There is something in this more than natural - Hamlet

[flow5]

It is widely pontificated by professional economists that: “no single policy event, or group of people created the Great Recession, GR”. Fittingly, as Hamlet said: “There is something in this more than natural” (no, not “animal spirits”). More like: “God doesn’t play dice with the universe” – Albert Einstein.

In the context of the commercial banking system (in the higher thought level of theoretical abstraction and interpretation of Newtonian mechanics), the whole isn’t the sum of its parts in the money creating process. I.e., an individual commercial bankers’ operational experience is diametrically opposed to the performance of the System. To a bank, its lending experience undoubtedly demonstrates – that its legal and economic lending capacity increases when funds flow into its vaults. And insofar as a bank’s correspondent and clearing balances (loanable funds) rise, such funds can be used to buy securities or make loans.

I.e., there is nothing to dispel the pervasive misconception that commercial banks, CBs, transmit credit and don’t, ex-nihilo, create new money and credit That is, as far as Congressional lobbyists think, indeed the most dominant economic predators, read oligarchs, who virtually control: The House Committee on Financial Services and the U.S. Senate Committee on Banking, Housing, and Urban Affairs, an individual CB’s modus operandi corresponds to that of an intermediary financial institution (e.g., perpetrating a fraud and deceit upon the American populace, dismantling usury rates by overriding state and local laws in 1980)…“If you lend money to one of my people among you who is needy, do not treat it like a business deal; charge no interest.” –Exodus 22:25

To wit, the arcane wordsmiths label this as: “credit intermediation”, where the CBs engage in “credit, maturity, and liquidity transformation” –spooky, spectral and shadowy if you will.

The Great Depression, GD, was the spring-board paradigm for the savings-investment process. It demarked the conceptual disagreement between the credit school of thought and the money school. The incongruity being that the withdrawal of funds from the thrifts reduced their size. But transferring deposits from the commercial banks thru the thrifts simply resulted in a shift of ownership of demand deposits endogenous to the commercial banks.

 
In its billowy Weltanschauung, what’s seemingly unreal to the ABA’s spirited proponents of CB time/savings deposit accounts (and the subsequent deregulation of interest rates), is that: dis-intermediation for the CBs isn’t predicated on the prevailing level of free market clearing rates, or on regulatory caps on savers’ rates of return, viz., Reg. Q ceilings, or even the pace of interest rate deregulation and incipient financial innovation. And that Keynes’ Liquidity Preference Curve (demand for money), is patently, a false doctrine (likewise the Wicksellian differential or equilibrium, i.e., natural, real rate, of interest).

Thus, it was inevitably a delusion (in contradistinction to John Maynard Keynes’s “optical illusion” in his General Theory of Employment, Interest, and Money, published in 1936 - pg. 81), to assume that the intermediaries can “attract” savings from the CBs, for the funds never leave the commercial banking system (I.e., Keynes exegesis posits that there is no difference between money and liquid assets, blurring BHC’s distinctions by aggregating both CBs and NBs, aka the Financial Modernization Act of 1999 - Gramm-Leach-Bliley, including, e.g., FAS 166 and FAS 167 consolidations from off-balance sheet, accounting dodges, and leveraged limit avoidance, given SIVs).

But savers (contrary to the superficial premise underlying the DIDMCA of March 31st 1980 in which CBs were assumed to be intermediaries and in competition with thrifts), never transfer their savings out of the banking system (unless they are hoarding currency). This applies to all investments made directly or indirectly through the non-banks.

During the GD, more than 1,700 savings and loans, S&Ls, failed - drying up available credit for new home construction. Account holders lost all of the money which had been diligently saved for a rainy day, and was enthusiastically entrusted to these failed, financial intermediaries, institutions (custodial conduits, apportioning investment pools, to be channeled between savers and borrowers).

 
Thus in time, the unreal, unnecessary, and unequal competition between the NBs (the Federal Reserve’s Flow of Funds data delineates the spectrum of NBS as the sum of total assets of funding corporations, insurance companies, finance companies, closed-end funds, exchange traded funds, pension funds, mutual funds, real estate investment trusts, money market mutual funds, brokers and dealers, and issuers of asset-backed securities),.with the CBs, resulted in a deterioration of the credit worthiness of the thrifts.

The response of the monetary authorities and state legislatures was to give the thrifts more and more discretion in lending. Given more latitude for self-dealing, greed and fraud reached monumental levels, e.g., rogue CEO’s call-money (stock options), not due diligence.

Thus bowing to political pressure, in March 1980, during a bipartisan vote, the DIDMCA was passed which created the legal framework for the addition of 38,000 more commercial banks to the 14,000 we already had & in the process, the abolition of 38,000 intermediary financial institutions. The intermediary financial institutions effected were the nation's savings & loan associations, mutual savings banks, & credit unions. Trust companies & stock savings banks had been commercial banks for many years. As Nixon said in 1971, and Milton Friedman seized upon: “We are all Keynesians now”.

To counteract the effects of the GD, Congress reacted by passing a progressive chain of new financial services legislation (for banks and thrifts). (1) The Federal Home Loan Bank Act of 1932 authorized the federal government to regulate the financial services sector. (2) The Federal Home Loan Bank Board (FHLBB) was established to oversee S&L operations and provide longer-term, fixed rate funding, and amortized loans, for ordinary U.S. citizens (enlarging the middle class and sponsoring capitalist roots). Thus, the S&Ls became one conduit for the social policy driven goal of obtaining widespread, single-family, residential (i.e., affordable), home ownership.

 
This regulatory and pro-capitalistic policy later engendered the aphorisms: "All we need is little banks, simple products and local bank managers operating on the 3-6-3 rule: "Borrow at 3%, lend at 6% and be on the golf course by 3pm"…“Thrifts are so much better when they are boring".

 
E.g., in the U.S. idyllic world, a short growth spurt sandwiched between 1954-1965, the CPI increased by 1.4 percent, un-employment averaged 5.4 percent of the workforce in the same period, and the nations’ money supply increased at only a 2 percent compounded annual rate. This was the only stint in U.S. history where savings were actually “put to work” - before stagflation denigrated the Phillips Curve (even before "Iain Macleod, coined the phrase in his speech to Parliament in 1965").

 
Alan Greenspan’s contention that the trade-off between Social Security, Medicare, and Medicaid benefits and gross savings supposedly explains the drop-off in cap-ex expenditures beginning in 1965. Greenspan confused the source with its use (and not its non-use). I.e., monetary savings are impounded within the confines of the CB System (they are lost to any type of consumption, investment, payment or expenditure), & unspent savings represent a leakage (non-use), in Keynesian National Income Accounting procedures.

The justification for the FSRR Act of 2006 (which authorized the payment of interest on excess reserves), was: “These measures should help the commercial banking sector attract liquid funds in competition with nonbank institutions and direct market investments by businesses” [sic] - Testimony of Treasury

But if savings do not exchange hands (are a leakage), they exert a dampening, contractionary, or net deflationary impact on prices, production, jobs, incomes, & in consumer & business confidence.

Whereas the activation of savings by the NBs increases employment, the direct demand for a variety of goods and services – and the opportunities of the commercial bankers to make bankable loans (along with enlarging U.S. Treasury coffers). The “loan pie” is not a fixed entity; it grows when the economy grows. Whereas the CBs are never conduits in the savings-investment process. CBs do not loan out existing deposits, saved or otherwise.

 
From a System’s context, CB held time/savings deposits are not a source of loan-funds for bank management, rather they are the indirect consequence of prior bank credit creation, directly or indirectly via the currency route, or thru the bank’s undivided profits accounts. I.e., the source of time/savings accounts is other bank deposits (bearing a one-to-one offset). And the growth of demand deposits can be largely accounted for by the expansion of commercial bank credit (viz., initially, “loans=deposits”).

The question is not whether net earnings on CD assets are greater than the cost of the CDs to a bank; the question is the effect on the total profitability of the commercial banking system. This is not a zero sum game. One bank’s gain is less than the losses sustained by other banks.

The empirical evidence is that: between 1945 and 1952, S&Ls increased their assets from $9b to $23b, or by more than 150 percent, while CB credit expanded by only about 20 percent (a CB/NB ratio of .13 percent). “By 1965, S&Ls accounted for 26 percent of household savings and provided 46 percent of single-family home loans.” And the number of S&Ls remained stable from 1945 through 1965, c. 6,000. Despite rising interest rates, and NIM compression, during the 1970’s, total S&L assets climbed from $176b in 1970 to $579b in 1979.

And before the New Deal, widespread bank failures were epidemic even in so-called prosperous times. In the 1921-29 period 5,411 banks failed; 8,812 in the 1930-33 period; but only 336 insured banks failed in the 28 year span from 1934-1962. Since the mid-sixties, the number of bank failures began to “inch up”.

So green-eyed struck by the NB’s success, the “go-for-broke” bankers wanted a bigger piece of the loan-pie. But the lending capacity of the CB system isn’t dependent upon the savings practices of the non-bank public (nor because we are the world’s largest debtor nation, with a cumulative deficit since 1985 of > $9 trillion, from deficits since 1976, contributing to our trading partners’, or Bernanke’s misnomer: “savings glut”, viz., Americans’ exorbitant privilege, or subsidy, i.e., dis-savings, in double-entry excess of imports over exports accounting).

 
The CBs could continue to lend even if the public ceased to save altogether. Net changes in Reserve Bank credit since the 1951 Treasury-Federal Reserve Accord are determined by monetary policy actions of the FOMC (the Fed's policy making arm), not by the private sector’s use or non-use of its voluntary savings.

It transpired that George Bailey’s “It’s a Wonderful Life” was soon supplanted by Ron Chernow’s “Go-For-Broke Banker”, Walter Wriston, former Citicorp chairman. Wriston, a global purveyor of financial predation, and “a sworn fore of bureaucrats, Mr. Wriston often joked: “Regulators sit by while snails go by like rockets.” He devoted much of his career to diving through loopholes in bank holding-company legislation or wriggling free of interest-rate restrictions.”

 
Indeed, the great German poet & playwright Bertolt Brecht put it in perspective: "it's easier to rob by setting up a bank than by holding up (one)." Leastways, that’s what “financier Charles Keating, who paid $51 million financed through Michael Milken's "junk bond" operation, for his Lincoln Savings and Loan Association which at the time had a negative net worth exceeding $100 million” must have been thinking. See: William K. Black, “How corporate executives and politicians looted the S&L industry — a brilliant exposé of the savings and loan scandal in the US in the early 1980s”.

Notwithstanding that the thrifts’ business plans imposed borrowing-short (as opposed to direct investment or bond-backed issuance), to lend-long vulnerabilities (viz., asset/liability maturity mis-matching), which over a period of time, transmogrified into dis-intermediation (“breaking the buck” for exclusively non-bank organizations – as since Roosevelts’ 4 day “banking holiday”, the CB’s have been “backstopped” by the sage of Walter Bagehot in his book Lombard Street: ”lend freely…”, but with haircuts and Section 13(3) non-recourse loans, later amended by Dodd-Frank), or as inflation and thereby competition for loan-funds mounted (the Fed lost boom/bust control), an economist’s word for going broke (producing an outflow of funds or negative cash flow).

 
And add the specious Keynesian concept that the volume of money could be controlled by using interest rates as the Fed’s monetary transmission mechanism, unavoidably resulted in the vast and inflationary expansion of the money stock and transactions velocity money (and the so-called “pushing on a string” during the GR, – an astonishing net loss of 12 million jobs). The effect of the FRB-NY’s “trading desk” tying open market policy to a fed funds bracket (its pegging policy c. 1965), was to supply additional (& excessive) legal reserves to the banking system whenever loan demand increased and vice versa.

 
(3) During the Depression era period of June 1933-1936, Congress launched the Home Owners Loan Corporation (HOLC) to buy millions of mortgages from the S&Ls and thereby free-up additional funding for qualified borrowers.

(4) The Banking Act of 1933, created the FDIC to protect our savings (and the “virtue of thrift” or discounted “time preference” or “time value” of money), and restore trust in the nation's financial systems.

(5) In June 1934, Congress passed the National Housing Act, NHA, which created the National Housing Administration, and the Federal Savings and Loan Insurance Corporation (FSLIC). The NHA was formed: to protect mortgage lenders by insuring full repayment for long-term, amortized, home mortgages, i.e., default by borrowers, and the FSLIC was set up to protect $5,000 for each saving’s account.

 
(6) In 1938, via amendments to the NHA, Congress established Fannie Mae, FNMA, so as to provide community banks, with federal funds, in which to make primary loans, originated by local lenders, for current residents. This funding eventually evolved into secondary, designer market offerings and distributions (financial engineering), for home loan mortgages (the securitization, or packaging, selling, and guaranteeing of MBS qualified loans or to other investors, e.g., ABS CDO covenants and issuance).

 
Beginning in the late 1930’s, conventional mortgage underwriting guidelines featured 20 percent down-payments and 30 year maturity loan-terms. 80 percent of the S&L’s core assets were derived from mainstay home mortgage lending. Membership provided a staid investment “outlet for savings”, principally via passbook savings accounts and term certificates of deposit.

In 1968 FNMA was converted to a GSE, and a public company, in order to eliminate its being reported in Lyndon Johnson’s unified Federal Budget figures (which then included the Viet Nam War), aka, George W. Bush’s “off-budget” Iraq and Iran wars in the Middle-East.

In 1970, Freddie Mac, FHLMC, was chartered by Congress as a private company and in 1984 converted to a public “listed”, company. The GSEs have access to a $750m line of credit at the U.S. Treasury and the FHLB, FFCB, TVA, FICO, and REFCORP are exempt from State and local taxing authorities (but only an implicit guarantee?, or a fait accompli appropriation?).

 
Up until 1992 GSEs bought only conventional mortgages. Then HUD set low-income standard targets. Home ownership was again enabled by government sponsorship in 2000 when low-income standards were, once again, revised downward (“The National Homeownership Strategy: Partners in the American Dream”, 1995, by Henry Cisneros, President Clinton’s HUD Secretary, and the CRA et al).

The Federal Reserve, under Regulation Q (established by the Banking Act of 1933), controlled the CB’s depository, or saver’s, rates-of-return, which it amended via: “The Interest Rate Adjustment Act of 1966”. This followed 5 successive rate increases promulgated by the Board and the FDIC beginning in January 1957, unique because it was the first rate adjustment that permitted the CBs to pay higher maximum rates on savings accounts than the NBs could competitively meet (due to the NB’s prior accumulation of longer-dated mortgage inventory concentrations as contrasted to the CB’s diverse loan and investment portfolio composition and shorter outstanding average durations). Hence, David Stockman’s call for “real-bills” doctrinaire segregation.

Thus, the 1966 S&L mortgage credit crisis was due to the lack of funds, not their cost. The deterioration of the non-bank’s infrastructure during the GR was identical to the 1966 thrifts’ paradigm. It was a credit crunch. The introduction of the payment of interest on excess reserve balances induced dis-intermediation for just the non-banks and exacerbated the GR’s depth and recovery. By inverting the short-end segment of the yield curve, remunerating excess IBDDs wiped out repo funding and the ABCP markets - 2 important wholesale (money market) funding sources for the NBs (necessitating AMLF and CPFF liquidity funding facilities). And as investment bank’s CDS insurance exploded, the PDCF was exploited.

Unlike the CBs, since 1935, the NBs weren’t circumscribed by Reg. Q ceilings until July 20, 1966. This ill-conceived legislation incentivized direct investment (and added the Archimedes lever of risk taking), as opposed to indirect investment by knowledgeable specialists with public track records. But transferring deposits ownership, from the commercial banks thru the thrifts (and MMMFs invented by the Reserve Primary Fund in 1971 without FDIC maximum provisos), simply resulted in an exchange of demand deposits within the CB system and at most, a geographical redistribution for money balances in money center banks (but most important, was also a non-inflationary addition to the supply of loan-funds matched by new NB earning assets, i.e., represented an expansion of R-gDp).

As Senator Nancy Landon Kassebaum later wrote 11/4/81: “Today, less than two years since the DIDMCA was established, most of the liabilities have been deregulated with no change in the asset structure that would enable payment of higher rates to depositors” (to wit: adverse interest rate differentials were the principle culprit responsible for destroying the thrifts), the difference the S&Ls paid to attract and hold savings, and the return on long-term mortgage commitments made at earlier, and lower rate, periods.

In the late 1980 thru early 1990 S&L crisis: primarily FDIC liquidations vs. FSLIC state-chartered and federally chartered mergers. Unfortunately, state-chartered thrifts had the same access to FSLIC guaranteed deposits as the most rigidly controlled federal thrifts (and 70 percent of the 1980-1990 S&L crisis failures were in California and Texas).

“The combined closings by both agencies of 1,043 institutions holding $519 billion in assets contributed to a massive restructuring of the number of firms in the industry. From January 1, 1986, through year-end 1995, the number of federally insured thrift institutions in the United States declined from 3,234 to 1,645. The S&L’s share of the mortgage market fell from 53 percent to 30 percent from 1975-1990.”

The GR was simply déjà vu. Congress, proceeding under politics which accommodated the banking lobbyists which influence the House & Senate Banking Committees (whose "campaign contributions typically exceed all other industry & labor groupings" -King of the Hill, Barron’s 1/13/97), rendering academic freedom to be the “barbarous relic”.

The heresy being Alton Gilbert’s Requiem for Regulation Q: What It Did and Why It Passed Away” 2/86 FRB-STL’s Review; i.e., “a fugitive unconcern for the cultivation of values only a painstaking care for which can assure the survival of a free society” – WFB.

In contrast see the esoteric and heroic outcry: “Monetary Policy Blunder Caused Housing Crisis”, April 6, 1967, and “Repeat of 1966-Type Credit Crunch Unlikely Despite Tight Money”, June 6, 1968, The Commercial and Financial Chronicle

The net precipitation was directed by the lined pockets of our elastic legislators:
(1) The 1982 Garn-St. Germain approval of ARMs
(2) End of usury ceilings in 1982 or loan alchemy fabricated to default
(3) The Tax Reform Act of 1981 expanding real-estate tax advantages
(4) The Tax Reform Act of 1986 that incentivized “cash-out” refinancing
(5) 2004 Bankruptcy Reform legislation
(6) HUDs 1992 low income targets
(7) The 2000 Commodity Futures Modernization Act ensuring unregulated OTC customized derivatives trading
(8) 1987 non-interest income business transfers, service charges, origination fees, etc.
(9) The FDIC’s 1991 systemic risk clause
(10) And the risk rating agencies’, risk weighted algorithms, didn’t allow for being upside down and underwater (negative equity), i.e., “mark-to-market” retooling.

Anyone still dancing?
---------------------------------------
The Tax Reform Act of 1986 Congress eliminated the tax deductibility of universal interest charges on consumer credit, e.g., auto loans, personal loans, and credit card balances, etc. This redirected and skewed consumer debt financing through home-equity lines of credit. Also, the new tax provision allowed tax-free capital gains to be extended from $250,000 ($500,000 for a married couple), i.e., double the previous level.

 
Next in significance, Congress introduced Federal legislation, via the Garn–St. Germain Depository Institutions Act of 1982 that allowed ARMs. Mortgage loan classifications were changed with ARMs. ARMs were set to LIBOR’s global saving’s glut rates (typically plus an additional 2-3 percent margin), of un-regulated E-dollar international credit. Presumably regulation should have forced ARMs to be sold with CAPs (ceilings for consumers and floors for lenders). Although home ownership is principally encouraged by income tax deductions.

The subprime market grew from $160b in 2001 to $540b in 2004. During 2004-2006 the private sector securitized 2/3 of home mortgages.
Securitization origination (without skin the game), evolved into the decoupling of a series of income payment streams which were then artificially re-risk-rated into subordinated and opaque tranches (to unsuspecting non-professionals). And these risk weighted algorithms didn’t account for falling real-estate prices.

Defaults and foreclosures accelerated in 2006 and were 80 percent higher in 2007. HSBC announced in Feb 2007 a $10.5b write-down related to subprime loans. In April 2007 New Century Financial Corp. filed for bankruptcy along with American Home Mortgage Investment Co. in August 2007

By mid-2008 some $1.9 trillion of MBS had been downgraded by bond risk-rating agencies (when the entire subprime market totaled $1.3 trillion – indicative of world-wide contagion). Bear Sterns collapsed in March 2008, and Indy Mac collapsed in July 2008 (coinciding with the Housing and Economic Recovery Act of 2008 and put into conservatorship. In Sept Lehman Brothers failed and FNMA and FHLMC were put into receivership.
Thus as deregulation progressed and credit steadily deteriorated, non-conforming loans, not just jumbo loans, proliferated, Alt-A mortgage classifications featured teaser zero down payment, no-doc, or no income verification

From 1995 to 2003 the number of conventional loans being securitized jumped from 46 to 76 percent. And the number of subprime loans jumped from 28 to 59 percent. Securitization facilitates the resale of these originations and mops up the lender’s balance sheet. “cash-out” financing (1/2 of subprime loans according to the Jan/Feb 2006 FRB-STL Review where home owners pocket the difference.

The GR represents monetary confusion, compounded. The axiom should be that if private profit institutions are to be allowed the “sovereign right” to create money, they must be severely regulated in the management of both their assets & their liabilities. And that means getting them out of the savings business. Government can if we want, go back to the times when a savings account was just that, and not an adjunct to our checking account. Laissez-faire capitalism doesn’t work. Otherwise, we will inevitably be faced with protracted declining standard of livings for the vast majority of Americans. There is no alternative.

[flow5]

The Distributed Lag Effect of Monetary-Flows

Early American, Yale Professor of economics, Dr. Irving Fisher, became renowned for his application of a fundamental axiom on a macro-level with his "equation of exchange".

The equation of exchange, P=M*V/T, is a tautological concept that embodies the symmetry between money flows and the aggregate value of all monetary transactions; where P represents the unit prices of all economic transactions, viz., Fisher's "price-level"; T, the # of "units" of all transactions; M, the volume of "means-of-payment" MoP, money; V, the transactions rate-of-money flows; and M*V, the volume of money-flows.

The econometric soothsayers dismiss the validity of the equation because of the impossibility of quantifying statistical surrogates for P and T. Nevertheless, his epochal transactions expression is a truism, e.g., to sell 100 bushels of wheat, T, at $4 a bushel, P, requires the exchange of $400 once, V, or $200 twice, etc.

The truistic impact of monetary demand, irrespective of supply, on the "asked" prices of goods and services requires the analysis and computation of the flow of money, and the only correct measure of money velocity (money actually exchanging hands), is Vt , a transactions or rate-of-change, roc, figure. If Vt was invariant, it wouldn't matter, but Vt fluctuated 2.5x that of the quantity of MoP over a corresponding 50 year period.

Whereas Vi, income velocity, the National Income and Products figure, is a contrived metric. Vi = N-gDp/M. All academe punditry, e.g., Nobel Laureate Dr. Milton Friedman, WSJ 9/1/83 and his "learned interpretations [sic], exercise in futility derives from the Keynesian emphasis on National Income Accounting. Obviously, #1 Vi will fall if, ceteris paribus, N-gDp or R-gDp increases, #2 the volume of M decreases, and #3 the gDp deflator rises.

Vi provides no guidance on the dynamics of money flows as it doesn't encompass the volume or roc in actual money flows. It is real MoP money actually transferring ownership that affects Irving Fisher's price-level, price trends, interest rates, employment, production, etc.

And Irving Fisher's transactions concept of money velocity, integrated with Cambridge economist Alfred Marshall's "cash-balances" equation, is mutually reinforcing. Where P = M/K*T; and M= MoP money; T = the physical volume of trade; K = the length of the period over whose transactions purchasing power is actually held (viz., the distributed lag effect of money flows); and P = the price-level of items included in T.

In fact, K is the reciprocal of Vt. K is a schedule of the volume of money that will be offered at given levels of P (monetary lag). As legal reserve guru Dr. Richard Anderson, former V.P. and senior economist, FRB-STL taught, required reserves are driven by payments (bank debits) - essentially synonymous with K.

Heuristically, as the empirical evidence of the last 100 years suggests, roc's in M*Vt = roc's in PT, where N-gDp is an statistical proxy. The time frame of reference is vitiated by K. En masse, K is a function of the MoP sought to be held at any given price-level. Thus, given low interest rates, people will hold, and not convert, their money balances into non-monetary assets for small price differentials - thereby reducing the supply of funds and their velocity (holdings which behave in a paradoxical fashion with respect to peoples' motives).

The upshot is that an immense deceleration (c. a 50 percent drop in 3 months), in money flows, or the proxy for inflation, now confronts the U.S. economy in Dec this year. It is my recommendation to short commodity input prices mid-Nov. for the accelerated last leg decline persisting into Jan 2016.

[Virgil Showlion]

The OP makes some interesting points, flow5, but you'll need to include a link and attribution if this is from another site.

    - Virgil (S.I. Mod)

[flow5]

Shorting oil today.

finance.yahoo.com/echarts?s=CLZ15.NYM+Interactive#{"range":"5d","allowChartStacking":true}

 

OPEC's administered prices are deflationary.  Free fall after Dec. 4th meeting.  The bottom in oil is March 2016.

"Math is nature's playbook"  - Walter Isaacson.

[flow5]

marketrealist.com/2013/07/crack-spread-101-part-1-whats-a-crack-spread/

www.howardweil.com/docs/Reports/WEEKLY%20REPORTS/REFININGReport.pdf

[flow5]

www.marketwatch.com/investing/index/DXY

Dollar down. Crude up.

finance.yahoo.com/q?s=clz15.nym

Haven't pulled the trigger yet.   This is the 3rd time we've had this market reaction.  The last money flow #'s were very weak (recessionary).  Should get a better fix @ 4:00

[flow5]

Lag recognition by investors will come late, aka, 1st qtr. 1981 N-gNp.

About as close as the #'s get to a recession level:

08/1/2015 ,,,,, 0.08 ,,,,, 0.28
09/1/2015 ,,,,, 0.05 ,,,,, 0.25
10/1/2015 ,,,,, -0.03 ,,,,, 0.19
11/1/2015 ,,,,, 0.00 ,,,,, 0.18
12/1/2015 ,,,,, -0.01 ,,,,, 0.10
01/1/2016 ,,,,, -0.02 ,,,,, 0.11
02/1/2016 ,,,,, -0.01 ,,,,, 0.12
03/1/2016 ,,,,, 0.01 ,,,,, 0.10


Roc in R-gDp drops by 11.

Roc in inflation drops by 18.

Can you say "revert-to-mean"?

[flow5]

The Fed's DEAF, DUMB, and BLIND.

It is axiomatic, with limited upward and downward price flexibility (nominal rigidity), unless money, and money flows, expand at least at the rate of "asked prices", output can't be sold, jobs will be lost, and incomes will decline.

Monetary policy objectives should be formulated in terms of desired rates-of-change, roc's, in monetary flows, M*Vt, relative to roc's in R-gDp. Roc's in N-gDp (though "raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp"), can serve as a proxy figure for roc's in all transactions, P*T, in Professor Irving Fisher's "equation of exchange". Roc's in R-gDp have to be used, of course, as a policy standard.

[Aman A.K.A. Ahamburger]

The Fed's DEAF, DUMB, and BLIND.

To me this can be summed up as weakness.

When I read your first post (I kept dancin' ) I see an institution that has been in a reactionary position since its creation. Then when things smooth out people have manipulated things to benefit the financial world - specifically wall street.

You have done a great job outing the issues.

So what I want to know is what can be done - realistically - from this point in small incremental steps to reign in the "wizardry"(as we have called it)?

[bimetalaupt]

Oct 31, 2015 13:12:42 GMT -5 flow5 said:

The Fed's DEAF, DUMB, and BLIND.

It is axiomatic, with limited upward and downward price flexibility (nominal rigidity), unless money, and money flows, expand at least at the rate of "asked prices", output can't be sold, jobs will be lost, and incomes will decline.

Monetary policy objectives should be formulated in terms of desired rates-of-change, roc's, in monetary flows, M*Vt, relative to roc's in R-gDp. Roc's in N-gDp (though "raw materials, intermediate goods and labor costs, which comprise the bulk of business spending are not treated in N-gDp"), can serve as a proxy figure for roc's in all transactions, P*T, in Professor Irving Fisher's "equation of exchange". Roc's in R-gDp have to be used, of course, as a policy standard.

Flow5,
The historic correlation of M3 and NYSE has now been violated.  M3 growth of 3% year over year is better then inflation. 

Current M3 18026.67 should be the target for DJIA in the next 12 months per past correlations.  If past evens hold up and we do not see any "Real bad Black Swan events" : DJIA might be good for a total return of about 5%.  Bonds are a better deal per LSE Professor Dr. Jagger ( also father to Mit Jagger).  My holdings in my Expert 50/50 are now almost correct ( Bonds and Cash accounts = 50.45%). Real deal are hard to find.  MMxv1-alpha has the DJIA  26.96857693464% overpriced ($-0.2696857693464/$1.0000)  MMXVI-ALPHA Black Swan event study # 42310.
We have noted the problems in Middle East have become worst.


Just a thought,
BiMetalAuPt

MMXVI-ALPHA Black Swan event study
STRESS TEST STUDY 42310
RIDK 5551.69875
15 MONTH DJIA PROJECTION 21718.0246014267
UPSIDE 4054.48460142667
DJIA UPSIDE/RISK 0.7303142306536
djia risk/return 1.3692736058355
Highest risk DJIA 16166.3258514267
PROF/LOSS PER$1.00 -0.2696857693464

[flow5]

Elliott Wave V ends Nov 27th.

[flow5]

Holiday's "elastic-currency" (viz., "Black Friday's" retail profitable turning point), is about to run into a rare, counter cross-current - setting up a selling opportunity.  Watch the wave carefully. Not everyone celebrates X-mas.

[flow5]

"Consumer confidence unexpectedly declined in November to the lowest level in more than a year as Americans grew less enthusiastic about the labor-market outlook" - Bloomberg

"China's Earliest Monthly Economic Indicators Flash Warning Sign"

bloom.bg/1Nqfs3S

- Nostradamus

[flow5]

The pro-rata share of the price-level.

To wit: "It is hard to imagine how something as sweeping and multifaceted as the financial crisis, GD 2.0, could have stemmed from a single cause or a single villain" - Alan S. Blinder (Princeton U).

The value of money is the utility it serves - its generalized purchasing power. The particular yardstick, or common denominator, is the accepted form it takes. A sale and purchase, the quid pro quo of exchange, represents a "double coincidence of wants", in either: indirect independent barter, or as calculated and exercised by monetary sovereignty, i.e., by legal tender rights (note: Congress prohibited nationals from using foreign moneys as legal tender in 1857 and then gold in 1933).

However, specific purchasing power properties (viz., their medium of exchange, unit-of-account, store-of-value, or par-value-standard), like (1) the administered price practices of OPEC in the early 70's and (2) tyrannical, partisan, predatory, market powers of czars and oligarchs (e.g., the American Bankers Association being the most powerful and well-funded), and (3) public policy induced concentrations of credit (e.g., affordable housing, and the 15 percent, pro-wall-street, long-term, capital gains tax), are ultimately ephemeral, i.e., mean-reverting (transitory in Fed-Speak). Just like Sir Thomas Gresham's law, with administered pricing practices: "the bad money drives out the good".

The price-level, inflation, is basically a monetary phenomenon. Inflation occurs when there is a chronic across-the-board increase in prices, or, looking at the other side of the coin, depreciation of money. Inflation is not a temporary increase in the price level, nor a long-term increase in any particular prices. Inflation simply results from a long-term excessive flow of money relative to the volume of real output of goods and services offered in the markets.

From the standpoint of the economy no overall index, or average of all prices, exists - "representative" being always a unique, individualistic: "basket of goods and services". Therefore, no single figure exists which represents the value of money. Instead, specialized price indices are compiled, e.g., producer and retail price indices, agricultural, raw material indexes, Case-Shiller home and CRB price indexes, etc.

The inflationary impact of Chairman Alan Greenspan's flows, the evidence of inflation, cannot be conclusively deduced from the monthly changes in producer or consumer prices. They reflect, in only a marginal amount, the inflation that has taken place in real estate.

The soaring real estate prices generated by these enormous flows were initially "validated" after legal reserves ceased to be "e-bound" in 1995, but then were swiftly abrogated by Bankrupt U Bernanke draining legal reserves for 29 contiguous months beginning in Feb 2006 - turning safe assets into impaired, unsaleable, assets (hence a solitary cause, the boom/bust in real-estate).

The price indices are passive indicators of the average change of a group of prices. They do not reveal why prices rise or fall. Only price increases generated by demand, irrespective of changes in supply, provide evidence of inflation. There must be an increase in aggregate monetary purchasing power, AD, which can come about only as a consequence of an increase in the volume and/or transactions velocity of money. The volume of domestic money flows must expand sufficiently to push prices up, irrespective of the volume of financial transactions, the exchange value of the U.S. dollar, and the flow of goods and services into the market economy.

These enormous flows were previously captured in the discontinued: G.6 Debit and Demand Deposit Turnover release.

See: 1938 Analysis of Committee Proposal "Member Bank Reserve Requirements", declassified in 1983

The lesson to be learned here is that price increases attributable to the exercise of monopoly powers applied to specific commodities, are of temporary duration, create price distortions (1974 presented foreign producers of gas-economical cars an unparalleled opportunity to penetrate our domestic market), that foster stagnation and unemployment and generally lower prices if not "validated" by an offsetting expansion of monetary flows.

I.e., the essence of a free capitalistic system is price flexibility, downward, as well as upward.

The evidence of inflation is represented by "actual" prices in the marketplace; The "administered" prices would not be the "asked" prices, were they not "validated" by M*Vt, i.e., "validated" by the world's Central Banks

[flow5]

bit.ly/1KXzawv

Latest forecast — December 11, 2015

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2015 is 1.9 percent
--------------

Since August 2015, the rate-of-change, roc, in money flows (proxy for R-gDp) has fallen 139 percent. Since August 2015 the roc in money flows (proxy for inflation has fallen 35 percent).

Y-o-Y money flows have fallen (i.e., contrary to all pundits, the Fed's already following a contractionary money policy):

01/1/2015 ,,,,, -0.03 ,,,,, -0.04
02/1/2015 ,,,,, -0.04 ,,,,, -0.07
03/1/2015 ,,,,, -0.04 ,,,,, -0.03
04/1/2015 ,,,,, -0.08 ,,,,, -0.07
05/1/2015 ,,,,, -0.09 ,,,,, -0.10
06/1/2015 ,,,,, -0.06 ,,,,, -0.10
07/1/2015 ,,,,, -0.09 ,,,,, -0.07
08/1/2015 ,,,,, -0.06 ,,,,, -0.03
09/1/2015 ,,,,, -0.05 ,,,,, -0.03
10/1/2015 ,,,,, -0.07 ,,,,, -0.08
11/1/2015 ,,,,, -0.07 ,,,,, -0.09
12/1/2015 ,,,,, -0.05 ,,,,, -0.07

According to roc's in M*Vt, long-term money flows are signaling, at least, a short term bottom in oil prices. And stock averages should have hit a bottom concurrent with short-term money flows.

[flow5]

The Fed targets ultra-short-term interest rates, or the FFR, the interest rate at which DFIs, depository financial institutions (CBs, S&Ls, MSBs, and CUs) lend reserve balances, their IBDDs held at District Reserve Banks, to other DFIs overnight, all on an uncollateralized basis, i.e., their Keynesian monetary transmission mechanism. The FRB-NY's "trading desk" couldn't move the FFR without a boost from the IOeR rate (there are just too many excess reserve balances, i.e., excess CB liquidity or clearing balances).


It's a monetary policy blunder (further reducing NIMs). The yield curve was brutally flattened (as opposed to steepened). It drove up short-term/money market (wholesale non-bank funding in the borrow-short to lend-long savings-investment paradigm), rates by 131 percent.


1.usa.gov/1P87b44


While wages/salaries have now "bottomed" along with the "price-level" (which the FOMC considers the unemployment rate key), the FFR stair-step move will invert the policy yield curve, which initially will result in a stoppage in the flow of savings thru the non-banks (i.e., reducing money velocity).


Increasing the IOeR rate will create ever higher levels of stagflation (business stagnation accompanied by inflation). In the long-run it will create higher real rates of interest rates, lower tax receipts, and higher federal deficits (which already need reduced). I.e., R-gDp will decelerate and inflation will accelerate - giving us an unwanted policy mix.


The Fed's 300 Ph.Ds. simply don't know the differences between money and liquid assets. It is an incontrovertible fact: never are the CBs intermediaries in the savings-investment process. The utilization of bank credit to finance real-investment or gov't deficits doesn't constitute a utilization of savings since financing is always accomplished by the creation of new money (loans=deposits).


So raising the FFR for the CBs has no impact on their lending capacity. The lending capacity of the CBs is not predicated on the level of interest rates (rather credit worthy borrowers). It is a psuedo-economic analysis to compare the CBs "cost of funds" (what they pay depositors), with their loans/investments. The CBs could continue to lend/invest even if the non-bank public ceased to save altogether.

In almost every instance in which Keynes wrote the term bank in the General Theory, it is necessary to substitute the term financial intermediary in order to make the statement correct. This is the source of the pervasive error that characterizes the Keynesian economics, the Gurley-Shaw thesis, the elimination of Reg Q ceilings, the DIDMCA of March 31st, 1980, the Garn-St. Germain Depository Institutions Act of 1982, the Financial Services Regulatory Relief Act of 2006, the Emergency Economic Stabilization Act of 2008, sec. 128. “acceleration of the effective date for payment of interest on reserves”, etc.

I.e., the CBs can force a contraction in the size of the non-banks/shadow banks, & create liquidity problems in the process, by outbidding the non-banks for the public’s savings.

[flow5]

Stocks will scream/explode higher in 2016.

[flow5]

Stocks and the U.S. economy have decoupled.  The Pacific Rim is home of 29 of the 50 busiest ports.  Far-east investors are selling the "stop gap" liquid instruments acquired in their balance of payments surpluses.  U.S economy to accelerate.  E-$ market to send oil down to 10-15 dollars a barrel. I.e., remunerating reserves, like unlimited FDIC transaction deposit insurance contracts E-$ credits.

[bimetalaupt]

Jan 20, 2016 15:28:28 GMT -5 flow5 said:

Stocks and the U.S. economy have decoupled.  The Pacific Rim is home of 29 of the 50 busiest ports.  Far-east investors are selling the "stop gap" liquid instruments acquired in their balance of payments surpluses.  U.S economy to accelerate.  E-$ market to send oil down to 10-15 dollars a barrel. I.e., remunerating reserves, like unlimited FDIC transaction deposit insurance contracts E-$ credits.

flow5
We are in the longest T-Bond bull market. Great call and fantastic thoughts:again!! Well Done
Again: Experts at Charles Schwab are again telling me to use the more conservative 5-5 system of Exports: do not try to catch the falling knife.
Bruce

[flow5]

Epitomized by the coterie of canonists in their respective field, e.g., Greenspan “The Map and the Territory”, Blinder “After the Music Stopped”, and Bernanke “Courage to Act”: asset bubbles have fragmented properties, characteristically idiosyncratic, but simultaneously indistinguishable from Professor Irving Fisher’s general price-level – core CPI.

Somehow asset bubbles are un-differentiable - until some imperceptible Wile E. Coyote moment, as popularized by the economic “time bombs”, of Nassim Nicholas Taleb’s, as portrayed by: “Black Swans“ (“problems of randomness, probability, and uncertainty”). But nope, I predicted and denigrated this theory of May 6th’s “flash crash”, i.e., 6 months in advance and within 1 day.

Alan Blinder: “After the Music Stopped”
1) Bubble bursting is like that. At some unpredictable moment, investors start “looking down”…, realizing that the sky-high prices they believed would never end are not supported by the fundamental – and start selling. It is abundantly clear that the crash must come eventually. Fundamentals win out in the end. But why it happens just when it does is always a mystery.
2) No one will ever know…why the stock market crashed in October 1987, rather than September, or November.
Alan Greenspan: “The Map and the Territory”
3) The wholly unprecedented stock price crash on 10/19/87…there was no simple probability distribution from which that event could be inferred
4) with rare exceptions it has proven impossible to identify the point at which a bubble will burst, but its emergence and development are visible in credit spreads
Ben S. Bernanke: “The Courage to Act”
5) First, identifying a bubble is difficult until it actually pops.
6) A lack of transparency caused a loss of confidence.
Janet Yellen’s speech: “A Minsky Melt Down”
7) “Minsky understood this dynamic He spoke of the paradox of deleveraging, in which precaustions that may be smart for individuals and firms – and indeed essential to return the economy to normal state – nevertheless magnify the distress fot eh economy as a whole”
Joseph E. Stiglitz “Free Fall”
8) Bubbles are, however, usually more than just an economic phenomenon. They are a social phenomenon.
9) 2) Futures prices are unpredictable.
Paul Krugman “End This Depression Now”
10) What actually happened, of course, was the Fed did everything Friedman said it should have done in the 1930’s – and so the economy seems trapped in a syndrome that, where not nearly as bad as the GD 1.0, bears a clear family resemblance.

Still in the crucible of scrutiny, the blood begins to boil, especially as the soldiers in white lab coats fasten the strait jacket of conventional wisdom and plunge the long hypodermic needle of “1984 dystopian”,viz., catatonia, into your backside, i.e., until strapped down and paralyzed in the blind alley of their litany, nothings’ recognizable.

Nay, 1.8 million years ago, my ancestors were nomadic hunters and the DNA’s still intact to “backtrack” and see “footprints in the sand”; (NN’s “elephant tracks”), i.e., the trail of economic transactions (money for whatever reason, actually exchanging hands).

No sandbagging. The impacted indoctrination long since entombed in the Fed’s 300 Ph.Ds. exposes, intuitively a priori (and a fortiori), the convoluted maze of fabled psychosis.
Straight from the Fed’s musty catacombs, seemingly hauntingly possessed by the “seductive Victorian gestalt of Keynesian exegesis”, an unfettered e-mail revealed (before Obama’s administration censored them):

Sent: Thu 11/16/06 9:55 AM
“Spencer, this is an interesting idea. Since no one in the Fed tracks reserves”
Richard G Anderson
Federal Reserve Bank of St Louis

How so you ask? - because the Fed began to encrypt their data; and not as the average weighted reserve ratio against deposit liabilities remains constant, but for legal reserves (fractional), ceased to be “binding” (because increasing levels of vault cash (larger ATM networks - as applied vault cash was allowed to count beginning in 1959), retail deposit sweep programs, fewer applicable deposit classifications (including the "low-reserve tranche" & "exemption amounts"), & lower reserve ratios, combined to remove most reserve, & reserve ratio, restrictions since c. 1995.
• And Donald Kohn, Vice Chairman of the Board of Governors of the Federal Reserve System and a 40 year tenured economist:
•
"I know of no model that shows a transmission from bank reserves to inflation"

David Stockman espouses the conventional wisdom: “The Great Deformation”, or as Joseph E. Stglitz said: “lemmings will follow each other over a cliff”.

1) …so the change of causation was long and opaque
2) The killer was that the Federal Reserve couldn’t control Friedman’s single variable, which is to say, the “money supply” as measured by the sum of demand deposits and currency (M1)
3) During nearly two decades at the helm, William McChesney Martin learned that the only thing the Fed could roughly gauge as the level of bank reserves in the System. Beyond that there simply weren’t any fixed arithmetic ratios, starting with the money multiplier – the latter measure the ratio between bank reserves, which are potential money and bank deposits which are actual money.
4) …a regulatory change in the early 1990’s which allowed banks to offer “sweep” accounts; i.e., checking accounts by day which turned into savings accounts overnight. Accordingly, Professor Friedman’s M1 could no longer be measure accurately”

1) Stockman doesn’t understand that the money multiplier is required reserves,

See: bit.ly/yUdRIZ

Quantitative Easing and Money Growth:
Potential for Higher Inflation?
Daniel L. Thornton


2) and that: “money” should be defined exclusively in terms of its means-of-payment attributes. The present array of interest-bearing checking accounts has confused the distinction between means-of-payment accounts (the primary money supply) and saving-investment accounts and created a dilemma as to what portion, if any, of these interest-bearing accounts should be considered as savings. This dilemma is resolved when the transactions velocity of demand deposits is taken into account; i.e., deposit classifications are analyzed in terms of monetary flows (MVt). Obviously, no money supply figure standing alone is adequate as a “guide post” to monetary policy.

EXAMPLE 1:
Black Monday Oct 19 1987.

On Sept. 4 the Fed raised (1) the discount rate 1/2 percent to 6, & (2) the federal funds rate 1/2 percent to 7.25 (up from 5.875 percent in Jan). On Sept. 30 fed funds spiked at 8.38; fell to 7.30 by Oct. 7; then rose to a peak of 7.61 Oct 19 (Black Monday).

At the same time, (Sept. & Oct 87), the decline in the proxy for R-gDp (its rate of change) plummeted (the sharpest decline in the statistical release ever up to that point). Then the quantity of legal reserves bottomed in the bi-weekly period ending 10/21/87. This was the trigger.

At the time, the 30 year conventional mortgage yielded 11.26 percent, up from 8.49 percent in Jan. 87, & Moody's 30 year AAA corporate bonds yielded 11.06 percent on 10/19/87, up from 9.37 in Jan. 87.

The preceding tight monetary policy & the sharp reduction in legal reserves, had forced all interest rates up in the short run (at the same time as inflation & R-gDp were decelerating).

And the banks scrambled for reserves at the end of their maintenance period - to (& bank squaring day), support their loans-deposits (contemporaneous reserve requirements were in effect exacerbating the shortfall & response time). Apparently a significant number of banks, or large banks with large reserve deficiencies, tried to settle their obligations at the last moment. And the NY “trading desk” failed to accommodate the liquidity needs in the money market (until too late, which ex-post, encrypts the data).

Black Monday's trigger was obscured because the decline in monetary flows (MVt) which overlapped Qtr3’s & Qtr4’s GDP (quarterly reports are used by the Bureau of Economic Analysis to measure gross domestic product – not monthly).

The Fed quickly reversed their policy when the markets panicked, i.e., they brought the volume legal reserves back into alignment.


Example 2:

I.e., as soon as Bernanke was appointed to the Chairman of the Federal Reserve, he initiated, his first "contractionary" money policy for 29 consecutive months (coinciding both with the end of the housing bubble, & the peak in the S&P/Case-Shiller 20-City Composite Home Price Index© in 2006-07-01 @ 206.52), or at first, sufficient to wring inflation out of the economy, but persisting until the economy plunged into a depression).

Note: A “contractionary” money policy is defined as one where the rate-of-change (roc’s) in monetary flows (our means-of-payment money times its transactions rate of turnover) is less than 2% above the rate-of-change in the real output of goods & services (for this entire 2 year period roc’s in M*Vt were NEGATIVE (less than zero!).

Money market & bank liquidity continued to evaporate despite the FOMC's 7 reductions in the target FFR (which began on 9/18/07). I.e., despite Bear Sterns two hedge funds that collapsed on July 16, 2007, & immediately thereafter filed for bankruptcy protection on July 31, 2007, the FED maintained its “tight” money policy [i.e., credit easing (reconstituting the mix of assets), not quantitative easing (injecting new money & reserves)].

The FOMC’s “tight” money policy was due to flawed Keynesian dogma (using interest rate manipulation as a monetary transmission mechanism), rather than by using open market operations of the buying type to expand legal reserves & the money stock.

On January 10, 2008 Federal Reserve Chairman Ben Bernanke pontificated: "The Federal Reserve is not forecasting a recession”. Bernanke subsequently initiated the economy’s coup de grâce during July 2008 (his second ultra-contractionary money policy).

I.e., Bernanke didn’t initiate an “easy” money policy until Lehman Brothers later filed for bankruptcy protection (& it was one the Federal Reserve Bank of New York’s primary dealers in the Treasury Market), on September 15, 2008. The next day AIG’s stock dropped 60%.

Note aside: the 2 year rate-of-change (roc) in MVt (which the FED can control – i.e., the roc in nominal-gDp), peaked in the 2nd qtr of 2006 @ 12%. Bernanke let it fall to 8% by the 4th qtr of 2007 (or by 33%). N-gDp fell to 6% in the 3rd qtr of 2008 (another 25%). N-gDp then plummeted to a -2% in the 2nd qtr of 2009 (another - 133%).

By withdrawing liquidity from the financial markets, risk aversion was amplified, haircuts were increased, additional and/or a higher quality of collateral was required, liquidity mis-matches were multiplied, funding sources dried up, long-term illiquid assets went on fire-sale, deposit runs developed, withdrawal restrictions were imposed, forced liquidations lowered asset values, counterparties’ credit default risks were magnified-- all of which contributed a general crisis of confidence & frozen financial markets (regulatory malfeasance, avoidance, or circumvention were subordinate factors).

Be forewarned, the most powerful and well-funded oligarch in our midst is the American Bankers Association, ABA. Be careful, as in counter espionage, of “double-edge swords”. “Big Brother” has you on his WWW radar. No solecism here, rather truly shades of “Soylent Green”. The ABA and its collaborators, that is its lobbyists, virtually control the House Committee on Financial Services & the U.S. Senate Committee on Banking, Housing, and Urban Affairs, and they collectively are effectively public enemy #1.

Note: “Like many large trade associations, ABA's principal activities include lobbying, professional development for member institutions, maintenance of best practices and industry standards (for example, routing transit numbers), consumer education, and distribution of products and services.[1] ABA is considered the largest financial trade group in the United States.” – Wikipedia

The great German poet & playwright Bertolt Brecht puts it in perspective: "it's easier to rob by setting up a bank than by holding up (one)."


Pièce de résistance? Enigma resolved.

John Maynard Keynes’s Liquidity Preference Curve is a False Doctrine

The money stock can never be managed by any attempt to control the cost of credit.

The only tool at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be controlled is legal reserves

[flow5]

Public enemy #1 is the ABA, who was indirectly responsible for stagflation (where income gains fail to match inflation outcomes).

These changes are preparatory considering the legal framework in "The Financial Services Regulatory Relief Act of 2006"

This act allows the Federal Reserve to pay interest on contractual clearing balances and excess reserve balances, two types of balances that depository institutions hold voluntarily at Reserve Banks. By helping to stabilize the demand for voluntary reserve balances, this authority may allow the Federal Reserve to implement monetary policy without the need for required reserve balances. In these circumstances, the Board--as authorized by the act--could consider reducing or even eliminating reserve requirements, thereby reducing a regulatory burden for all depository institutions.

This is the direction of political-economic instruction. The U.S. doesn’t have a Federal Reserve System, it has the Commercial Banker’s System. We have an “elastic” currency “aided and abetted” by “elastic” legislators. We have perennial Walter Wriston caricatures pressuring the House Committee on Financial Services & the U.S. Senate Committee on Banking, Housing, and Urban Affairs. We have a conspiratorial organization that goes by the name of the American Bankers Association - with its well funded lobbyists.

The Board of Governors is self-described as: “subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute” Even so, the Fed is “connected at the hip” with Congressional allies, a la Greenspan, who the New York Times called a “three-card maestro”.

The Fed’s research is politically coordinated, targeted to justify its monetary policy objectives - those that appease the banking community. It’s as the university professor said: “innovate away from home”. Academic freedom has become the “barbarous relic”.


Financial Services Regulatory Relief Act of 2006.

the legislation does include a number of provisions that, when implemented, should provide substantial relief to banking organizations and increase efficiency in the banking system while enhancing the Federal Reserve's tools for conducting monetary policy
The Regulatory Relief Act will allow the Federal Reserve to pay depository institutions interest on the balances held to meet reserve requirements; it also gives the Board the discretion to lower the ratio of required reserves to transaction accounts.
The Board has long sought these amendments, which were also supported by the American Bankers Association and America's Community Bankers. Unfortunately, for reasons related to congressional budget scoring, these amendments will not become effective until October 2011.
Nevertheless, when the Federal Reserve is able to begin paying interest on required reserve balances, much of the regulatory incentive for depositories to engage in resource-wasting efforts to minimize reserve balances will be eliminated, to the economic benefit of banks, their depositors, and their borrowers.
In these circumstances, the Board--as authorized by the act--could consider reducing or even eliminating reserve requirements, thereby reducing a regulatory burden for all depository institutions.
These measures should help the banking sector attract liquid funds in competition with nonbank institutions and direct market investments by businesses. Balances that depository institutions must hold at Federal Reserve Banks to meet reserve requirements pay no interest.

These consumer sweep programs are expected to spread further, threatening to lower required reserve balances to levels that may begin to impair the implementation of monetary policy. In order to compete for the liquid assets of businesses, banks set up complicated procedures to pay implicit interest on what are called compensating balance account

Because banks cannot attract demand deposits through the payment of explicit interest, they often try to attract these deposits, aside from compensating balances, through the provision of services at little or no cost. The payment of interest on required reserve balances could remove the incentives to engage in such reserve avoidance practices.

Reserve requirements have at times been employed as a means of controlling the growth of money. In the early 1980s, for example, the Federal Reserve used a reserve quantity procedure to control the growth of M1

While reserve requirements no longer serve the primary purpose of monetary control, they continue to play an important role in the implementation of monetary policy in the United States. They do so by helping to keep the federal funds rate close to the target rate set by the Federal Open Market Committee. They perform this function in two ways:

First, they provide a predictable demand for the total reserves that the Federal Reserve needs to supply through open market operations in order to achieve a given federal funds rate target; daily precautionary demands cannot help smooth the funds rate from one day to the next. They are also difficult to predict, making it harder for the Federal Reserve to determine the appropriate daily quantity of reserves to supply to the market

Financial Services Regulatory Relief Act of 2006.
The act will also allow the Federal Reserve to pay interest on contractual clearing balances and excess reserve balances, two types of balances that depository institutions hold voluntarily at Reserve Banks. By helping to stabilize the demand for voluntary reserve balances, this authority may allow the Federal Reserve to implement monetary policy without the need for required reserve balances. In these circumstances, the Board--as authorized by the act--could consider reducing or even eliminating reserve requirements, thereby reducing a regulatory burden for all depository institutions.

Law Passed to Pay Interest on Reserves, Effective in 2011
The Financial Services Regulatory Relief Act of 2006 authorized the Federal Reserve banks to pay
interest on reserve balances and gave the Board of Governors authority to lower reserve
requirements on all transaction deposits (applied to deposits above a certain threshold level) to as low as zero percent, from their previous minimum top marginal requirement ratio of eight percent. These changes are not effective until October 2011.

Changes to the interest rate target are done in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target.
This monetary policy approach was pioneered in New Zealand. It is currently used in the Eurozone, Australia, Canada, New Zealand, Norway, Poland, Sweden, South Africa, Turkey, and the United Kingdom.
H.R. 4209 also includes a technical provision related to pass-through reserves. This provision would extend to banks that are members of the Federal Reserve System a privilege that was granted to nonmember institutions at the time of the Depository Institutions Deregulation and Monetary Control Act of 1980.
It would allow member banks to count as reserves their deposits in affiliated or correspondent banks that are in turn "passed through" by those banks to Federal Reserve Banks as required reserve balances. The provision would remove a constraint on some banks' reserve management and would cause no difficulties for the Federal Reserve in implementing monetary policy. The Board supports it. Bernanke
the prohibition of interest on the demand accounts of businesses is an anachronism that no longer serves any public policy purpose. Repeal of the prohibition would remove an unnecessary regulatory burden, enhance the competitiveness of depository institutions, and benefit bank depositors Meyer

In estimating that demand, the Desk must take account of the demand for the three types of balances held by depository institutions at the Federal Reserve--required reserve balances, contractual clearing balances, and excess reserve balances
Financial Services Regulatory Relief Act of 2006.
The act will also allow the Federal Reserve to pay interest on contractual clearing balances and excess reserve balances, two types of balances that depository institutions hold voluntarily at Reserve Banks. By helping to stabilize the demand for voluntary reserve balances, this authority may allow the Federal Reserve to implement monetary policy without the need for required reserve balances. In these circumstances, the Board--as authorized by the act--could consider reducing or even eliminating reserve requirements, thereby reducing a regulatory burden for all depository institutions.

I.e., the ABA spearheaded this disparaging Act.

[flow5]

Time deposits….demand deposits

1939........15.........................33
1954........47....................... 121
1964......126....................... 156
1974......421....................... 274
1979......676....................... 401
1986...1,215....................... 491
1996...1,271....................... 420
2006...3,696....................... 317
2016...8,222.................... 1,233

The ratio of TD/DD in 1939 = 0.45
The ratio of TD/DD in 2016 = 6.67

The drive by the commercial bankers to expand their savings accounts has a totally irrational motivation, since it has meant, from a SYSTEM's standpoint, competing for the opportunity to pay higher and higher interest rates on deposits that already exist in the commercial banking SYSTEM.

As long as savings are held in the CBs in whatever form, these deposits are not financing investment, or indeed anything; their transactions velocity is zero. If on the other hand these deposits are transferred through the NBs they are invested or otherwise "put to work". Such use of deposits does not change the volume of deposits in the CBS, merely their ownership.

This is the cause of our economic malaise.

[Aman A.K.A. Ahamburger]

That looks like one hell of a bazooka for the BOOM after the game has ended. Default back to the New Deal??... Count down to E-O-Y 2019....



Plus (+)



(+)

French Revolution

Through the Revolutionary Wars, it unleashed a wave of global conflicts that extended from the Caribbean to the Middle East. Historians widely regard the Revolution as one of the most important events in human history.[2][3][4]

(+)

Wahhabism

Equals (=)

Panic of 1873 The Eastern Hemisphere in Flames by 2019

A.K.A. it's the way of the future.

[flow5]

The belligerent bifurcation of the trading desk’s counterparty (remunerating excess reserve balances), has emasculated the Fed’s “open market power”, viz., its sovereign right to create new money and credit: at once and Ex-nihilo. I.e., "pushing on a string" should have only applied prior to the nominal legal adherence to the fallacious "Real Bills Doctrine" which was terminated in 1932 - due to a paucity of eligible (hopelessly impaired), commercial and agricultural paper for the 12 District Reserve bank’s discounting purposes.

Historically, coming out of a recession, the commercial banks bought highly liquid, short-term assets, pending a more profitable disposition of their legal and economic lending capacity, i.e., between 1942 and Oct 2008, the CBs remained fully “lent up”, the CBs minimized their volume of excess reserves.

bit.ly/1qp4BgD

But during the GR, there was no Treasury-Federal Reserve collaboration, as the Treasury-Federal Reserve Accord of 1951 dictated (the Treasury, Jack Lew, can issue segmented control of their sales, and the “desk” can buy “on-the-run” treasuries (the most recently issued U.S. Treasury bonds or notes of a particular maturity - as ZeroHedge repeatedly accused it of often doing).

The result was a shortage of "safe-assets" in spite of high federal deficits. Thus, whereas in the past, the money stock would have risen as the CBs bought T-bills, instead they opted to hold idle, or unused, clearing and liquidity balances (floating, policy rate, IBDDs in their respective District Reserve bank).

bit.ly/1RT7PSN

Beginning in 1970, the FOMC expressed its policy objectives in terms of specified rates of growth in one or more measures of the money stock or bank credit (then monetary policy reports were mandated by the Humphrey-Hawkins Full Employment Act of 1978 - later money stock figures were discontinued: “In July 2000, the Federal Reserve announced that it was no longer setting target ranges for money supply growth”).

1.usa.gov/1qp4zp8

The FOMC’s directive used to instruct the Manager of the FRB-NY’s “trading desk” (our Central Bank), on how to respond when bank reserves or the money and credit aggregates departed from the tracking path of weekly values associated with the directive adopted.

E.g., in 1972 the FOMC began to couch its instructions in terms of reserves available for private non-bank deposits (RPD). If the growth of RPD appears likely to exceed the FOMC’s desired growth path, then the Manager would supply non-borrowed reserves more grudgingly. Restraining the growth of non-borrowed reserves would cause the Federal funds rate to rise and work to choke off an undesired growth in deposits.
.

[flow5]

Inflation's obviously too high. The FOMC's policy mix produces stagflation. The only viable option is to "unleash savings". I.e., drive non-inflationary savings back through non-bank, real-investment conduits (completing the circuit income velocity of funds and avoiding the deflationary impact of idle funds) - and simultaneously tighten monetary policy. The idea is to activate existing money - by putting savings "to work".

See:

"Should Commercial Banks Accept Savings Deposits?” by Leland J. Pritchard, Edward E. Edwards, and Lester V. Chandler at the 1961 Conference on Savings and Residential Financing in Chicago, Illinois

Commercial bank-held savings (i.e., monetary savings), funds held beyond the income period in which received, have a velocity of zero. They do not circulate anywhere. They are idle - un-used and un-spent. They are the economic equivalent of hoarding cash under a mattress. And stagnant money is a non-recognized leakage in Keynesian National Income Accounting procedures. I.e., savings never equal investment.

In other words, savings flowing through the non-banks never leaves the commercial banking system in the first place. The NBs are the CB's customers. Savers never transfer their funds out of the commercial banking system (only as currency held by the non-bank public increases - which is never more than a short-seasonal proposition). This applies to all investments made directly or indirectly through the non-banks (the truistic financial intermediaries between savers and borrowers).

Shifts from time deposits, TDs, to transaction deposits, TRs, within the CBs and the transfer of the ownership of these deposits to the NBs involves a shift in the form of commercial bank liabilities (from TD to TR) and a shift in the ownership/title of (existing) TRs (from savers to NBs, et al). The utilization of these TRs by the NBs has no effect on the volume of TRs held by the CBs, or the volume of the CB's total earnings assets.

As long as voluntary savings are impounded within the commercial banking system, they are lost to investment or consumption, indeed to any type of payment or expenditure. The savings held in the commercial banks, in whatever deposit classification, can only be spent (liquidated), or invested, by their owners; they are not, and cannot, be spent by the banks.

Never are the commercial banks intermediaries in the savings-investment process. When the CBs grant loans to or buy securities from the non-bank public they always create at-once, ex-nihilo, new money and credit.

[flow5]

Transforming time/savings deposits into auxiliary money, besides having severe adverse effects on the economy, has had a devastating impact on commercial bank profits. Interest on time/savings deposits, from the standpoint of the banking system, amounts to paying for something (deposits), the system already possesses. Lacking this interest incentive, holders of “saved” demand deposits would acquire investments outside the banking system. This contrary to the conventional wisdom would not result in the diminution of the demand deposits, or earning assets of the banking system. The confusion arises from a unique feature of the commercial banking system; the whole is not the sum of its parts in the money creating process.

The individual commercial banker may or may not perform an intermediary role between savers and borrowers. By attracting an inflow of funds, he enlarges his legal reserves and clearing balances, plus his legal and economic capacity to expand loans and investments. But all such inflows involve a decrease in the lending capacity of other banks, unless the inflow results from a return flow of currency to the banking system, or is a consequence of an expansion of Reserve Bank credit.

From the standpoint of the banker, he has simply loaned out the funds acquired; from the system's standpoint the added earning assets have been acquired by the creation of new money.

[flow5]

The drive by the CBs to expand their savings accounts (elimination of Reg. Q interest rate ceilings for the commercial banking industry), has a totally irrational motivation, since it has meant, from a system’s economic standpoint, competing for the opportunity to pay higher and higher interest rates on deposits that already exist in the CB system.

This puts pressure on loan officers to seek higher and riskier loans and interest rates. Not only are marginal loans acquired by this process, but also many otherwise good loans become marginal at lofty rates. Default design is the inevitable consequence.

But it does profit a particular bank to pioneer the introduction of a new financial instrument - until their competitors catch up; and then all other banks in the system become losers.

The question is not whether net earnings on the CBs assets, ROA, are greater than their funding costs. The question is the total profitability of the banking system (interest is the CBs largest expense item). This is not a zero sum game. One CB's gain is much less than the losses sustained by all other CBs in the system.

[flow5]

"Did Affordable Housing Legislation Contribute to the Subprime Securities Boom? FRB-STL August 2012

"We find little evidence to support the view that either the CRA or the GSE goals caused excessive or less prudent lending than otherwise would have taken place"...in fact the opposite was uncovered.

[Aman A.K.A. Ahamburger]

Apr 10, 2016 14:15:52 GMT -5 flow5 said:

"Did Affordable Housing Legislation Contribute to the Subprime Securities Boom? FRB-STL August 2012

"We find little evidence to support the view that either the CRA or the GSE goals caused excessive or less prudent lending than otherwise would have taken place"...in fact the opposite was uncovered.

Looking at derivatives growth, and past booms(railway, mining, etc) regulations essentially have zero impact. Ethics is the only way build sustainable economic growth.

[flow5]

"Ethics is the only way build sustainable economic growth"

---------------

And commercial banking is un-ethical. 

It is unethical for special interest groups to have preferential, indeed a crony self-serving privilege, i.e., sovereign right, to profit from the creation of the publics’ legal tender.

As Willie Sutton said: his reason for robbing banks is 'That's where the money is'

The great German poet and playwright Bertolt Brecht would have agreed and once said it was "easier to rob by setting up a bank than by holding up (one)."

Thomas Jefferson's my favorite:

"I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies."

Zerohedge:

"according to Levin, who knows the Fed's operating structure intimately, says the members of the regional Fed bank boards of directors, the majority of whom are selected by the private banks with the approval of the Washington-based governors, should be chosen differently. The professor says director slots now reserved for financial professionals regulated by the Fed should be eliminated, and that directors who oversee and advise the regional banks should be selected in a public process involving the Washington governors and local elected officials. These directors also should better represent the diversity of the U.S."
"Levin also wants formal public input into the selection of new bank presidents, with candidates’ names known publicly and a process that allows for public comment in a way that doesn’t now exist. The professor also wants all Fed officials to serve for single seven-year terms, which would give them the needed distance from the political process while eliminating situations where some policy makers stay at the bank for decades. Alan Greenspan, for example, was Fed chairman from 1987 to 2006."
"As the WSJ conveniently adds, the selection of regional bank presidents has become a hot-button issue. Currently, the leaders of the New York, Philadelphia, Dallas and Minneapolis Fed banks are helmed by men who formerly worked for or had close connections to investment bank Goldman Sachs"