Fed's John Williams Opens Mouth, Proves He Has No Clue About Modern Money Creation

Tyler Durden's picture




 

There is a saying that it is better to remain silent and be thought a fool than to speak out and remove all doubt. Today, the San Fran Fed's John Williams, and by proxy the Federal Reserve in general, spoke out, and once again removed all doubt that they have no idea how modern money and inflation interact. In a speech titled, appropriately enough, "Monetary Policy, Money, and Inflation", essentially made the case that this time is different and that no matter how much printing the Fed engages in, there will be no inflation. To wit: "In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid. Over the past four years, the Federal Reserve has more than tripled the monetary base, a key determinant of money supply. Some commentators have sounded an alarm that this massive expansion of the monetary base will inexorably lead to high inflation, à la Friedman.Despite these dire predictions, inflation in the United States has been the dog that didn’t bark." He then proceeds to add some pretty (if completely irrelevant) charts of the money multipliers which as we all know have plummeted and concludes by saying "Recent developments make a compelling case that traditional textbook views of the connections between monetary policy, money, and inflation are outdated and need to be revised." And actually, he is correct: the way most people approach monetary policy is 100% wrong. The problem is that the Fed is the biggest culprit, and while others merely conceive of gibberish in the form of three letter economic theories, which usually has the words Modern, or Revised (and why note Super or Turbo), to make them sound more credible, they ultimately harm nobody. The Fed's power to impair, however, is endless, and as such it bears analyzing just how and why the Fed is absolutely wrong.

First, here is our rule of thumb to determine if someone who talks about money, inflation or monetary policy has even a vague clue of what they are talking about: do a text search for the words: repo, shadow banking, collateral, collateral-chains, rehypothecation, or deposit-free money creation. If not one of those terms appears anywhere, feel free to toss the reading material right into the trash.

The reason for this is that as we will not tire of explaining, conventional monetary theory, as it existed 50, 40 or even 30 years ago changed totally and irrevocably with the advent of shadow banking: financial bank transformation (Maturity, Credit and Liquidity) intermediaries unfunded by deposits, and whose liabilities exist in state of Schrodingerian "moneyness" limbo, as unlike banks they have no [insert term here]-to-deposit ratios of any kinds. As such the liabilities backing the assets shadow banks create out of thin air has the same practical reality as a wave function: the money is there, as long as it is not observed. Any process of observation of what is really beneath the surface leads to an eventual collapse of the Shadow Banking wave function, and with it the credit money that it sustains. As frequent readers will know this is a sizable amount: as of last chick it was just under $15 trillion or just over the total conventional liabilities in circulation!

We have discussed the topic of Shadow Banking, and its importance extensively before, most recently here.

What is amusing and at the same time tragic is that as the chart above shows, the reason why virtually nobody talks about shadow banking, and not one coherent monetary theory exists to account for its is simple: shadow banking as a relevant phenomenon only appeared in the 1980s and then exploded, hitting a peak of over $20 trillion in liabilities. As such when the bulk of "modern" monetary theories were conceived it was not a factor. Now... it is, and accounts for more than half of the credit money in circulation. 

In other words, an appropriate analogy to what happens when virtually anyone defines or tries to explain monetary policy, having been taught using conventional theory, is the same as attempting to understand how an iPod works using the instruction manual for a 19th century record player.

And still they do.

Here is what is happening explained as simply as possible, and paraphrasing what we said last week:

  • The reason inflation has not exploded yet, dear Mr. Williams, is that even as the Fed is pumping trillions of reserves into conventional financial intermediaries, shadow banking is continuing to implode at a pace of nearly $100 billion per quarter.
  • The continued implosion of shadow banking liabilities is why the Fed will have no choice but to continue stepping in and providing reserves which in turn merely plug a deleveraging hole created as more and more market participants realize the only players left in "capital markets" are central banks, creating a feedback loop, whereby more CB intervention leads to more private capital outflows and so on.
  • The disappearance of shadow liabilities which are deposit-free, and thus not a cause of inflationary concern, means their replacement will naturally have to come courtesy of deposit-backed conventional money replacements.
  • As deposits soar from their current level of $10 trillion to $20 trillion and so on, as more and more money is printed by the Fed, the threat of hyperinflation becomes all too real, as all shadow banking has done for the past 30 years is merely to buffer the inflationary threat! (a bullet point that none of our endgame: deflation friends seem to grasp)
  • Finally, the offset to any actual deflation in the real world, even by the Fed's broken comprehension of modern money creation and monetary pathways is one: CTRL-P. And believe us: puhing CTRL-P takes no effort at all. In fact, the more the 'deflation' out there, the more the CTRL-P pressing. Until one day, hyperinflation, which has always been a phenomenon of terminal loss of confidence in a currency, is the inevitable answer.

And there you have it: this is what Mr. Williams should have discussed when he explained how this time monetary theory is different. He didn't, not because he doesn't get it: we are confident he does, but because he understands that if people begin discussing the real swan in the box, then a light-bulb may go off above the head of some more reputable economist somewhere, and at that point the Fed's little game will be exposed by even the "respected"establishment.

Which is why it won't happen.

Luckily, for those who wish to learn more not less, serendipity will have it that none of than that sole expert on how true modern money creation works, the IMF's Manmohan Singh, has released a key article on VOX just today, which is incalculably more relevant and valuable than any garbage spewed forth by the Fed. The article, is titled, appropriately enough: "The (other) deleveraging: What economists need to know about the modern money creation process." It doesn't explain everything, but at least it attempts to bridge those aspect of shadow money creation that few if anyone dares to speak about in formal circles and among serious people with Ph.Ds, and even Nobel prizes in Economics and Peace.

 

Must read:

The (other) deleveraging: What economists need to know about the modern money creation process

Manmohan Singh, Peter Stella, 2 Jul 2012

The world of credit creation has shifted over recent years. This column argues this shift is more profound than is commonly understood. It describes the private credit creation process, explains how the ‘money multiplier’ depends upon inter-bank trust, and discusses the implications for monetary policy.

One of the financial system’s chief roles is to provide credit for worthy investments. Some very deep changes are happening to this system – changes that surprisingly few people are aware of. This column presents a quick sketch of the modern credit creation and then discusses the deep changes are that are affecting it – what we call the ‘other deleveraging’.

Modern credit creation without central bank reserves

In the simple textbook view, savers deposit their money with banks and banks make loans to investors (Mankiw 2010). The textbook view, however, is no longer a sufficient description of the credit creation process. A great deal of credit is created through so-called ‘collateral chains’.

We start from two principles: credit creation is money creation, and short-term credit is generally extended by private agents against collateral. Money creation and collateral are thus joined at the hip, so to speak. In the traditional money creation process, collateral consists of central bank reserves; in the modern private money creation process, collateral is in the eye of the beholder. Here is an example.

A Hong Kong hedge fund may get financing from UBS secured by collateral pledged to the UBS bank’s UK affiliate – say, Indonesian bonds. Naturally, there will be a haircut on the pledged collateral (i.e. each borrower, the hedge fund in this example, will have to pledge more than $1 of collateral for each $1 of credit).

These bonds are ‘pledged collateral’ as far as UBS is concerned and under modern legal practices, they can be ‘re-used’. This is the part that may strike non-specialists as novel; collateral that backs one loan can in turn be used as collateral against further loans, so the same underlying asset ends up as securing loans worth multiples of its value. Of course the re-pledging cannot go on forever as haircuts progressively reduce the credit-raising potential of the underlying asset, but ultimately, several lenders are counting on the underlying assets as backup in case things go wrong.

To take an example of re-pledging, there may be demand for the Indonesia bonds from a pension fund in Chile. As since these credit-for-collateral deals are intermediated by the large global banks, the demand and supply can meet only if UBS trusts the Chilean pension fund’s global bank, say Santander as a reliable counterparty till the tenor of the onward pledge.

Plainly this re-use of pledged collateral creates credit in a way that is analogous to the traditional money-creation process, i.e. the lending-deposit-relending process based on central bank reserves. Specifically in this analogy, the Indonesian bonds are like high-powered money, the haircut is like the reserve ratio, and the number of re-pledgings (the ‘length’ of the collateral chain) is like the money multiplier.

To get an idea on magnitudes, at the end of 2007 the world’s large banks received about $10 trillion in pledged collateral; since this is pledged for credit, the volume of pledged assets is a good measure of the private credit creation. For the same period, the primary source collateral (from hedge funds and custodians on behalf of their clients) that was intermediated by the same banks was about $3.4 trillion. So the ratio (or re-use rate of collateral) was around 3 times as of end-2007. For comparison to the $10 trillion figure, the US M2 was about $7 trillion in 2007, so this credit-creation-via-collateral-chains is a major source of credit in today’s financial system. Figure 1 shows the amounts for big banks in the US and Europe.

Figure 1. Pledged collateral that can be re-used with large European and US banks

 

An example

As this process is unfamiliar to many non-specialists, consider another example. Figure 2 illustrates how a piece of collateral (e.g., US Treasury bond) may be used by a hedge fund to get financing from a prime-broker (say, Goldman Sachs). The same collateral may be used by Goldman to pay Credit Suisse on an OTC derivative position where Goldman was ‘out-of-the-money’ to Credit Suisse. And then Credit Suisse may finally pass the US Treasury bond to a money market fund that will hold it for a short tenor (or till maturity). Notice that the same Treasury bond has been used twice three times as collateral for extensions of credit – from the original hedge-fund owner to the money market fund.

Figure 2. An example of a collateral chain

 

 

The other deleveraging

Comparing private and traditional money creation, a critical difference is that private credit creation turns on banks’ trust of each other. New credit gets created only if the onward pledging occurs and this depends, for example, on UBS’s trust in Santander as a counterparty in the first example. Due to heightened counterparty risk, onward pledging may not occur and the collateral thus remains idle in the sense that it creates no extra credit.

To put it differently, a key difference between the trade and pledge-collateral credit creation processes is the role of governments. The traditional textbook money multiplier is based on insured deposits and thus largely a creature of government regulation and the central bank’s lender of last resort assurance. The collateral multiplier is very much a creature of the market.1 The multiplier – which essentially measures how efficient illiquid assets can be converted into liquid collateral and thus credit – varies with the extent to which markets views a given asset classes as ‘liquid’ in normal and stressed markets.

This brings us to the key policy point. The ‘other’ deleveraging. In this new private-money-creation process, there are three distinct ways of reducing credit.

  •     Increase the haircut (like raising the reserve requirement);
  •     Reduce the supply of assets that can be used for pledging; and
  •     Reduce the re-pledging of pledged collateral (shortening the collateral chain).

Most recent research has focused on the first. Balance sheet shrinkage due to ‘price declines’ (i.e., increased haircuts) has been studied extensively – including the recent April 2012 Global Financial Stability Report of the IMF and the European Banking Association recapitalisation study (2011).

In this column we raise the flag on the second and (more importantly) the third way. When market tensions rise – especially when the health of banks comes under a shadow – holders of pledged collateral may not want to onward pledge to other banks.

  • With fewer trusted counterparties in the market owing to elevated counterparty risk, this leads to stranded liquidity pools, incomplete markets, idle collateral and shorter collateral chains, missed trades and deleveraging.
  • In practical terms, the ratio of pledged-collateral (which is a measure of the credit thus created) to underlying assets falls as this onward pledging, or interconnectedness, of the banking system shrinks.

This ratio decreased from about 3 to about 2.4 as of end 2010 – largely due to heightened counterparty risk within the financial system in the present environment. These figures are not rebounding as per end 2011 financial statements of banks – see Table 1 and Figure 1. Indeed, anecdotal evidence suggests even more collateral constraints recently.

Table 1. Sources of pledged collateral, re-use and overall collateral 

 

Source: Velocity of Pledged Collateral – update, Singh (2011)

Consequences of the other deleveraging: The cost of credit

Reduced market interconnectedness, or the trend toward ‘fortress’ balance sheets, may be viewed positively from a financial stability perspective if one simply views each institution in isolation. However, the vulnerabilities that have resulted from the weakened fabric of the market may yet to have become fully evident. Since the end of 2007, the loss in collateral flow is estimated at $4-$5 trillion, stemming from both shorter collateral chains and increased ‘idle’ collateral due to institutional ring-fencing; the knock-on impact is higher credit costs for the economy.

Relative to mid-2007, the primary indices that measure aggregate borrowing cost (e.g., BBB index) are well over 2.5 times in the US and 4 times in the Eurozone. This is after adjusting for the central bank rate cuts, which have lowered the total cost of borrowing for similar corporates (e.g., in the US, from about 6% in 2006 to about 4% at present). Figure 3 shows that for the past three decades, the cost of borrowing for financials has been below that for non-financials; however this has changed post-Lehman. Since much of the real economy resorts to banks to borrow (aside from the large industrials), the higher borrowing cost for banks is then passed on the real economy.

Figure 3. Post-Lehman, borrowing cost for financials are higher than non-financials 

 

Source: Barclays Intermediate, investment grade spreads (1983-2012)

Collateral and monetary policy

Since cross-border funding is important for large banks, the state of the global pledged collateral market may need to be considered when setting monetary policy.

Overall financial lubrication in the US, UK, and the Eurozone, exceeded $30 trillion before Lehman’s bankruptcy (of which 1/3rd came via pledged collateral). Certain central bank actions, such as the ECB’s LTRO, the US Federal Reserve’s qualitative easing and the Bank of England’s asset purchase facility have been effective in alleviating collateral constraints. However, these ‘conventional’ actions, to the extent they merely exchange bank reserves for collateral of prime standing (such as US Treasuries), do not address the issue credit creation via collateral re-pledging (Singh and Stella 2012).

The ‘kinks’ in the red line (Figure 4) M2 expansion due to QE but much of the ‘easing’ for good collateral is deposited with the central banks and is not available to fund lending. As of end-2011, the overall financial lubrication is back over $30 trillion but the ‘mix’ is in favour of money which not only has lower re-use than pledged collateral but much of it ‘sits’ in central banks.

Figure 4. Overall financial lubrication – M2 and pledged collateral 

 

Policy issues

As the ‘other’ deleveraging continues, the financial system remains short of high-grade collateral that can be re-pledged. Recent official sector efforts such as ECB’s ‘flexibility’ (and the ELA programs of national central banks in the Eurozone) in accepting ‘bad’ collateral attempts to keep the good/bad collateral ratio in the market higher than otherwise. But, if such moves become part of the central banker’s standard toolkit, the fiscal aspects and risks associated with such policies cannot be ignored. By so doing, the central banks have interposed themselves as risk-taking intermediaries with the potential to bring significant unintended consequences.

Authors' note: Views expressed are of the authors only and not of the International Monetary Fund.

References

Copeland, A, A Martin, and M Walker (2010), “The Tri-party Repo Market Before the 2010 Reforms”, Federal Reserve Bank of New York Staff Report No. 477.
EBA (2011), 2011 EU-wide stress test results.
IMF (2012), Global Financial Stability Report, April.
Mankiw, Greg (2010), Macroeconomics, Worth Publishers; Seventh Edition. Shin, Hyun. S (2009), “Collateral Shortage and Debt Capacity” (unpublished note).
Singh, Manmohan (2011), “Velocity of Pledged Collateral – Analysis and Implications”, IMF Working Paper 11/256.
Singh, Manmohan and Peter Stella (2012), “Money and Collateral”, IMF Working Paper No. 12/95

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Mon, 07/02/2012 - 14:44 | 2581318 francis_sawyer
francis_sawyer's picture

He shoulda stuck to doing inspirational & faggoty movie tune soundtracks...

Mon, 07/02/2012 - 14:46 | 2581328 takeaction
takeaction's picture

This is a better tune.....I swipe my EBT...."Wish I could buy some weed with my EBT"  Classic

http://www.youtube.com/watch?v=o64Fz-KW1Dk

Mon, 07/02/2012 - 15:03 | 2581384 vast-dom
vast-dom's picture


PLEASE EMAIL THIS ARTICLE DIRECTLY TO THE FED'S FRAUD DEPT.:

 

Federal Reserve Consumer Help:ConsumerHelp@federalreserve.gov 

Mon, 07/02/2012 - 15:08 | 2581397 Pladizow
Pladizow's picture

He is attempting to do nothing more then justify QE3++++++!

Mon, 07/02/2012 - 15:20 | 2581421 vast-dom
vast-dom's picture

he's doing a lot worse than that...

Mon, 07/02/2012 - 16:03 | 2581571 The Monkey
The Monkey's picture

Shorts squeezed again! Here comes 1400.

Mon, 07/02/2012 - 19:17 | 2582098 Jay Gould Esq.
Jay Gould Esq.'s picture

Mr. Williams' assertion calls to mind another prescient call:

"Stocks have reached what looks like a permanently high plateau."

Prof. Irving Fisher.
15 October, 1929.

Mon, 07/02/2012 - 15:57 | 2581542 Edward Teller
Edward Teller's picture

Go to http://research.stlouisfed.org/fred2/categories/24 and check out MZMNS and MZMV (in the monetary section). Mr. Durden's excellent piece explains all the nuances of what's happening. These charts (going back to late 1950s) show what's coming simply and graphically. The destruction of values may very well be keeping "inflation" (It's ALL inflation) in line, but turnover is the lowest since 1960. When velocity turns, that's it.

Mon, 07/02/2012 - 18:08 | 2581950 Fluffybunny
Fluffybunny's picture

I agree that it's excellent. It's one of the the best, most informative posts on this site in a long time. Lots of credit to Manmohan Singh as well.

Mon, 07/02/2012 - 14:51 | 2581344 theMAXILOPEZpsycho
theMAXILOPEZpsycho's picture

Increasing the monetary base has absolutely zero bearing on price inflation - not when all the money is going towards clearing the debt in the system. This is exactly the policy the fed should favour, and only sadists actively seeking the end of the world as we know it would argue differently. Where there is price inflation, this can easily be stopped by prosecuting commodity speculators. We need a reset, we need to re-capitalise our greatest institutions, and we need to move forward. Together.

Mon, 07/02/2012 - 14:59 | 2581370 francis_sawyer
francis_sawyer's picture

Another 'wannabee' MDB...

Mon, 07/02/2012 - 15:19 | 2581414 Kitler
Kitler's picture

I don't know FS... he kinda had me at:

"We need a reset, we need to re-capitalise our greatest institutions, and we need to move forward. Together."

"...and only sadists actively seeking the end of the world as we know it would argue differently."

 

Moving forward 'together" is very important when someone has their penis up the other guy's ass. Sounds like the our good friends have things well under control to me.

Mon, 07/02/2012 - 15:21 | 2581438 Bansters-in-my-...
Bansters-in-my- feces's picture

another "fucking idiot" I would say.

Mon, 07/02/2012 - 14:59 | 2581372 centerline
centerline's picture

Where can I get in on all this debt clearing action?  I must be missing something.

Mon, 07/02/2012 - 15:00 | 2581376 Dr. Engali
Dr. Engali's picture

There is only one MDB.

Mon, 07/02/2012 - 15:03 | 2581381 Comay Mierda
Comay Mierda's picture

not when all the money is going towards clearing the debt in the system

every FRN printed is a dollar of debt with interest attached to it.  money printing does not clear debt, it replaces it with new debt

the only way to clear debt from the system is bankruptcy, then switching to an asset based currency like gold.

 

Mon, 07/02/2012 - 15:02 | 2581383 bnbdnb
bnbdnb's picture

Good plan, its not happening. Now what?

Mon, 07/02/2012 - 15:27 | 2581463 El Oregonian
El Oregonian's picture

" and we need to move forward. Together."

Hey Psycho, you go over the cliff on your own. Boiled down to simpleton terms so that even airheads get it...

If you have a lemonade stand with just so much lemonade to sell but someone gave everyone endless dollars to buy my lemonade. Provided it is the best lemonade around, how long until the product is gone or the inevitable rising prices to accommodate inventory replacement?

Remember, free money isn't free...

Mon, 07/02/2012 - 18:09 | 2581952 Fluffybunny
Fluffybunny's picture

MMT is dead. Let it go.

Mon, 07/02/2012 - 20:22 | 2582199 cranky-old-geezer
cranky-old-geezer's picture

 

 

Increasing the monetary base has absolutely zero bearing on price inflation - not when all the money is going towards clearing the debt in the system.

No debt has been cleared from the system idiot. All that new money has been funding more and more debt, and a lot of that debt is junk status.  Trillions of dollars of debt paper out there, from federal down to corporate, is junk, just shy of worthless.

That's why bank balance sheets keep going red again after multi-billion dollar bailouts.  All the debt paper held  on those balance sheets keeps losing value.

You're right that price inflation isn't directly linked to money printing. 

Price inflation IS directly linked to confidence in the currency, and confidence in USD around the world is dropping rapidly, especially now with the entire asian bloc of nations moving away from the dollar.

Williams' cute little charts don't show steadily dropping confidence in the dollar, nor do they show when confidence will suddenly vaporize completely and the dollar crashes overnight.

That time is coming.  It's closer than anyone wants to believe.

Your idols at the Fed know this.  It's why your chief idol, Bernanke, is scared shitless about QE3.  He knows it would precipitate a major drop in the dollar, and QE4 might crash the dollar completely.

On the other hand, if what you say is true, then go ahead with QE3 then QE4 then QE5 and so on.  Fund $500 trillion of new debt, $1,000 trillion of new debt, hell, even $10,000 trillion of new debt.  Let's have $50 QUADrillion of debt floating around out there. 

Imagine how THAT would boost the economy.

Mon, 07/02/2012 - 16:41 | 2581666 Chaffinch
Chaffinch's picture

John Williams has been re-hypothecated ; )
According to Shadowstats there is some sort of multiplier thing going on...

Mon, 07/02/2012 - 14:45 | 2581326 Widowmaker
Widowmaker's picture

John Williams is a fucking liar.

Does that make sense?

END FRAUD IN A BOX - END THE FEDERAL RESERVE!

Mon, 07/02/2012 - 16:06 | 2581583 machineh
machineh's picture

I'm surprised Williams didn't advocate monetizing international postal reply coupons.

Oh, wait -- Charles Ponzi already did that!

Mon, 07/02/2012 - 14:48 | 2581333 Flakmeister
Flakmeister's picture

Hey... maybe he is telling us the secret plan, which is that all "printed" money is going to Money Heaven, aka Excess Reserves, as fast as assets are vaporising....

Oh yeah, it ends when the Aliens from Beta Centari arrive to inject capital into the "good bank" once the FED is split into a "bad bank" and a "good bank"....

Mon, 07/02/2012 - 14:56 | 2581360 Widowmaker
Widowmaker's picture

Here is good bank/bad bank paradigm for your models:

 

Fraud Bank of the Federal Reserve

and

Federal Reserve Bank of Fraud

Mon, 07/02/2012 - 15:01 | 2581378 centerline
centerline's picture

Bankerspeak for saying that current money has already gone to heaven.  lol.

Mon, 07/02/2012 - 15:01 | 2581334 Mercury
Mercury's picture

In a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply, and, ultimately, inflation are no longer valid.

 

Wow...by that logic, why bother to collect taxes?

Here you go kids (and Mr. Williams), some holiday catch-up reading:

Shadow Banking - Pozsar

Shadow Maturity Transformation and Systemic Risk - Krieger

Rehypothocation/Shadow Banking - Singh

Are The Brokers Broken? - King

 There will be a pass/fail test later on in your life (but sooner than you think!).

Mon, 07/02/2012 - 15:04 | 2581389 Marginal Call
Marginal Call's picture

The purpose of taxes is to create demand for their bank notes by tying our labor to it and then taking some of it.  It's not so they can take our dollars, it's so we'll take theirs. 

Mon, 07/02/2012 - 17:06 | 2581770 emersonreturn
emersonreturn's picture

 Egyptian slaves produced a pyramid, all we get is yet another scheme.

Mon, 07/02/2012 - 18:25 | 2581976 ATM
ATM's picture

But we're getting $26/gallon biofuel and thousands of acres marred by useless wind-turbines whose hulking forms will stand for centuries!

Mon, 07/02/2012 - 19:23 | 2582113 eddiebe
eddiebe's picture

Excellent point, but even more so, it is both of the above, with the sweat equity of producers in the real economy value added.

Tue, 07/03/2012 - 01:31 | 2582797 blindman
blindman's picture

from the first link
"..Credit creation through maturity, credit, and liquidity transformation can significantly
reduce the cost of credit relative to direct lending. However, credit intermediaries’ reliance on shortterm
liabilities to fund illiquid long-term assets is an inherently fragile activity and may be prone to
runs.1
1 There is a large literature on bank runs modeled as multiple equilibria initiated by Diamond and
Dybvig (1983). Morris and Shin (2004) provide a model of funding fragility with a unique
equilibrium in a setting with higher order beliefs. Martin, Skeie and von Thadden (2011) provide a
theory of runs in the repo market.
As the failure of credit intermediaries can have large, adverse effects on the real economy (see
Bernanke (1983) and Ashcraft (2005)), governments chose to shield them from the risks inherent in
reliance on short-term funding by granting them access to liquidity and credit put options in the
form of discount window access and deposit insurance, respectively..."
.
are they using the correct terms here? is the cost
of credit being reduced? or is the creation of credit
being divorced from legitimate and discernible evaluation?
the assumption is that this failure is undesirable so "government" intervenes, at gun point, to "shield the process from risk".
the same "government", fed res, that upholds the
mandate of price stability.
but does the fed ask what does this
rehypothecated credit creation process do to the
price/s? the prices of the underlying of the securities
needing stability? the price of a house? the price
of a rented room? the cost of this, their financial
engineering of credit, on the communities that sustain
their existence by working for wages and paying taxes
in the real , non-off shored worlds.
tyler says the shadow system is one of credit with no
deposits and is/has been a buffer to the expected/feared/eventual inflation. but ...
it has also been the source of income for maybe 20%
of the highest paying jobs in the financial sector that
might be entirely eliminated as it collapses.
the inflation we have already seen may be underestimated
and the inflation, change in price over time to the
higher extreme, may be offset by even worse employment
realities. one thing is for sure, the systemic, banks,
get the bailout and the money, the "real" stuff from the
sovereign, first. everyone else is on their own, certainly welcome to apply for a loan so long as the
bank and its owner have not fled the country with the
money.
.
up top in figure 2. the chain. if you substitute
the word collateral with the word fraud the dynamics
remain the same, no? i think that is part of the problem.

Mon, 07/02/2012 - 14:49 | 2581337 FL_Conservative
FL_Conservative's picture

What I REALLY want to know is whether he wore his big shoes, red hair and rubber nose.

Mon, 07/02/2012 - 14:49 | 2581340 YesWeKahn
YesWeKahn's picture

Assuming that they aren't stupid. They have done all this for one goal: enrich their banker buddies.

Mon, 07/02/2012 - 14:51 | 2581341 0z
0z's picture

Opening a new account in US. They want to open a "seggregated account" for me at JPM. Not an expert on US banks, and as it is most banks in the world could, because of reflexivity, be considered insolvent. But which bank would you or do you hold your margin accounts with in the US?

Thanks, appreciated.

Mon, 07/02/2012 - 15:40 | 2581502 bank guy in Brussels
bank guy in Brussels's picture

Foreigner opening a bank account in the USA, ha! ... Soon some people who are bribing the US judges will take it away from you.

Like with MF Global, you may soon be 'Corzined', your account 'vaporised'.

Ha!

 

 

Mon, 07/02/2012 - 16:15 | 2581601 NotApplicable
NotApplicable's picture

Rehypothetically speaking...

Mon, 07/02/2012 - 19:02 | 2582054 0z
0z's picture

Where does everyone keep their futures account?

Mon, 07/02/2012 - 19:01 | 2582052 Diogenes
Diogenes's picture

First it will be frozen, then it will be liquidated, then it will evaporate.

Mon, 07/02/2012 - 14:51 | 2581345 bigdumbnugly
bigdumbnugly's picture

san francisco fed head opens mouth long enough to spit out what?

Mon, 07/02/2012 - 14:51 | 2581346 orangedrinkandchips
orangedrinkandchips's picture

Fantastic!

So he is like Homer Simpson and while he is spewing shit like a muppet, this is what happens inside his brain!~

 

http://www.youtube.com/watch?v=ddyZ0XZZbbw

Mon, 07/02/2012 - 14:52 | 2581349 jaap
jaap's picture

He could start reading "modern money mechanics" by..... the FED

Mon, 07/02/2012 - 14:53 | 2581350 Martial
Martial's picture

The REAL John Williams (and no, still not talking about the composer):

 

http://www.youtube.com/watch?v=seBWlOMt2Tk&feature=em-uploademail

Mon, 07/02/2012 - 16:05 | 2581578 Comay Mierda
Comay Mierda's picture

this John Williams is a rockstar

Mon, 07/02/2012 - 14:56 | 2581361 centerline
centerline's picture

Been saying for years that the net effect of actions to date was akin to fueling a rocket.  Not going anywhere until a point of ignition occurs.  Is it their intention to create some sort of "jump" to a new steady-state of economic measure?

Just to give everyone a warm-fuzzy feeling... the rocket scientists who built this thing are the same ones who continue to exclude banking in the economic blueprints that are being used to build said rocket.  Seems more likely the rocket is going to denonate on the pad.  But, this might be the intention as well - either directly or indirectly... never knowing who really is running the show or what the plot is all about.

Mon, 07/02/2012 - 14:56 | 2581363 Temporalist
Temporalist's picture

And still the Fed is focusing 80% of its time on "message" rather than substance.

Mon, 07/02/2012 - 15:00 | 2581374 SemperFord
SemperFord's picture

That was a long freaking read...The majority of Americans are happily ignorant so even if the Fed did say the truth would the majority even be able to comprehend it? I doubt it.

Mon, 07/02/2012 - 15:00 | 2581375 LawsofPhysics
LawsofPhysics's picture

Proving once again that it isn't what you know so much as who you know.  fuck the paper-pushers.

Mon, 07/02/2012 - 15:04 | 2581386 TonyCoitus
TonyCoitus's picture

I don't have many ah ha moments, so this is a monumental achievement. Thanks be to Tylers.

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