400 points this week due to this presidents administration trying to distract citizens to the fact they are losing the battle against the current health care plan.  in their efforts to deflect blame and to try to not look anymore stupid than they already do, they have decided to go back to blaming the banks and Fed Reserve President Bernanke who worked around the clock and saved not only the financial system but life as we know it, we were headed for a disaster we may never have come out of if not for his multiple programs to get the economy and financial system to where we are today, not great but a heck of a lot better.  He implemented many programs, some never used before.  He repaired the commercial paper market which is the life blood to corporate lending as well the money market funds, and has gotten the credit and capital markets back into shape, or we would have seen a wave of corporate bankruptcies like you could not imagine.  I won't get into interest rate stuff, but his programs are the reason mortgage rates are so low, and the housing market has fallen even further.  Not to mention the huge recover we have seen in the S&P 500.  I am sure you have all seen this reflected in your 401K statements in the past year."

I'll agree on a few points. I hate to get political but the fact of the matter is they are looking for a scape goat. Health care failed. Scott Brown delivered that message.

Message received at the White House.

Now they are taking the collective anger of those who are po'd about Health Care and funneling it towards the banks. Don't know if there will be any bight. Like MachineHead pointed out, the banksters got 140 billion in one year and will likely negotiate out of the 90 billion in fines over 10 years.

Bernake is an utter and absolute moron and a failure. He prolonged the depression, doing so will only make it worse. We also now are trapped. Who the heck thinks we will get Volcker or some Volckerite who jacks up interest rates? I mean really! The interest on the deficit would be un-payable.

As for the 401k comment - who cares, if you still have one it will the governments they will take it and buy UST's that no one else will want.

He/She is nice I'm sure, just like my FB Veep. But nice and without a clue are two different things. I'm going to stop bashing the banksters on my facebook because I could argue with my chickens and have a better time.

Good luck.

joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Re: Need help in this argument

I have the same issue with my friend, who is a financial advisor for one of the large banks that is a ward of state. He was complaining to me yesterday(and I'm sure that he was pitching the company line) that Obama was being anti-business, anti-banks with his bank plans.

Mish said this the other day...be careful what you wish for...which I happen to agree with. I'd rather have honest markets. I just don't know that the sheep are ready for reality. Maybe Prechter will be right after all!

Quote:

 

Be Careful What You Wish

Everyone is railing about banks not lending and the bonus pools at Goldman Sachs, JPMorgan, and Morgan Stanley. Well guess what?

  • Reduced leverage means reduced lending and reduced profit potential.
  • Marking loans to market would reduce lending and reported earnings.
  • Goldman Sachs going private would reduce S&P 500 earnings.
  • Bringing assets on to the balance sheets of banks would reduce S&P 500 earnings.
  • Reduced earnings (in the long run) means lower share prices

Everyone wants more small business lending and less risk. Sorry folks, that is physically and logically impossible. Reducing reckless risk, especially risk born by others (taxpayers) is a good idea, but it's important to understand exactly what that will mean to earnings going forward.

Think of the affect lower share prices and reduced risk taking will have on pension plans and 401Ks. In the long run, less risk is a good thing, and I am in favor of it. I just doubt people are prepared for what it means.

The stock market is already insanely overvalued, and the regulatory actions everyone is clamoring for will make it even more so. Good luck with that.

Johnny Oxygen's picture
Johnny Oxygen
Status: Diamond Member (Offline)
Joined: Sep 9 2009
Posts: 1443
Re: Need help in this argument

OK. From what I've read in your friends post I would say he is defending the current economic system which means fractional reserve banking, Keynesian economics and so forth. Most of his argument centers around the fact that if you don't support the mechanisms then the system will fail. Which is correct.

The gov'ts only real source of income is interest on money it prints?  Interesting, pretty sure I pay a hell of a lot of income taxes.

The government gets money form taxes, bonds and of course just printing it.

As for banks,  I will make this simple.  By definition a BANK is a levered entity.

Yes. In a Keynesian world this is true. Replace this with a debt free note (greenback) and the problem vanishes. So why is it still here? Bankers and their paid politicians.

That is what the federal reserve is there for, if it isn't or some other type of organization, then the banking system doesn't work, and the economy gets stuck in the mud, never moving us forward.

Yes. In a Keynesian world this is true. Which proves that it doesn't work.

the root of the problem was the american consumer, and the loosening credit standards put in place by our congress in the 1990's that forced freddie and fannie to give mortgages to people that had no chance of paying it back.

Yep. Heard this argument a lot and it is naive. Do you really think a banker would put themselves in jeopardy of taking a huge loss because the government told them to do this or that. No way in h*ll. The truth is the bankers thought that housing prices were going to continue to soar. So you give anyone a loan that will take it. When they default, and you know they will, then you keep what they have put into and then but the house back on the market at its assumed higher value price. That is why the bankers did it. Pure greed.

The Fed and the FDIC, without their intervention, the financial system would have collapsed.  These entities have to exist to supply order in the system.

Again. The great keynesian lie that bankers love sooo much. It really amounts to extortion. Give us your lunch money or we'll beat you up. Or in this case crash your economy.

If they are so damn brilliant, where are their great ideas on how to better handle the situation?  Haven't heard one yet.

Of course not because they are in the pocket of the bankers.

Look. His whole argument revovles around supporting a system that cleary only works for the top 2% were debt goes to the poor gain goes to the wealthy. The Keynesian system, by design, is in play because it benefits those in power. Period.

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Need help in this argument

Wow....  only just picked this thread up...  talk about believing your own BS!

Tell him to do the CC.

Mike

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
edwin's picture
edwin
Status: Member (Offline)
Joined: Apr 21 2009
Posts: 5
Re: Need help in this argument

Hi

Nice to read about people that work for big banks haven't a clue what their employers business is. I have come across a few myself, but they where very receptive to arguments since we are experiencing a financial crisis. I must admit not being aware of fractional reserve banking myself before september 2008. A collegue had told me about it before that but it just didn't get it (so unbelieveable?)

Of course the (big) banks played a huge part in the mortgage mess. They sold the mortgages to anyone who wanted them (really anyone) and then insured themselves with CDSs at AIG and friends. There was no way to loose as long as the insurance companies would pay up in case of a default. The funny thing is that nobody expected to get 100cents on the dollar with their CDSs, but that is what mr Geithner took care of.

Edwin

A1B2C3D4's picture
A1B2C3D4
Status: Member (Offline)
Joined: Aug 24 2009
Posts: 24
Re: Need help in this argument

It is not widely understood that politicians were at the root of the housing debacle. As far back as 1977 Congress passed the Community Reinvestment Act which pressured banks to make the loans to those who didn't meet the ordinary criteria whose use excluded such poor risks. The banks would be graded and in order to avoid an unsatisfactory grade had to increase the volume of loans made to poor risk applicants. Those who pleased the govt regulators got an AAA rating!

The impetus for this government intervention in the banking mortgage industry was the desire on the part of lobbyists, ACORN being a major one, to enable poor people to realize the American Dream of home ownership. 

Yes the banks made the loans under duress. The mortgage loans were then passed on to entities like Fannie Mae or Freddie Mac which bundled them mixed in a few better quality loans and passed them still further to hedge funds. 

Sure people seeking a certain amount of money were encouraged to believe they could afford still higher amounts, and a larger home!

Naturally government officials at the highest level now claim that government was not responsible for the debacle which ensued, blamed the banks instead, and claimed that only the government could resolve the crisis if it only had more power!

Also notice that the Federal Reserve System "created" the funds, coupled with the Fractional Reserve Banking Policy, to provide the banks with the paper currency necessary to make those mortgages possible.

If you would like a few links I suggest: 

Ayn Rand's Atlas Shrugged, a novel from 1957 dramatizing timeless principles and getting to the philosophical basis for our troubles. Capitalism: The Unknown Ideal and The Virtue Of Selfishness and For The New Intellectual. Also The Objectivist Newsletter 1962-65

www.atlassociety.com www.fff.org www.mises.org www.cafehayek.com www.aynrand.org www.fee.org www.YALiberty.org www.campaignforliberty.com

 

John99's picture
John99
Status: Gold Member (Offline)
Joined: Aug 27 2009
Posts: 490
Re: Need help in this argument

Hi Castlewp

Your friend's email seems flawed from the very beginning and starting with a flawed premise, and therefore impacts most everything else.

He is missing the whole reality of 'fractional reserve banking', which is the mechanism that causes inflation in the first place.

In his early paragraph he speaks about the widget workers demanding more increases in pay and infers this is the cause of inflation.

Reality is the workers need increases in wages because the cost of living inflates. As the cost of living increases, they need more money just to keep even. The workers do not cause the inflation, the banking system does through 'fractional reserve lending (or banking).

In his next paragraph he shows that he misunderstands Fractional Reserve Banking. He uses the example of $1,000 in deposits and then incorrectly states that of that amount the bank lends out $800 keeping $200 in reserve. No such thing. The bank keeps the entire $1,000 as a 10% base reserve, for creating out of thin air, a new $9,000 of money that never before existed, and here is the inflation - immediately, as this newly created money comes into existence and on into the economy. The more money chasing the same number of goods and services drives up prices (or actually devalues the purchasing power of existing money).

There is also the point that this newly created $9,000 will be issued as debt and loaned out into the economy (cars, houses, etc). The next problem is that because all previously existing money has also been issued as debt,  the money for the interest payments on this new $9,000 does not exist. Every current dollar in existence is owed to somebody by somebody else. Even the money in our wallet, which we hold for a time-dated period.

The interest payments on newly created money have to be stolen from the existing money supply and out of future fractional reserve debt creation, and this guarantees scarcity, greed and hording as we all fight to make those interest payments. The money creation system of fractional reserve banking by its nature, creates and causes inflation.

We believe when we deposit that $1,000 into the bank, it is our money. Truth is it is not, it becomes the bank's money. Yes, they have an obligation to return it to us, but legally we have loaned this money to the bank to invest however they see fit. And when they create $9,000 in new money issued as debt, if any or all of those loans default, our initial $1,000 deposit disappears very quickly.

An excellent vid for this is Money as Debt II, Promises Unleashed at:



And some confusing info on Fractional reserve Banking at:
http://en.wikipedia.org/wiki/Fractional Reserve_banking

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: Need help in this argument

Castle,

Mr. Banker is so deluded he needs several months of financial rehab to hope to begin to cure his ailment.  I am not suggesting my response here will address every point in his post, but I will try to hit the major ones.

Inflation is caused by the growing supply of money and credit, and no other reason.  Workers do not demand higher wages just because they want them.  Maybe in today's society, due to the fact we have been programmed to assume some amount of inflation every year, some people might believe this is just the way things are, instead of the ways things are caused to be by our banking and monetary system. 

Nowhere does he place any of the blame for the bubble on the Fed's cheap interest rates.  I agree that some of the villains he points to are real:  Fannie, Freddie, Congress, and to some extent, the consumer.  However, behind all this was cheap money provided by the Fed, without which none of the other "villains" could have done squat.

The Fed, and you friend's hero, Bernanke, created the bubble which they later and still do claim to have saved us from.  They always cause the financial disasters they later claim make their existence necessary for without them we could not save ourselves from them. 

He also describes the Fed as if it's some objective, non-profit entity only here to save us from ourselves.  Nothing could be further from the truth!  The Fed is owned by ever bank in America.  Literally every bank, when chartered, has to put up x% (I think it's 6%) of their net assets for their "Fed membership dues", and this gives them the right to be bailed out at the taxpayers expense later on.  It's just a cartel, and the myth that we need the Fed to save us from financial crisis is bunk, since the Fed has precipitated financial crisis after financial crisis ever since it was invented.  In fact, that is what they are best at.  It is a cartel with a monopoly on our money and credit, the ability to create money and credit out of thin air yet charge us interest, topped off with the ability to make us the taxpayers cover for their mistakes when things go wrong under the preposterous notion that we must do so to save ourselves.

There is a conspiracy theory here alright, and it revolves around what the Fed tries and would like for the rest of us to believe about it, it's members, and their collective cartel of larceny.

 

 

 

 

 

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Need help in this argument

You might want to email your friend this link and tell him to go to page 94.

One thing I'd also tell them is that Deutche Bank has 31 billion in derivatives in the US, not sure what it has outside, but they are 24 on the list below JPMC, BOA and CITI which have87trillion, 38 trillion and 31 trillion respectively.

Best luck when these blow up.

castlewp's picture
castlewp
Status: Gold Member (Offline)
Joined: Oct 7 2008
Posts: 304
Re: Need help in this argument

Hey guys you are great!!! Thank you so much for the information. It is really helping and he is actually listening to the points you have all made that I couldn't articulate.  I have mentioned to him to watch the CC but to no avail,  yet.

Bill 

LogansRun's picture
LogansRun
Status: Diamond Member (Offline)
Joined: Mar 18 2009
Posts: 1444
Re: Need help in this argument

You may want to look at this thread for some great info concerning fractional lending.  Larry (DrKLuv) is the BEST!!!!

http://www.peakprosperity.com/forum/understanding-cc-chapter-7-fractiona...

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: Need help in this argument

Castle, this video vlog by Peter Schiff on Jan 21, hits a lot of points on all this:

 

jpitre's picture
jpitre
Status: Gold Member (Offline)
Joined: Mar 3 2009
Posts: 366
Re: Need help in this argument

And this guy is a banker ?!? Suggest Chapter 7 as a good start 

http://www.peakprosperity.com/crashcourse/chapter-7-money-creation

Your friend says that the bank gets to loan $800 on the $1,000 deposit, however the banking system gets to loan $10,000 which makes quite a difference.

Jim

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments