Perspectives on the global economic meltdown- (Nov 28 2010)

somnath · Post by **somnath** » 10 Mar 2011 10:00

arnab wrote:The NSSF restructured the accounting issue but not the 'real' issue where with an aging population the disburements will always be higher than receipts. Or a sudden shock to the system where the population begins to doubt GOIs ability to repay the money or people realise the 'money illusion' that a 10% rate of return does not cover a 17% inflation - so maybe invest in riskier equities (and we are back to GFC)

Well in case for some reason disbursals exceed inflows then the Central Govt does not lend anymore money to the states out of this source...State govt have to look for other avenues of funding...there is no balance sheet impact on GOI..There cannot be, as the govt does not treat the inflows as "revenues"...

BTW, not all state govt borrowings are "gteed" by GOI, only some are..Obviously loans extended by the Centre to the states cannot be g'teedby the Centre!

arnab · Post by **arnab** » 10 Mar 2011 10:23

somnath wrote: Well in case for some reason disbursals exceed inflows then the Central Govt does not lend anymore money to the states out of this source...State govt have to look for other avenues of funding...there is no balance sheet impact on GOI..There cannot be, as the govt does not treat the inflows as "revenues"...

BTW, not all state govt borrowings are "gteed" by GOI, only some are..Obviously loans extended by the Centre to the states cannot be g'teedby the Centre!

hmmm Not sure I understand this. Chart V.2 of this document shows that including NSSF securities (that were grandfathered in 1999), the public account component of SG outstanding liabilities is around 50 % of total state liabilities.

http://rbidocs.rbi.org.in/rdocs/Publica ... 200210.pdf

As far as I know only 'Loans from Centre' is not guaranteed by GOI (well in practice it is but let us say notionally it isn't. ) For Small savings, the GOI is acting as a banker to public, so irrespective of whether the debt is serviced or not - GOI will have to repay the funds to public on maturity.

Now assume a world where disbursements are higher than receipts. The 'receipts' includes both new recipts and interest received from investments (which include state loans) - why wouldn't there be a balance sheet impact? Wouldn't GOI have to finance the 'gap' through own borrowings?

somnath · Post by **somnath** » 10 Mar 2011 10:38

arnab wrote:hmmm Not sure I understand this. Chart V.2 of this document shows that including NSSF securities (that were grandfathered in 1999), the public account component of SG outstanding liabilities is around 50 % of total state liabilities.

http://rbidocs.rbi.org.in/rdocs/Publica ... 200210.pdf

As far as I know only 'Loans from Centre' is not guaranteed by GOI (well in practice it is but let us say notionally it isn't. ) For Small savings, the GOI is acting as a banker to public, so irrespective of whether the debt is serviced or not - GOI will have to repay the funds to public on maturity.

Now assume a world where disbursements are higher than receipts. The 'receipts' includes both new recipts and interest received from investments (which include state loans) - why wouldn't there be a balance sheet impact? Wouldn't GOI have to finance the 'gap' through own borrowings?

You are right - GOI g'tees all the "patras" - so the investor only takes GOI risk...But Loans to state from Centre are not g'teed, definitionally sounds odd! And it is also a fact that a large part of state govt borrowings are funded out of small savings today...Especially true for some states like WB!

The "gap" between receipts (interest repayments from states) and expenditure (interest payments to the investor) is taken in the Union Budget - it should be listed under Subsidies (AFAIK, its a fairly small amount now)...So the net balance sheet risk to GOI is if a state govt defaults on its loan extended by the former...in which case GOI needs to pay out of its own budget...In a sense, GOI is underwriting the credit risk of indv state govts to the investor in these "patras"...

But unless state govts start defaulting on a large scale, a domino effect is not plausible..And state govt finances have been improving steadily for the last 7-8 years...

VikramS · Post by **VikramS** » 10 Mar 2011 11:57

paramu wrote:For that Indians have to discuss the problems with the existing system so that everybody understands it, and the alternatives available. They need to realize that the sun they are using to tan is not real sun and the tan they are developing is actually a disease.

SDREs do not need tanning.

; the TFTA might.

India is growing organically at a healthy pace and there is no need to stick a leg out while the imbalances remain. The last crisis did not significantly affect India. Hopefully the next one too, will help India emerge stronger.

Hari Seldon · Post by **Hari Seldon** » 10 Mar 2011 14:45

India is growing organically at a healthy pace and there is no need to stick a leg out while the imbalances remain. The last crisis did not significantly affect India. Hopefully the next one too, will help India emerge stronger.

Yup, but if oil stays consistently above $100 a barrel, then our organic growth, akin to organic veggies, will start to cost.

Some reports aver growth may slip to 6% from the current 8.5% trajectory. Don't know how the exactly the figures were reached but there you have it.

shyam · Post by **shyam** » 10 Mar 2011 21:40

I saw this somewhere a while ago:

Average bank balance of an American = $-3000
Average bank balance of a Chinese = $800

Who is rich?

Chinmayanand · Post by **Chinmayanand** » 11 Mar 2011 00:17

shyam wrote:I saw this somewhere a while ago:

Average bank balance of an American = $-3000
Average bank balance of a Chinese = $800

Who is rich?

Very simple, sirji . It's the american with helicopter Ben.

Hari Seldon · Post by **Hari Seldon** » 11 Mar 2011 05:34

^^^ Sure, but much of that +$800 has been lent again to 'em underwater yanqui consumers only. Still feeling rich now, are we?

devesh · Post by **devesh** » 11 Mar 2011 09:13

^^^ that is the problem with China. it has become enamored with playing the West's game. and in doing so, it has become beholden to the West.

Hari Seldon · Post by **Hari Seldon** » 11 Mar 2011 11:13

How's this for perspective.....

Spanish town reintroduces peseta to boost economy

A small town in northern Spain has decided to reintroduce the old Spanish currency - the peseta - alongside the euro to give the local economy a lift. Shopkeepers in Mugardos want anyone with forgotten stashes of the old cash at home to come and spend it.

It is nine years since the peseta was official currency in Spain. But Spain's economic crisis has forced some to be inventive. The hard times have seen thousands of businesses close and more than two million jobs go.

Forgotten coins
More than 60 shops in Mugardos, a small fishing town in Galicia on Spain's northern coast, are accepting the peseta again for all purchases, alongside the euro. It is an attempt to get cash registers ringing - and help lift the town out of a long and painful economic slump. Shopkeepers were sceptical at first, but they now say the scheme is a great success.

People are travelling into Mugardos from outside just to spend the old currency they never got round to converting. One man visited the local hardware store this week with a 10,000-peseta note he had found at home, and had no idea what to do with. He is now the happy owner of a sandwich toaster. The euro was introduced here in January 2002. Spaniards then had another three months to exchange their old currency at any bank.

That cash can still be converted today, but only at the Bank of Spain itself, and it says a staggering 1.7bn euros ($2.4bn) of cash is still unaccounted for - stashed, perhaps, then forgotten; piles of coins that slipped down the backs of sofas; or even big notes kept by collectors. That is the reserve the shopkeepers of Mugardos are hoping to tap and give a desperately needed boost to business.

Still, the Bank of Spain estimates that almost half the country's millions of missing pesetas will never be recovered - despite their value. It believes many left the country long ago, in the purses and pockets of tourists.

This is the way to go. The oiro is dead, just doesn't know it yet, perhaps. Outsource pesata printing to the ECB, I say.

abhischekcc · Post by **abhischekcc** » 11 Mar 2011 11:50

They should outsource it to pakistan, I hear they have good quality printing presses running non-stop.

Neshant · Post by **Neshant** » 11 Mar 2011 14:42

Arjun wrote:Since you claim to be a free-markets proponent, which should put both of us on the same side of the table

Supporting the existance of a useless middleman industry is not compatible with the word free market.
So no you are not on the same side of the table. In fact you are not even in the same building where the table is at. You obviously don't understand the meaning of the word.

- do you seriously believe your personal opinion on finance, or my opinion on autos matters a whit - clearly it should be the market that decides on what is 'productive' and what is not 'productive'

If the market should decide, then there is no reason for the useless middleman industry.

Once honest money is introduced, the power shifts to the people who earn the wealth and away from con men. It is only the people who earned the wealth who have the right to decide what is productive by voting with their money, not some con man industry that owes its existance to money counterfeiting and scamming.

- ....if there exist folks who want to put their money in banks or borrow from one - they have decided that banks play a productive role.

No they haven't. The fiat money the productive earn is counterfeited and loses value due to printing encouraged by the useless middleman industry. This forces the productive to deposit their money in a bank to help keep pace with this counterfeiting (aka inflation). However since inflation figures put out by the useless middleman industry are themselves bogus, the money still loses value as interest paid never equals the real rate of inflation. Inflation is a robbery by the useless middleman industry and a transfer of wealth from the productive to itself for having done no real work other than counterfeiting money & scamming.

Same goes for the private company that calls on an i-banker to take it public

Banks research nothing, invent nothing, develop nothing, manufacture nothing (except scams) so they obviously are no source of wealth. In all instances, its money of the saver that is being gambled with and losses are passed onto the saver through printing and bailouts if and when the venture fails. The profits are quickly privatized however by the useless middleman industry.

or the person who decides to take on life insurance so his family faces less risk,

If someone faces less risk, someone else has to face more risk. Again, it is the saver that is made to take on the risk with no benefit to the saver. The loss however is gladly passed on to the saver through printing & bailouts.

or the person who wants to put his money in the equity market but avoid stock-selection by going through a mutual fund

The issue of fiat money being used to entrap the wealth of the productive aside, if someone wants to do that with their own savings and is willing to pay the fee, the bank would be a providing a productive service.

That aside, the fact that banks have gambled their arse to insolvency is evidence enough that anyone relying on banks for investment advice is crazy - especially given that bank business model relies on scamming the productive economy.

or the entrepreneur who wants capital and knocks on the door of the VC firm to fund him / her.

If the capital is coming from a saver in the productive economy, it is a productive industry. If venture "capital" company is like goldman sachs which is ripping off the productive, its destructive.

2) Since you seem to have formed a primitive association that only 'deterministic' outcome fields are productive

Obviously you don't understand the meaning of the word productive.

Even a street preformer who performs tricks for coins is part of the productive economy. He offers entertainment and does not rob society but merely asks that people volunteer a donation for his efforts if they enjoyed it.

A person who starts a business selling his invention with his own savings and fails is still part of the productive economy. His efforts and thousands like him eventually give rise to succesful companies.

The unproductive useless middleman industry forces itself upon productive society through scams like bad money, counterfeiting, bailouts, gaming and scaming to appropriate the wealth of the productive to itself. Its a con business akin to crime which offers no value to society and only lives off the productive energies of others.

All that a pharma firm coming out with a new drug has done is that it has tested the drug out on thousands of cases and determined that the drug would 'most likely' not have 'adverse consequences' for the majority of folks.

Drugs are tested for efficacy, not just safety. It take almost a billion dollars for a company to get a drug to market and its a 10 year process to get it approved. Almost anything in the private sector that relies on selling a product to society that society willingly buys is productive. The useless middleman industry has little to sell except scams and games the system to milk the productive.

There will be enough savers who will be willing to put in their money into the top corporate names through corporate bond offerings.

That's upto savers.

But what about the thousands of SME names across every country? Do you seriously believe that savers would research these company's financials and start lending directly to these SMEs??

Savers are savers because they are good at judging risk and managing their own money - unlike the fools running today's insolvent banks. If the potential reward is high enough and risk low enough, capital will go anywhere. If savers judge some company to be undeserving of their investment, it won't get it. Its a hard process to convince a saver to part with his surplus. Its not as simple as getting some idiot at a bank to sign off on a loan and print up the money at the savers' expense and then start hollering for a bailout.

Arjun · Post by **Arjun** » 12 Mar 2011 01:54

Neshant, your views on the financial services sectors and the specific alternatives to them are certainly fascinating !!

You don't think insurance should exist. You would rather that the peace of mind from knowing that your assets are insured from unforseen disasters, or that your family is secure in the event of your death - be completely junked in your utopian 'savers-driven' world where savers face up to all unforseen events 'like a man'!!

You don't think banks should exist. So you are OK with a corporate oligopoly where the top few global corporates obtain debt funding 'directly from savers' purely on the basis of the power of their existing brand - and you are OK with virtually forcing the shutdown of all large, medium and small firms set up by entrepreneurs who don't form part of this cosy club.

You make a serious statement that individual 'savers' are actually willing to pore through mounds of documents from various firms and take their OWN call on lending these SMEs money ??? Obviously you are not a high-net worth saver. 99.9% of HNWs (by definition a HNW is an individual with high savings) have absolutely NO time nor inclination to be doing this - and WANT an advisor or financial intermediary to be recommending the best assets or where they can directly park their debt assets.

Before we get to judging all of this, lets complete the process of obtaining your views so we are complete in all aspects-

- Leave aside corporate banking, how about retail banks? Lets take mortgages as an example. Are you again looking at individual savers all across the US to evaluate each individual mortgage applicant based on his credit history and real estate potential in his /her geography and take a call on whether to lend directly to this individual?

- Presume credit cards are a big no-no for you ?? No evil 'consumption' and debt oriented vices for the high-minded savers in your world ?

- For some reason, you actually went easy on the mutual fund part of the asset management sector. How about independent alternative management firms - say independent PE firms such as KKR or Blackstone, or VC firms like Kleiner Perkins or Sequoia?

- How about i-banking (M&A advice and equity / debt fund raising through capital market IPOs etc) - should exist or should not exist??

- How about financial advisory / wealth management firms? Presumably there is absolutely no demand from HNWs for their services in managing savings, right ??

Swaroop · Post by **Swaroop** » 12 Mar 2011 08:33

Actually, if we really are men, we must also grow our own food. How can we let useless intermediaries like retailers make all that profit? All for what, getting the produce and arranging it on shelves?? This is nothing but loot. It will really be a great day when we are able to get rid of such blood sucking parasites.

Ambar · Post by **Ambar** » 12 Mar 2011 09:32

Absolutely! Ever since i've read St.Schiff's gospel, i have decided i'll ditch Macy's and just buy some bales of cotton from a farmer in CO, and make my own threads! How dare those blood sucking,parasitic,snake oil salesmen,bogus middlemen make a profit off me ? Very uncool and non-productive!

Arjun · Post by **Arjun** » 12 Mar 2011 09:46

Ambar wrote:Absolutely! Ever since i've read St.Schiff's gospel, i have decided i'll ditch Macy's and just buy some bales of cotton from a farmer in CO, and make my own threads! How dare those blood sucking,parasitic,snake oil salesmen,bogus middlemen make a profit off me ? Very uncool and non-productive!

What?? And convert the farmer into a bogus middleman in the exploitative, blood-sucking consumption game you are playing?? We can see through your feudal mindset here.

You should buy land in CO and just grow your own threads and foods on YOUR land. Get to doing some honest work for a change, my man!

shyam · Post by **shyam** » 12 Mar 2011 12:57

Why is that so many experts find it difficult to understand the point? People have the choice to not go to the particular retailer to purchase things (of course, except when Walmart comes to the scene). Once people stop going there, that retailer will go bankrupt. But people have no choice to avoid the money printing role of the central banks. They are imposed on them.

Arjun · Post by **Arjun** » 12 Mar 2011 13:22

shyam wrote:Why is that so many experts find it difficult to understand the point? People have the choice to not go to the particular retailer to purchase things (of course, except when Walmart comes to the scene). Once people stop going there, that retailer will go bankrupt. But people have no choice to avoid the money printing role of the central banks. They are imposed on them.

As long as you restrict your peeves to what you call 'fiat money' and the role of Central banks - you are on relatively safe ground. But when you (or others) think banning the entire financial sector (as opposed to regulating it better) is a serious or practicable suggestion - surely you understand you are tending towards the wacko !

Also if you are debating - please present the complete alternative system you have in mind, down to the specifics and details - I am sure this is not meant to be a thread for whines.

Hari Seldon · Post by **Hari Seldon** » 12 Mar 2011 13:35

Also if you are debating - please present the complete alternative system you have in mind, down to the specifics and details - I am sure this is not meant to be a thread for whines.

Good point. Can't say there's nothing on this dhaga that wouldn't do better in the whines thread only. Part of life, I guess.

Here's an interview of Nomura's Richard Koo whose masterpiece-ish book 'the holy grail of macroeconomics' I'd say is a heavily recommended read only.

Richard Koo: How the West is Repeating Japan’s Mistakes

Well, a tad alarmist perhaps. Its not as if the west learnt *nothing* from the great depression. Prof Ben Bernank is after all a professional student, scholar and expert on the subject. A second GD was averted thanks to the massive liquidity flood Ben flooded the TFTA bank valuts with post sept 2008 and that was a good thing too. But since then, much could have been done better blah blah...theek hai, first oppportuinity for the lame duck GWB to do the right thing elapsed. The second great op, with sri (st.?) Obama's coronation filled many souls with hope, only to collpase into weirder and deeper mistakes. Anyway, water down the bridge only.

At least now, when there are no more excuses and when the clear failures of past policies are glaringly visible, is it too much to ask for for sanity to resurface? Should gubmints now go on austerity binges squeezing mango people when the culprits are the high-finance crooks? But no, count on gubmints squeezing essential services from the little people, which someday I fear will recoil on all of us, eventually.

shyam · Post by **shyam** » 12 Mar 2011 13:57

Arjun wrote:As long as you restrict your peeves to what you call 'fiat money' and the role of Central banks - you are on relatively safe ground. But when you (or others) think banning the entire financial sector (as opposed to regulating it better) is a serious or practicable suggestion - surely you understand you are tending towards the wacko !

As long as banks are allowed to collapse when they take bad bet, they should be allowed to exist. It is upto the consumer to decide whether to save his money in those banks or inside his mattress. Problem with modern banking is that they regularly need to be bailed out. This indicates that they don't behave responsibly and not inherently stable. What is the point in adding more regulations when the people at the top of food chain can violate them without the risk of punitive actions?

Also if you are debating - please present the complete alternative system you have in mind, down to the specifics and details - I am sure this is not meant to be a thread for whines.

What is missing from the entire picture is the attittude to live within the means. We have only finite resources in the world, and we need to learn live with lesser consumption. Unfortunately, modern financial system survives only when there is growth, which also implies that consumption has to increase. We might be able to kick the current economic problem by prinitng more money, like someone at WEF suggested, create $100Trillion credit. With 10% fractional reserve banking, total avilable credit will go to 1 quadrillion. Consider other multiplier effects, the world will have more money that any other available resources. Currently estimated $1500 Trillion derivates may look like a small amount. But, this will last only for few more decades till the next crisis catches up. Is the system we are counting on so much built to have periodic crashes?

Hari Seldon · Post by **Hari Seldon** » 12 Mar 2011 13:57

Continuing the theme above, here's more....

Germany Sets Steep Price to Shore Up Euro Zone

Faced with financial turmoil that has resisted every emergency fix the European Union has adopted, European leaders are considering a radical step: giving up some of their independence to set domestic economic policies and cutting back many of the wage and welfare benefits that have defined the region’s politics for decades. In return, the European Union would provide funds to shore up the weakest member states, including Portugal, Greece and Spain.

The proposals, originally pressed by the newly assertive German chancellor, will be debated Friday in what is expected to be a contentious session of the leaders of the 17 countries that use the euro.

Germany is calling for several measures: raising retirement ages to reduce the burden on pension funds, ending the linking of wages to increases in the cost of living, committing to debt reduction and submitting to a level of budget scrutiny that was until recently considered anathema — and is still viewed by many as a step too far.
...
Among the measures it is pressing is an agreement to raise retirement ages closer to Germany’s, where access to government pensions begins at age 67, well above the European average. Germany would also like others to stop pegging wage increases automatically to inflation. That is a necessary step if wages are to shrink in absolute terms, which some economists argue is necessary if bitter medicine to inject some competitiveness into the economies of Europe’s southern tier.

The Germans would also force private bondholders who bought the high-yielding debt of the most troubled euro-zone countries to bear part of the burden if countries defaulted or needed to restructure their debt — and not be protected by taxpayers.
You go, girl!

...
German officials contend that commitments remaining in the pact are important, that retirement ages and benefit systems should be adjusted to fiscal and demographic realities and that each country must find a way to make debt limits binding, as Berlin has done.

Mrs. Merkel is insisting that all three levels represent a package, and that there will be no increase even in the temporary bailout fund unless there is a deal on the pact.

The German fourth Reich ain't started yet. But soon, it will.

vic · Post by **vic** » 12 Mar 2011 14:52

I believe that Banks should be protected from "panic run" but if they have made fundamental mistakes then they should be allowed to fail.

Also if somebody puts money in high risk high yield bonds and then they must take a haircut. I would propose a haircut of double the interest. Say yield was 8% on 100 Euros then haircut of 2x8=16 should be taken by the bond holder and he can get, say, Euro 84 instead to 108

Arjun · Post by **Arjun** » 12 Mar 2011 15:07

shyam wrote:As long as banks are allowed to collapse when they take bad bet, they should be allowed to exist. It is upto the consumer to decide whether to save his money in those banks or inside his mattress. Problem with modern banking is that they regularly need to be bailed out. This indicates that they don't behave responsibly and not inherently stable.

Banks which fail due to one-off internal reasons are typically not a problem. They can be allowed to fail, unless they are largely dependent on wholesale funding from other banks. A larger problem is that usually, due to a sudden movement in the markets (say commercial real estate falling drastically) several banks could be in trouble at the same time. The decision to either allow them to fail or to bail them out should be based on - what is the cost to the taxpayer by bailing out all or some of these banks and (ii) the indirect cost to the taxpayer should all these banks fail without being bailed out which therefore results in depressing the economy further. Another point to note is that in days of easy lending standards - the taxpayer actually benefits in the initial years (since investment goes up, growth is brisk & employment / wages go up). So one has to evaluate the big picture based on these factors. Insisting on higher capital adequacy ratios is another way of addressing the problem.

Also, in case someone feels like whining about this aspect as a reason for banning banks - I would suggest the alternative blueprint for the financial system be presented for critique. The economy always operates in cycles - and banks just happen to be the most visible symptoms of this cyclicality - not the cause of it.

What is missing from the entire picture is the attittude to live within the means. We have only finite resources in the world, and we need to learn live with lesser consumption. Unfortunately, modern financial system survives only when there is growth, which also implies that consumption has to increase. We might be able to kick the current economic problem by prinitng more money, like someone at WEF suggested, create $100Trillion credit. With 10% fractional reserve banking, total avilable credit will go to 1 quadrillion. Consider other multiplier effects, the world will have more money that any other available resources. Currently estimated $1500 Trillion derivates may look like a small amount. But, this will last only for few more decades till the next crisis catches up. Is the system we are counting on so much built to have periodic crashes?

Good point. However there will always be business cycles - but as long as the underlying trend is upwards, there won't be any jasmine revolutions ! What is the alternative proposed?

somnath · Post by **somnath** » 12 Mar 2011 18:01

Arjun wrote:Banks which fail due to one-off internal reasons are typically not a problem. They can be allowed to fail, unless they are largely dependent on wholesale funding from other banks

Well, not really..Banks that depend on retail funding are a lot more difficult to be allowed to fail, as social costs are higher of small depositors losing moeny...Which is why they allowed Lehman to go down while having rescued "retail" banks like Wells Fargo..The problem is, even Lehman, which was really one of the smaller "wholesale" banks, caused a meltdown in the entire system...Banks are so inter-related with trillions of dollars of swaps, g'tees and other obligations to each other that one large bank failing causes distress to the system..

There are no easy answers really...Higher capital requirements is one - and is already being done....But beyond a point, higher capital requirements push up costs of capital for eveyone, more for small and medium corporates and individuals....The only viable solution would be to delink the riskier parts of the banking business from banks - things like leveraged trading for instance...Thats what the Volcker Act is trying to achieve...Its difficlut to execute - a lot of client business depend on the bank being able to warehouse the risk..But it is being done in parts now...

Arjun · Post by **Arjun** » 12 Mar 2011 20:50

somnath wrote:Well, not really..Banks that depend on retail funding are a lot more difficult to be allowed to fail, as social costs are higher of small depositors losing moeny...Which is why they allowed Lehman to go down while having rescued "retail" banks like Wells Fargo..The problem is, even Lehman, which was really one of the smaller "wholesale" banks, caused a meltdown in the entire system...Banks are so inter-related with trillions of dollars of swaps, g'tees and other obligations to each other that one large bank failing causes distress to the system..

Lehman was largely an investment bank - so I would categorize it seperately from both commercial (or wholesale) banks as well as retail banks. But even as an i-bank the systemic risks were evident - which was why the Fed was concerned.

I was using 'wholesale banks' as shorthand for defining 'systemically important' banks which are highly interconnected with the rest of the system and usually these are ones with a significant percentage of wholesale / inter-bank funds. The difference is that for a retail bank, the FDIC in any case guarantees the deposits, but all other funders other than retail depositors might suffer a loss. However in the case of a bailout of a 'systemically important' bank the focus is on keeping the entire bank afloat as a going concern.

Here's an elaboration on the distinction from the FSA Chairman: Addressing the Too-Big-To-Fail Problem

* When a non-systemic, medium-size bank fails, (as, for instance, quite regularly happened in the US’s more fragmented banking system even before the financial crisis), there is typically a wide range of resolution options available, such as break- up and sale or controlled wind-down, and all funders other than insured depositors may suffer some loss – certainly debt capital providers, possibly senior debt holders, perhaps uninsured depositors – according to the financial resources available and the order of claims.

* But over the last two years, when large banks deemed systemically important have been in danger of failure, only one model of rescue has been followed – government capital injections and guarantees to keep the entire existing bank safe as a going concern, with equity holders losing because of dilution, but all other fund providers, including debt capital providers, protected.

Neshant · Post by **Neshant** » 12 Mar 2011 21:31

Arjun wrote: You don't think insurance should exist. You would rather that the peace of mind from knowing that your assets are insured from unforseen disasters,

I don't know why you find it so hard to understand a very simple message : If someone is ripping off the money of someone else to gamble without his consent, its unproductive and part of the useless middleman industry.

Insurance that is insured by the capital of savers who have AGREED to insure a certain party for a fee is legit. Insurance that uses taxpayer bailouts & money printing to make good its losses is not insurance - its a ripoff and transfer of risk/loss to the productive without consent. Its not that insurance per say is productive/unproductive, its where it (un)consentually gets its capital from and to whom it bills its losses.

If I gamble with your life savings without your CONSENT by 'insuring' a bunch of earth quake prone houses, it is a ripoff. The capital is not mine to gamble with to begin with. You have not agreed to partake in the venture to put your capital on the line but I force you into it anyways. An entire useless middleman industry has sprung up around the idea of ripping off the capital of the productive under various "insurance", "investment", "promoting inflation" and other bullshit scams and it needs to stop. The root of this evil as i have pointed out is fiat money which is nothing more than a counterfeiting operation by crooks aka the useless middleman industry.

Hope that's clear now.

So you are OK with a corporate oligopoly where the top few global corporates obtain debt funding 'directly from savers' purely on the basis of the power of their existing brand

If savers want to invest their hard earned money anywhere, who are you to say otherwise? In any case, who says savers would invest only in the top few global corporations. Savers look for value and a company that can already attract a hoard of capital is not likely to pay a good yield for a saver's capital.

- and you are OK with virtually forcing the shutdown of all large, medium and small firms set up by entrepreneurs who don't form part of this cosy club.

If savers want to invest in a firm of any kind, its their choice.

Or are you suggesting savers be ripped off by the useless fee collecting & scamming middle man industry to hand over their money to whomever? Please confirm if savers have a right to own their own savings without being ripped off.

You make a serious statement that individual 'savers' are actually willing to pore through mounds of documents from various firms and take their OWN call on lending these SMEs

If a saver CONSENTS to handing over his capital to the useless middleman industry to gamble with, the useless middleman industry is no longer useless - it becomes a productive industry. It becomes productive not on the basis of losing / gaining money for the saver but through demand for its services from the saver. All that's required beyond that is for it to eat its own loss. Why is this simple concept not sinking in?

this - and WANT an advisor or financial intermediary to be recommending the best assets or where they can directly park their debt assets.

If savers WANT an advisor, they will get one. Please confirm if a useless middleman industry that's billing its losses to people who DO NOT WANT any advisor nor bare the cost of their losses should or should not exist.

Are you again looking at individual savers all across the US to evaluate each individual mortgage applicant based on his credit history

Leaving aside the issue that TRILLIONS of crap mortgages passed through the hands of "PROFESSIONALS" in the useless middleman industry, if a saver wants to invest in mortgage backed sercurity offered by the Goldman Scam company, he has that right. Assuming Goldman Scam isn't passing on the risk to the rest of society but ONLY to the saver who decided to risk his capital, GS is operating in a productive role.

But when taxpayer is made to insure the scam, bailouts are used to pay for the aftermath of the scam, money printing is used to ripoff the saver who had no part in the scam, running up debt is used to backstop the scam, stock market rigging is used to transfer wealth to the scammer, govt 'regulatory' position is packed with ex-Goldman Scam employees and politicians bribed by Goldman Scam lobbyists..etc then a simple conclusion is arrived at - its a scam.

Goldman Scam category then changes from productive to unproductive and it joins the ranks of the good old USELESS MIDDLEMAN INDUSTRY. Amen.

Now I have 1 simple question for you :

Please confirm if savers have a right to own their own savings without being ripped off by ANY third party.

Neshant · Post by **Neshant** » 12 Mar 2011 22:41

Arjun wrote: As long as you restrict your peeves to what you call 'fiat money' and the role of Central banks - you are on relatively safe ground. But when you (or others) think banning the entire financial sector (as opposed to regulating it better) is a serious or practicable suggestion - surely you understand you are tending towards the wacko !

I'm not being funny or anything but are you just playing dumb or are you really unable to understand?

The REASON the central bank came into existance was to PASS ON THE LOSS of the useless middleman industry (aka financial con man industry) to the rest of society via counterfeiting money. That is the major source of revenue for this industry and its means of subsisting. The role of the federal reserve is to preserve the monopoly of a private banking cartel upon which rests the entire useless middleman industry that is banking & financing.

There would be NO ISSUE of contention with any financial company if the money was honest, the capital it attracted came from savers with their CONSENT and the savers alone ate the loss - not having the loss forced onto the rest of productive society via money printing and scamming. The whole reason fiat money was created by crooks is to PASS ON THE LOSS to suckers down the line and this evil is what the present day financial con man industry subsists on.

THAT is what needs to be shut down and the means towards that end is shutting down the fiat scam and the central banking crooks who promote it.

Neshant · Post by **Neshant** » 13 Mar 2011 00:02

interesting view point on the useless middleman industry :

VikramS · Post by **VikramS** » 13 Mar 2011 00:47

shyam wrote: What is missing from the entire picture is the attittude to live within the means. We have only finite resources in the world, and we need to learn live with lesser consumption. Unfortunately, modern financial system survives only when there is growth, which also implies that consumption has to increase. We might be able to kick the current economic problem by prinitng more money, like someone at WEF suggested, create $100Trillion credit. With 10% fractional reserve banking, total avilable credit will go to 1 quadrillion. Consider other multiplier effects, the world will have more money that any other available resources. Currently estimated $1500 Trillion derivates may look like a small amount. But, this will last only for few more decades till the next crisis catches up. Is the system we are counting on so much built to have periodic crashes?

shyam:
The way the system is supposed to work is that if there is excess money supply, it will increase the cost of the resources and hence reduce the consumption. The brakes on the growth of the system come from the limit to what resources are available; the price of those resources will go up as the money supply goes up and the value of money, as measured by the amount of resources it can purchase goes down.

It is true that this creates a boom-bust cycle in resource pricing. As the money supply goes up, the prices go up, till it reaches a point where the price becomes so high that affects economic growth. Then the prices start falling till they reach a point where the bankers panic and turn on the spigot, and the cycle begins again! One might argue why the hell do we want to live in a boom-bust-boom system.

I think the answer lies in understanding where we spend our money. In most developed economies, the portion of the money spent on resources is a small fraction of the total consumer expenditure. Most of the money is spent in obtaining services. That is why in a lot of ways, these economies are much less sensitive to commodity pricing than one would expect. So the fractional reserve system and the fiat money, makes sure that when comes to innovation (and economic growth), there is no constraint from the availability of money side of the ledger. The constraints they hope will come from the real world: wages and commodity pricing. That it creates boom-bust cycles in commodity pricing is a reality.

On the flip side though, most modern inventions are not related to basic industries. Often their net-net result will be a reduction in the per-capita consumption of resources. The fuel efficiencies of cars has gone up by almost 70-80% in the past three decades, all as a result of what I call incremental, evolutionary changes.
http://en.wikipedia.org/wiki/File:CAFEStandard2.png

However because the wealth created introduces a lot of new consumers, the total consumption is going up.

Of course for the developing world, where the Mango man spends a huge chunk on commodities, this is a major problem. As I have alluded to before, the emerging world will be forced to address the currency and trade imbalances sooner or later to prevent revolutions sparked by hunger.

The problem with all fixed amount of money systems (like the Gold standard) is that they put a limit on the money supply (a man-made construct) which puts a cap on growth, instead of using more natural constructs like supply of commodities and wages to put a cap on growth.

Neshant · Post by **Neshant** » 13 Mar 2011 02:12

VikramS wrote:I do not understand why you make a link between a new industry creating jobs and impact of existing inventions on productivity. Growth (and the resulting savings) come from increased productivity and there are enough evolutionary changes happening to keep that cycle going.

Most of the impact of an invention is felt when its introduced on a mass scale into the market and is absorbed by industry. That's already happened in the 90s and that was the justification of the stock market boom. From then on there was a whole decade that passed. Can't bring the same song & dance out of the cupboard 10 years after the fact and claim suddenly the stock market is moving up because people are re-discovering the cell phone or its adding some great gains in productivity that it wasn't already. Where are the well paying jobs anyways if society is suddenly prospering on account of re-discovering the cell phone or computer?

Now if someone introduced a cell phone that could teleport goods and do away with FedEx, that would be justification for the stock market jumping 100%. It would be revolutionary and wildly productive. Money printing, stock market rigging, running up debt, scamming - that's all bogus growth & destructive.

I am glad you at least mention that the capital to nurture and adopt a new technology comes from savings. And these savings eventually come from increase in productivity.

I thought the money came from stock market rigging & money printing?

Where's your definition of where money comes from to build new technology? You just copied what I said and repeated it back to me.

Could you put in one simple sentence (without copying what I said) where money comes from to build productive industries? My view is you can't because you are confused about economics & money.

Arjun · Post by **Arjun** » 13 Mar 2011 07:53

VikramS wrote: One might argue why the hell do we want to live in a boom-bust-boom system.

One other key reason why folks tolerate boom-bust cycles is that the longer-term trend is sloped upwards. If for example, the US or the world for example were to enter a period of sustained degrowth over a 3 - 4 year period or longer, then I see validity for questioning the underpinnings of the system.

But instead, here's the US record of the instances of negative growth over the last 60 odd years..Even the subprime crisis resulted in only one-year of negative growth:

The U.S. economy grew by an average of 3.8% from 1946 to 1973, while real median household income surged 55% (or 1.6% a year).[4][30] The economy since 1973, however, has been characterized by both slower growth (averaging 2.7%), and nearly stagnant living standards, with household incomes increasing by 10%, or only 0.3% annually.[4] The worst recession in recent decades, in terms of lost output, occurred during the 2008 financial crisis, when GDP fell by 4.1% from the spring of 2008 to the spring of 2009. Other significant recessions took place in 1957–58, when GDP fell 3.7%, following the 1973 oil crisis, with a 3.1% fall from late 1973 to early 1975, and in the 1981–82 recession, when GDP dropped by 2.9%.[31][32] Recent, mild recessions have included the 1990–91 downturn, when output fell by 1.3%, and the 2001 recession, in which GDP slid by 0.3%; the 2001 downturn lasted just eight months.[32] The most vigorous, sustained periods of growth, on the other hand, took place from early 1961 to mid 1969, with an expansion of 53% (5.1% a year), from early 1991 to late in 2000, at 43% (3.8% a year), and from late 1982 to mid 1990, at 37% (4% a year).

VikramS wrote:The problem with all fixed amount of money systems (like the Gold standard) is that they put a limit on the money supply (a man-made construct) which puts a cap on growth, instead of using more natural constructs like supply of commodities and wages to put a cap on growth.

Good point

Arjun · Post by **Arjun** » 13 Mar 2011 08:45

Neshant wrote:If someone is ripping off the money of someone else to gamble without his consent, its unproductive and part of the useless middleman industry.

Now that you've added this qualifier to your definition of the 'useless middleman industry' it is starting to make more sense. I am not sure this qualifier of 'gambling without his consent' was present in your prior statements.

Lets look at the two qualifiers you have raised -

1) Money given by consent: Certainly all money taken in by banks and other intermediaries have to be based on documents indicating the saver's consent. That is a key principle the industry lives by - and anybody guilty of violating this is obviously committing serious fraud. If you believe that a significant percentage of money taken in by the financial industry is not based on the consent of the relevant savers - do indicate this.

2) The issue of bailouts of failed banks. I believe further academic study is required to (a) quantify the net impact on tax-payers (which could in fact, be either +ve or -ve) of bank bailouts & (b) the issue of TBTF needs to be addressed and steps taken accordingly.

On (a), I am willing to be convinced by the output from any serious academic study, but I would keep in mind that bailout money is not an expense but an investment that is being made, and intuitively given that banks are a high-beta industry that provide outsize returns when the economy improves - if the government has the opportunity to invest at the lowest point of the investment cycle and exit at a higher point, I wouldn't be too negative on the prospects of a handsome return.

On (b)- policies on addressing TBTF definitely need to be outlined and put in place.

VikramS · Post by **VikramS** » 13 Mar 2011 10:34

Neshant wrote:
VikramS wrote:I do not understand why you make a link between a new industry creating jobs and impact of existing inventions on productivity. Growth (and the resulting savings) come from increased productivity and there are enough evolutionary changes happening to keep that cycle going.
Most of the impact of an invention is felt when its introduced on a mass scale into the market and is absorbed by industry. That's already happened in the 90s and that was the justification of the stock market boom. From then on there was a whole decade that passed. Can't bring the same song & dance out of the cupboard 10 years after the fact and claim suddenly the stock market is moving up because people are re-discovering the cell phone or its adding some great gains in productivity that it wasn't already. Where are the well paying jobs anyways if society is suddenly prospering on account of re-discovering the cell phone or computer?

I am glad that you at least recognize the bold part. What you of course stubbornly refuse to recognize is that the "all that happened in the 90s" has little to no justification. Unless you are living in a cave, you can not but help to see that a LOT is happening. Not only in the way the technology is put to use but also in the number of people who are using it. I have given you specific real world examples but they seem to fly above your head.

I specifically asked you the question about your professional roles have been since you have amply demonstrated what I am forced to call "sheer ignorance" to understand the impact of technology in the way businesses are run. Talk to someone in inventory management or supply chain management and how the field has changed dramatically over the past two decades. Look at the performance of the consumer discretionary sector over the past two years, and try to understand the role of technology in their ability to to boost profitability. But according to you all the impact was already felt in the 90s.

Ignorance is bliss in the gold-bug land.

I posted a graph of how fuel efficiency in the US has gone up almost 80% over the past three decades. Clearly the ICU and the car were invented more than a 100 years ago, and by your hypothesis all the impact on productivity of the motor vehicle should have been felt when Ford started mass-producing Model T. What you refuse to acknowledge that the 80% increase in mileage itself has an impact on productivity across the entire economy, and it is made possible by advances in a whole bunch of industries: materials, semiconductors, computer aided design and modeling.

I thought the money came from stock market rigging & money printing? My view is you can't because you are confused about economics & money.

You flatter yourself.

My job as an investor is to profit from the system. I know that I individually can not change the system; just like you can not will away the sun. And all that I have read about Keynsian economics and the gold bugs etc. points to the fallacies of the current system. None of them present an alternative.

vic · Post by **vic** » 13 Mar 2011 10:38

I don't think anybody can be against the banking profession but the problem is of the "banking" cartel controlling the regulator i.e. the "federal bank" in this case.

Ambar · Post by **Ambar** » 13 Mar 2011 11:21

If ACC cement stock has risen from 20 Rs to 1000Rs in the last 22 years,it is not because they kept 're-inventing' cement, but because they became more efficient in production and supply towards a growing demand. If companies existed solely on 'invention' of new technologies, then 99.999% of all companies would be bankrupt in no time.

For all the hate spewed towards bailing out the banks, people forget that an unprecedented 350+ banks have been shut down in less than 2 years. The largest banks that had a systemic risk across businesses were saved. Ironically, some of the most vocal libertarians were tagging the line of Norwegian govt during its banking crisis, where it nationalized all banks and took over the assets, and eventually made a profit when the markets stabilized. The Fed just stopped short of nationalizing their assets, instead loaned them while keeping the assets in the private hands.

The 'reserve' that is attached to the names of every central bank in the world should surely be self-explanatory. It is the lender of the last resort in times of crisis. A while back, we were debating the merits of a high SLR+CRR in India, compared to its peers.Even with a 25% SLR+CRR, if there is a systemic collapse, no bank can ever repay every rupee of all its depositors money on a single day.This leads to the spread of fear and uncertainty and more failures. The role of a 'reserve bank' is to mitigate such a scenario by making sure the banks have enough capital to fulfill their obligations and restore faith. Why do we forget the run on our own ICICI in 2004 and again in 2008/09 ? RBI, which never makes statements about private institutions,came out with press releases about ICICI' capital solvency. The run on ICICI stopped overnight, and there were no more baton-charges outside ATMs/bank counters.

The question is not if the Fed should have saved the economy, but rather when do they stop the blood transfusion. TARP and TALF have long expired. QE2 will wind down in June.And interest rates that were rising in the last year has shown trends of reversal (so much for the loss of faith!) when there is renewed fears about another crisis.Fed or no fed, there's only so much the government can do. If the private sector continues to hoard cash, there is no ways those jobs are coming back. And the economy will remain stagnant for foreseeable future.

VikramS · Post by **VikramS** » 13 Mar 2011 11:41

All this talk of Keynesian economics, money printing etc. has got me thinking about alternative systems.

Looking from a very high level, there are two sides of the ledger:
(A) Stuff and Services which are on sale
(B) Money (or its equivalent) which are available to buy (A).

In the current system, there is no limits on (B). The amount of (B) chasing (A) determines the price paid.

In an alternative system, let us assume that there are strict limits on (B). Then how would prices of (A) react? Unless the amount of (A) available is decreasing, the price of (A) will go down as the amount of (A) goes up. The amount of (A) would go up via the following:

=> Discoveries of more resources
=> More efficient methods leading to higher productivity
=> More people joining the workforce with a suitable skill level.

Note that all the above (A) going up, are typically what we call "growth", the pie becoming bigger.

Now if (A) is going up and (B) is fixed, then the price of (A) will go down. i.e. given a fixed amount of money, higher growth/productivity will result in lower prices since the amount of money (B) is fixed, and there is more (A) available.

That is the classic deflationary scenario. And the biggest victim of a deflationary scenario is debt. A debt based system can not survive if the price of assets bought on debt are likely to fall. So a system where money supply is fixed, the role of debt in driving growth would literally be non-existent. Only the most secure and the most reliable would be able to borrow.

The question which arises is this: Is a system where debt and lending to the masses is not viable, a better system? Would such a system encourage risk-taking and innovation? Or would a system like this lead to stagnation? What historical evidence do we have to study this?

Christopher Sidor · Post by **Christopher Sidor** » 13 Mar 2011 12:32

The Makings of a Bond Debacle

Business Week carried this article on 10-March-2011.

Among central bankers, there is agreement on the recipe for restoring stable, steady global growth. Step 1: Emerging-market central banks raise rates enough to put a lid on inflation. That supposedly prevents price pressures from spreading to the U.S. and gives the American economy more time to recover. Then, after interest rates in emerging markets have been set, it's time for Step 2, with the U.S. Federal Reserve tightening rates. As with a delicate soufflé, timing really matters. If it's off, the whole thing can collapse into an unappetizing mess.
....
....
Specifically, they are worried about the 1994 scenario. That year, the U.S. economy was overheating, and investors didn't believe the Fed was serious about fighting inflation. To convince them, the Fed powered into action, raising rates faster than the markets expected. By the end of the year, rates in the U.S. stood at 5.5 percent, up from 3 percent in January. When rates go up, bond prices go down. Bondholders, fearing further Fed action, sold big time. Ten-year Treasuries lost 12 percent, according to Bloomberg data, and global capital losses reached about $1.5 trillion that year. The jolt from higher rates contributed to Mexico's currency crisis and the bankruptcy of California's Orange County. U.S. growth slowed to 0.9 percent in the second quarter of 1995, from 5.6 percent the previous year.
....
....
Worse, emerging markets may end up raising rates steeply at the same time the Fed swings into action to cool off the U.S. economy. That would likely trigger a bond market collapse. The rate increases would make it harder for companies to find affordable capital and for consumers to get credit and shop, leading to a worldwide brake on growth.

I wonder which currency will be the casualty this time, if this so called timing is off ?

There is a comment on this article given by Jack. I am reproducing it here in full for it is an interesting read

The basic premise of this article is incorrect. Monetary tightening by emerging market central banks will push inflation to the US, not prevent it. China is not able to tighten its money supply because it tied itself to the US dollar by a virtually fixed exchange rate. When the Fed prints, the Bank of China must print also. If China lets inflation rise, the US will see prices go up on all Chinese imports. If China really tightens, the dollar will go down against the yuan and prices in dollar terms will also rise. So either way, the US will see inflation as Chinese producers are forced to pass on some of the rising costs to the US consumers. This is why US bond prices have nowhere to go but up in the next 12 months. We are very close to the edge of a cliff for US bond prices, which have been artificially propped up by the Fed for years.

Jack is basing his conclusion on the assumption, "China is not able to tighten its money supply."
The real beauty of the above comment is this, If China exports inflation, then US will be hurt. If China does not export inflation then it will have to bear the cost. Does China have the capability of absorbing this cost? Because the alternative is worse. Loss of employment and the dreaded social instability. 1989 anyone ??

Arjun · Post by **Arjun** » 13 Mar 2011 14:45

VikramS wrote:That is the classic deflationary scenario. And the biggest victim of a deflationary scenario is debt. A debt based system can not survive if the price of assets bought on debt are likely to fall. So a system where money supply is fixed, the role of debt in driving growth would literally be non-existent. Only the most secure and the most reliable would be able to borrow.

I think you are basing your assumption on a pure 'monetarist' view of inflation. If one doesn't, my answer would be as follows-

While fixed money-supply systems will likely be overall deflationary - the laws of supply and demand will remain applicable to each specific tradeable goods or resources. So as long as there are supply-side constraints on most natural resources and global demand is increasing, their prices should continue to see a rise. Similarly, if we are talking property - given supply and demand dynamics the prices in most cities will probably continue to climb. Therefore, mortgage backed debt would still be feasible. However, since the lender will not be incentivized to lend with zero interest rates - there would be an equilibrium rate reached which would be nominally low.

As regards corporate debt, as long as there are projects that provide decent ROIs, firms will be willing to borrow at some interest rate, and lenders will be happy with non-zero but low rates for their cash.

Hari Seldon · Post by **Hari Seldon** » 13 Mar 2011 19:46

Well, we've had strong discussions on the pros and cons of 'fin system', central banking, fiat money, gold standard, 'productive economy' and all that, but mostly in the abstract.

Would be great if folks could make pointed references to where alternative systems are, whether in pure form or not, currently in action someplace in the world. Would lend concreteness and much more , IMVHO, to general academic-ish discussions then, perhaps.

Someone above mentioned the mass death of small banks in the US as proof that banksters are getting their come-uppance. oh-no, sir. There's a clear class/caste system among bankers too. There's the TBTF (too big to fail) TFTAs and there's everybody else. The loss of the small banks which are then swallowed by the TBTFs is *not* a good thing.

BTW, seems North Dakota suffered much less than others (including comparable neighbors) both in this crisis and in crises galore that preceded this one. Could this be a reason?
http://en.wikipedia.org/wiki/Bank_of_North_Dakota
Just throwing a Q out there, is all. only.

VikramS · Post by **VikramS** » 14 Mar 2011 00:43

Arjun wrote: So as long as there are supply-side constraints on most natural resources and global demand is increasing, their prices should continue to see a rise. Similarly, if we are talking property - given supply and demand dynamics the prices in most cities will probably continue to climb. Therefore, mortgage backed debt would still be feasible. However, since the lender will not be incentivized to lend with zero interest rates - there would be an equilibrium rate reached which would be nominally low.

As regards corporate debt, as long as there are projects that provide decent ROIs, firms will be willing to borrow at some interest rate, and lenders will be happy with non-zero but low rates for their cash.

Arjun: The whole point of a fixed amount of money system is that on aggregate prices will not rise since there is no "new" money to support the rise.

Prices are determined by the marginal trades. Right now, the amount of marginal money available is unlimited. The rationing of stuff (A) is determined by the supply of stuff, not by the availability of money. In a fixed amount of money system, the marginal money available will not be unlimited. Hence the rationing of stuff (A) will happen not only because of supply constraints, but also the availability of money (B). And the availability of money will not be tied to the ability to pay, thereby putting an artificial lid.

My hypothesis is that if the amount of marginal money is constrained, the incentive to take risks and innovate are going to be significantly constrained. Further the role of the must-haves in determining prices of everything will be critical. So if the price of staples go up, then the price of discretionary stuff will have to readjust downwards to keep the total sum constant.

So unlike the current system, the elasticity of the system to absorb price shocks will be severely constrained. There will be a reluctance to lend against assets which are not staples; simply because they are the ones which will fall off the list if the price of staples goes up.

The problem with the current system is that humans have proven, time and again, that the ability to pay is not judged effectively before money is made available. The alternate system pretty much this judgement out of equation. However as a result it will result in severe constraints on the availability of debt.

The question of course is which system is better: One with booms and busts because of the ability to judge the credit worthiness is not proven to be adequate. Or one which does not allow the booms and bust to occur simply because it eliminates credit to a very large extend.

My WAG is that as long as there are innovations and changes which improve productivity, the current system is better. OTOH when human beings reach a point where the population growth in near replacement numbers, most human beings live well above sustenance levels, and the marginal return on investment starts shrinking, then perhaps the second system will become more relevant.
---------------------------------------------------------------

Hari ji:

ND is in the middle of an energy driven boom; economy is doing great.
http://www.foxbusiness.com/markets/2011 ... -big-boom/

Perhaps it is the harbinger of the times to come: the parts of the US in basic industries both resources and AG will do really well.

Post Lehman, the chance of a TBTF to be allowed to go under was zero. It is not just a question of systemic risk but also the TFTAness of the US. Citibank processes such a huge amount of foreign exchange and state department related transactions, that letting it fail would have literally saying to the world that the US is kaput. Similarly with GS.

There were many which went under from Bear Sterns, Lehman, and the buy-under of Merrill Lynch. Of course the likes of Wachovia, Wamu etc were also there.

So while a few of the TFTAs were saved, a lot of wannabe TFTAs were left for the dead. The Word on the Street was that Lehman will NOT be allowed to go under. So when it went, the reality hit the street.

Very different from Japan IMHO, and what makes the US unique in a lot of ways.