The banks have implicit guarantees by the Federal Government.
They are de-facto nationalized. However, the FED and all other cooperating central banks are privately owned by stakeholders from some of the same banks.
So it goes like this basically:
FED loans money through various means to achieve negative real interest rates -> Banks lobby the Federal government to create favorable regulations(i.e. loose housing lending standards) -> A bubble forms as Banks make nominal gains in the “loosest” sector(s) -> When the miss-allocation of capital gets high enough that the consumer can no longer sustain additional credit expansion(de-leveraging) the bubble bursts and interest rates rise -> The federal government eliminates the losses of the FED owning banks through bailouts resulting in real gains for the largest stakeholders -> Repeat until nation’s productivity and currency is sufficiently devalued then move on to next area of world(i.e. Asia).[/quote]
What’s interesting to me about this is that they must lobby with the government to create loose lending standards. I think a lot of people are under the impression that if the government did away with lending policies altogether, everyone would benefit.[/quote]
You misunderstand. The reason they have to lobby for loose lending standards is because the market corrects for low interest rates with higher standards(higher down payments, etc…) in order to stop the bleeding of credit driven by the FED. Without those regulations to remove the risk of lending, the bubble can’t continue to grow and less damage is done. The government doesn’t create “lending policies” and can’t “do away with them” interest rates are by definition the cost of borrowing and behave based on supply and demand just like anything else. Government “standards” and “regulations” are nothing but price controls. They put an artificial “floor” or “ceiling” in place that prevents corrections from happening.[/quote]
Correct me if I’m wrong but it sounds like don’t think the FED should even exist. The problem isn’t necessarily with the FED, although I personally believe the US needs to restructure their prudential banking supervisory branches and eliminate deposit insurance. The problem is the blatant ignorance by some very large financial institutions. The GFC showed how some of these top management people don’t know what the fuck they’re doing. Greenspan is also an idiot for believing these institutions understood the things they were involved in. Matter of fact, they still don’t know some of the things on their trading books. But basically it boils done to banks running out of ways to make money. Let’s not forget banking was originally a social activity, then it morphed to a more shareholder focused business and now it’s basically run for the benefit of employees. That’s a cultural transformation that doesn’t exist in some banks from other parts of the world. And that’s why US banks will continually dive into risks they cannot control for. You know, they’re basically in this system and they’re taking advantage of it. If you get rid of the regulations and regulators a lot of these guys will fail and the whole thing will implode.[/quote]
It’s difficult for me to respond to this, because there are a lot of incorrect premises in your paragraph.
As to your question about the FED…
I don’t know if the FED SHOULD exist or not. I do know that the FED is a third party institution that mandates price controls world wide in collaboration with other cooperating central banks. These price controls have resulted in the largest miss-allocation of resources in the history of the world and continue to do so.[/quote]
Well I’d like to hear what you have to say.
I think “collaboration” is a stretch.
They are all officially part of the Bank of International Settlements. It’s an official intergovernmental organization of central banks. A lot of the lending not officially reported by the FED is to foreign banks. This can be a quid-pro-quo to purchase treasuries for example. The vendor-financing between China and the U.S. is an example of central bank collaboration for the purposes of political solidarity.
As to what I have to say on the broader topic…
I’m not patient enough to type it all out, especially since it would include fleshing out fundamental principals of subjectivity in prices and the nature of money and credit.
Edit: I’d elaborate over a VOIP service, its much easier for me to talk then to type if you still want to hear it. PM me if you want.